When a loved one passes away, it’s hard enough just dealing with the loss, and the last thing you want to think about are your finances. But if you receive an inheritance, it’s important to understand what it means for your overall financial situation, including your tax and super. Here are some basic facts you should know.
Understanding the rules
Your tax obligations depend on the type of inheritance you receive. If you inherit property or the capital of a deceased estate, you generally won’t have to pay any tax at all. However, if you receive an income from the inheritance, such as share dividends or rent from an investment property, it’s generally considered to be part of your taxable income. This means it will be taxed at your marginal tax rate. You should also be aware that having this extra income may push you into a higher tax bracket. Your adviser or a tax professional can help you navigate the tax rules to make sure you don’t end up paying more than you should.
Remember, your income is taxable in the year you inherit it — not when you receive it. So, for example, if you came into an inheritance on 30 June 2016, it will form part of your income for the 2015 – 2016 tax year, even if you don’t actually receive any money until the next tax year.
The same tax rules also apply regardless of whether you receive an inheritance from an Australian or non-Australian resident. But if you’ve already paid tax in another country, you may be eligible for a foreign tax offset. For more information, visit the Australian Taxation Office website.
If you receive a death benefit from someone else’s super when they pass away, the way it’s taxed will depend on whether you receive the benefit as a lump sum or an income stream. If you choose to take the benefit as a lump sum, you won’t have to pay any tax if you’re considered a tax dependant of the person who passed away (for example, a current or former spouse or a child under the age of 18) but you will be taxed if you’re not their tax dependant.
Another option is to leave the money in super and draw it as an income stream. In this case, the amount of tax you’ll pay will depend on your age, the age of the deceased, and whether you’re considered a tax dependant of the deceased. You can find out more on the Australian Taxation Office website. Depending on your circumstances, you might be better off taking the benefit as either a lump sum or income stream — or a combination of both.
Give your super a boost
If you’ve received an inheritance but you’re not sure how to make the best use of it, you might consider investing it in one of your most important assets — your retirement savings. Every extra bit you add to your super now, will pay off in the future, when you consider how your super balance grows over time.
Generally speaking, you can top up your super with this type of ‘non-concessional contribution’ at any time while you’re still working. And the good news is, you won’t pay any tax on these contributions.
Get the right advice
When it comes to inheritances, the rules around tax and super can be complicated. For expert advice tailored to your situation, please speak to us.
Information is current as of 31 January 2017.
Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice.
Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A PDS for Colonial First State’s products are available at colonialfirststate.com.au or by calling us on 13 13 36.