Overseas Inheritance Tax in Australia – Will You Have to Pay Tax? - Waterhouse Lawyers

Overseas Inheritance Tax in Australia – Will You Have to Pay Tax?

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Overseas Inheritance Tax in Australia – Will You Have to Pay Tax?

Have you inherited money, property or other assets from a family member overseas? You may be wondering whether you need to pay tax in Australia.

  1. Many Australians receive inheritances from relatives living overseas, particularly from countries such as the United Kingdom, China, India, Singapore, Hong Kong and New Zealand.
  2. The good news is that Australia generally does not tax inheritances. However, there are important exceptions, particularly where the inheritance comes from a foreign trust, includes income earned by a deceased estate, or involves overseas property.
  3. The Australian tax consequences depend on how the inheritance is received, the nature of the assets and whether the recipient is an Australian resident for tax purposes.

.Do You Pay Tax on an Overseas Inheritance in Australia?

  1. Australia does not impose a general inheritance tax or estate duty. Therefore, if you inherit money directly from a deceased relative overseas, the inheritance will generally not be taxable merely because you receive it.
  2. For example, if your parent dies overseas and leaves you $500,000 from their personal savings, you would generally not be required to pay Australian income tax on that inheritance.
  3. Similarly, transferring the inherited money from an overseas bank account into Australia does not, by itself, create an Australian income tax liability.
  4. However, the position may be different if the money is distributed through a foreign trust or deceased estate that has accumulated income or capital gains.
  5. Inheriting Money from a Foreign Trust – Section 99B
  6. One of the most important exceptions involves inheritances received from foreign trusts.
  7. Under section 99B of the Income Tax Assessment Act 1936 (Cth), certain amounts distributed by a foreign trust to an Australian resident beneficiary may be included in the beneficiary’s assessable income.
  8. This means that an inheritance received through a foreign trust may be taxable, even if the trustee describes the payment as capital or an inheritance.
  9. However, section 99B(2) contains important exclusions. These may protect distributions representing the original capital of the trust, commonly referred to as trust corpus, provided the statutory requirements are satisfied.
  10. For example, suppose your father established a foreign trust containing $1 million of his personal savings. Over time, the trust earned another $400,000 from investments.
  11. If you receive a distribution from that trust, the Australian tax consequences may depend on whether the amount represents qualifying original capital or accumulated income and gains.
  12. The critical issue is not simply whether the money was inherited, but whether the distribution is assessable under Australian tax law.

The ATO’s Rule for Overseas Inheritances

  1. The ATO has introduced an important compliance approach for Australian residents who receive distributions from overseas deceased estates.
  2. Under Practical Compliance Guideline PCG 2024/3, the ATO generally considers a distribution to be low risk where:
  • The deceased was not an Australian tax resident when they died.
  • The distribution is made from a non-resident deceased estate.
  • The inheritance is distributed within 24 months of the deceased’s death.
  • The total value received by the Australian resident beneficiary does not exceed AUD $2 million.
  1. The $2 million threshold applies to the total value received by the beneficiary, including amounts received through multiple distributions.
  2. Importantly, this is not a $2 million tax-free exemption. It is an ATO compliance approach intended to reduce compliance risk for qualifying distributions.
  3. An inheritance exceeding $2 million, or received more than 24 months after death, is not automatically taxable. However, the beneficiary may need to establish which amounts are excluded from assessable income under section 99B(2).
  4. The guideline’s deceased-estate compliance approach does not extend to separate testamentary trusts established under a deceased person’s will.

