Australia has no inheritance tax but that does not mean assets pass between generations tax-free.

The Productivity Commission estimates that $3.5 trillion in assets will change hands by 2050. As this wealth moves through estates, superannuation funds, family trusts and private companies, the way assets are owned can matter just as much as who is named in your Will.

Here are four misconceptions we regularly encounter when advising families on succession planning:

The family home will always pass tax-free

A family home may be sold by an executor or beneficiary without capital gains tax (CGT), but the exemption isn’t automatic.

In many cases, a full CGT exemption may be available where the property was the deceased’s main residence immediately before death, wasn’t being used to produce income, and is sold within two years.

Main residence eligibility becomes more complex where:

  • the home was previously rented;
  • the deceased had moved into aged care;
  • a beneficiary continues living in the property;
  • the property is rented after death; or
  • the estate takes more than two years to administer.

The ATO may extend the two-year period if delays are outside the control of the executor or beneficiary.

We often see families make decisions about retaining or renting a property without considering tax implications. Obtaining early advice can help avoid unexpected CGT outcomes.

There’s no tax when an investment property is inherited

A beneficiary generally won’t pay CGT simply because they inherit an investment property. Instead, the potential tax liability is usually deferred until the property is later sold.

When this happens, the beneficiary must then determine the property’s cost base. Depending on the circumstances, this may be the deceased’s original cost base or the property’s market value at the date of death.

Different rules apply depending on whether the property was acquired before or after capital gains tax commenced on 20 September 1985.

As a result, records such as purchase contracts, stamp duty, legal costs and capital improvement expenditure can remain important decades after the property was originally acquired.

Locating these records early can save time, cost and tax when the property is ultimately sold.

Superannuation passes to adult children tax-free

Many people are surprised to learn that superannuation doesn’t automatically form part of their estate.

Instead, the trustee of the superannuation fund pays the benefit according to superannuation law, the super fund rules and any valid death benefit nomination.

Whether tax applies depends on who receives the benefit.

The tax outcome depends on whether the recipient is a death-benefits dependant for tax purposes.

A spouse, former spouse, child under 18, financial dependant or person in an interdependency relationship with the deceased can generally receive a lump-sum death benefit tax-free.

For a financially independent adult child:

  • the tax-free component remains tax-free;
  • the taxed element of the taxable component is generally taxed at up to 15%, plus the 2% Medicare levy when paid directly; and
  • an untaxed element may be taxed at up to 30%, plus the Medicare levy.

When a non-dependant adult beneficiary inherits through the deceased estate, rather than directly from the fund, the estate is liable for tax on the taxable component but generally does not pay the Medicare levy.

For families with substantial super balances, the intended beneficiary and payment pathway can significantly impact the final after-tax amount received.

My Will controls the family trust

Family trusts are often central to a family’s wealth, yet they are frequently misunderstood in succession planning.

Assets held in a discretionary trust do not generally form part of an individual’s estate. The trustee owns the trust assets, meaning a Will does not automatically determine who controls the trust following death.

In practice, control may depend on:

  • who can appoint or remove the trustee;
  • succession provisions for the appointor;
  • the directors of a corporate trustee;
  • ownership of shares in the corporate trustee; and
  • the terms of the trust deed.

Families should also review any existing Family Trust Election (FTE).

A FTE nominates a test individual and defines the permitted family group for tax purposes. While it can assist with access to certain trust loss and franking credit concessions, distributions outside the permitted family group may attract family trust distribution tax at 47%.

The death of the test individual does not automatically cancel the election or change the family group of the trust. This can create unexpected distribution complications as wealth and control pass between generations.

Plan early and review your succession arrangement now

A Will is only one part of an effective succession plan.

Families should review their major assets and tax history, superannuation nominations, trust deeds, Family Trust Elections, company documents and control arrangements together rather than in isolation.

Doing this before illness, incapacity or death generally provides more time to correct inconsistencies and understand the potential tax consequences for future generations.

If it has been some time since your succession arrangements were reviewed, now may be an appropriate time to revisit them and ensure they continue to reflect your intentions.

Contact HLB Mann Judd to discuss your succession plans and the potential tax implications for your family and future beneficiaries.

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