According to the Tax Foundation, an international not-for-profit, the world’s highest inheritance tax rate at 55% is in Japan. This is closely followed by South Korea at 50%, with France and the US holding third and fourth place at 45% and 40% respectively.
In fact, just fifteen OECD countries levy no taxes on property passed to the next generation or lineal heirs. One of those countries is Australia.
Australia – the land Down Under with no inheritance tax? Actually, not quite.
Where Australia has not officially had inheritance taxes or ‘death duties’ for the last few decades, the prevailing tax laws can still catch unsuspecting people – and their inheritances – unawares.
Here are some examples how…
Superannuation
Superannuation is what is known as a ‘Non-Estate’ asset i.e. it doesn’t automatically get captured by the Will. When a superannuation member passes away, the Australian Tax Office (ATO) prescribes that who the superannuation balance gets paid out to will determine the tax treatment of the benefit payment.
Quite simply, it distils down to two things; a) the ‘tax dependancy’ status of the beneficiary and b) the underlying tax components of the superannuation balance.
Where potentially as little as 0% tax applies where the balance has been left to a superannuation tax dependant, up to potentially 30% tax applies were the beneficiary is a non-tax dependant. Not a nice surprise!
Close and ongoing monitoring of superannuation nominations and estate planning provisions is warranted to ensure that the end outcome, is the most tax friendly outcome for the ultimate beneficiaries.
Cost Bases and pre-CGT assets
The date 20th September 1985 carries special significance in the financial planning and taxation worlds, as it is was on this date that Capital Gains Tax (CGT) came into being in Australia via the Hawke/ Keating government.
When a person passes away, an asset in their Estate can pass directly to their beneficiaries (for example, a share portfolio). As the beneficiary, you ‘acquire’ the asset on the day the person died. What you also inherit is a Cost Base (the date that an asset is taken to have been purchased as far as tax is concerned), and this is where the 20th September 1985 carries special significance.
If the person who bought the asset bought it before 20 September 1985 i.e. pre-CGT, then the beneficiary’s cost base is the date of death. It doesn’t matter what the original cost base was under the eyes of the tax laws. However, if the person bought the asset after 20th September 1985 i.e. post-CGT, then the beneficiary’s cost base is the original cost base, and the Capital Gain is realised in the hands of the beneficiary on subsequent sale.
Consider a share portfolio that is worth $1,000,000 on date of death, but which was bought for $500,000… as you can see, the date 20th September 1985 carries special significance.
It’s almost like a potential tax bill lying in wait behind the scenes. Where we can’t change the tax laws, we can be aware of them when it comes to clients wanting to make equitable Estate Planning provisions amongst their beneficiaries across their asset base.
We will note here that principal residences/ family homes carry an additional set of rules and leniencies when they are bequeathed to the next generation.
Are Beneficiaries living overseas?
According to one of our most favourite pieces of bedtime reading – that being the Income Tax Assessment Act 1997 (Cth) – Capital Gains Tax (CGT) event K3 can occur when a person passes away and a certain type of CGT asset that they owned just before dying, is bequeathed to a beneficiary who is a foreign resident.
Where CGT event K3 is triggered, the tax surprise (a.k.a. tax bill) falls to the Estate of the deceased, diluting the inheritances of the other beneficiaries.
This situation is more common than you think, especially when we think of adult children relocating and living overseas.
Careful provisioning in the Will so that non-resident beneficiaries are excluded from inheriting certain kinds of assets (as a balancing item) are one way to help address CGT event K3, and why seeking professional legal advice is key.
A final word
Estate Planning is about leaving the right assets to the right people at the right time. In saying that, no one likes tax surprises – not least our clients, nor their families.
With the keen application of foresight and strategic expertise by qualified Advice professionals (financial advisory, legal and accounting professionals working in harmony together) – there are strategies that can be employed to reduce the tax impost of certain kinds of assets to certain kinds of beneficiaries.
The message is clear – plan ahead of time to avoid tax surprises (a.k.a. tax leakages!) in your legacy.
Naomi Mee-Martino CFP® is a Financial Planner and Director with Bastion Financial Group.
Bastion Financial Group specialises in investment management and holistic financial planning advice to high net worth families, professionals and business owners. We utilise asset allocation, proven research based methods, a focus on education and decades of experience to help clients minimise the risk and stress of creating and managing wealth. We are Certified Financial Planners and active members of the Financial Planning Association of Australia (FPA). Our Advisory team can be contacted on;
Naomi; naomi@bastionfinancialgroup.com.au or (08) 6225 5150 or 0413 917 698
David; david@bastionfinancialgroup.com.au or (08) 6225 5150 or 0407 770 782
Important information
This article has been prepared by Bastion Financial Group Pty Ltd., Authorised Representative(s) of Godfrey Pembroke Group (ABN 38 078 629 973), an Australian Financial Services Licensee, registered office at Level 2, 26 Brisbane Avenue, Barton ACT 2600.
Any advice in this document is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal financial, tax and legal advice prior to acting on this information.
Opinions constitute our judgement at the time of issue and are subject to change. No member of the Godfrey Pembroke Group, nor their employees or directors, gives any warranty of accuracy, nor accepts any responsibility for errors or omissions in this document.