Capital Gains Tax on Inherited Overseas Property

  1. If you inherit a house, apartment, land or shares located overseas, you generally do not pay Australian capital gains tax (CGT) simply because you inherit the asset.
  2. However, CGT may arise when you subsequently sell or otherwise dispose of the inherited asset.
  3. For example, if you inherit a property in the United Kingdom and later sell it while an Australian tax resident, any taxable capital gain may need to be included in your Australian income tax return.
  4. The amount subject to CGT will depend on factors including:
  • When the deceased originally acquired the property.
  • Whether the deceased was an Australian or foreign tax resident.
  • The property’s relevant cost base.
  • Your Australian tax residency status.
  • Whether any CGT exemption or discount applies.
  1. In particular, you should not assume that the property’s market value on the date of death will automatically become its Australian CGT cost base.
  2. The relevant rules are contained in Division 128 of the Income Tax Assessment Act 1997 (Cth)Is Income Earned from an Overseas Inheritance 
  1. Even if the inheritance itself is not taxable, income subsequently earned from inherited assets may be subject to Australian income tax.
  2. For example, an Australian tax resident who inherits an overseas investment property may be required to declare rental income earned from that property.
  3. Similarly, dividends from inherited shares and interest earned from inherited bank deposits may be assessable in Australia.
  4. Australian tax residents are generally taxed on their worldwide income, subject to applicable exemptions and concessions, including special rules for certain temporary residents.
  5. Where foreign tax has already been paid on income or capital gains, a foreign income tax offset may be available, subject to the relevant requirements.
  6. Do You Need to Declare an Overseas Inheritance to the ATO?
  7. A genuine inheritance that is not assessable income generally does not need to be included in your Australian income tax return.
  8. However, where an inheritance includes taxable trust distributions, income or capital gains, the relevant amounts may need to be declared.
  9. The ATO may also ask you to explain the source of substantial funds received from overseas.
  10. It is therefore important to retain documents showing that the money represents an inheritance and, where relevant, establishing which part of the distribution represents capital rather than taxable income.
  11. What Documents Should You Keep?
  12. If you receive an inheritance from overseas, we recommend retaining:
  • The deceased’s will and death certificate.
  • Correspondence from the executor or estate administrator.
  • Documents showing the assets owned by the deceased at death.
  • Estate accounts and distribution statements.
  • Foreign trust deeds and financial statements, where applicable.
  • Overseas bank statements and evidence of funds transferred.
  • Property valuations and acquisition records for inherited assets.
  1. These documents can be particularly important where the ATO seeks to apply section 99B to a foreign inheritance.
  1. Frequently Asked Questions About Overseas Inheritance Tax

Is a $1 million inheritance from overseas tax-free in Australia?

  1. Generally, yes, if the amount represents inherited capital and no specific taxing provision applies. However, where the inheritance is received through a foreign trust or includes accumulated income, part of the amount may be taxable.

Can I transfer inherited money from overseas to Australia without paying tax?

  1. Generally, yes. Transferring inherited funds into an Australian bank account does not itself create an income tax liability. However, the underlying inheritance may need to be examined to determine whether any part is assessable.

What happens if I inherit more than $2 million from overseas?

  1. An inheritance exceeding $2 million is not automatically taxable. However, it falls outside the particular low-risk compliance approach in PCG 2024/3. The Australian tax treatment must be determined under the relevant legislation, including section 99B where applicable.

Does it matter which country the inheritance comes from?

  1. Yes. Although Australian tax law determines whether an Australian tax liability arises, the laws of the country in which the deceased lived or held assets may also impose inheritance, estate or other taxes.
  2. The existence of an applicable double taxation agreement may also be relevant, although an agreement does not necessarily eliminate taxes imposed overseas.

What if I have already received an inheritance and the ATO says it is taxable?

  1. The ATO’s position should be examined carefully. In particular, it may be necessary to determine whether the amount is excluded from assessable income under section 99B(2) or whether the ATO has correctly identified the source and character of the distribution.
  2. Depending on the circumstances, there may be grounds to challenge an assessment through the ATO objection process.
  3. Specialist Tax Advice on Overseas Inheritances
  4. Receiving an inheritance from overseas can create unexpected Australian tax consequences, particularly where foreign trusts, substantial estates, inherited property or accumulated investment income are involved.
  5. Waterhouse Taxation Lawyers specialises in Australian taxation law and can assist with:
  • Determining whether an overseas inheritance is taxable in Australia.
  • Advising on foreign trust distributions under section 99B.
  • Establishing whether inherited funds represent capital or taxable income.
  • Advising on capital gains tax arising from inherited foreign assets.
  • Preparing ATO objections and representing taxpayers in disputes concerning foreign inheritances.
  1. If you have received, or expect to receive, an inheritance from overseas, obtaining specialist tax advice before the funds are distributed may help prevent unexpected Australian tax liabilities.

Contact Waterhouse Taxation Lawyers for advice on the Australian tax treatment of your overseas inheritance.

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