Time to read : 7 Minutes

The aim of many people, in their later years, is to take steps so their wealth cascades down the inheritance chain to keep their children and grandchildren intact. 

And it does help that unlike the UK and USA, Australia doesn’t have an inheritance tax (or an estate tax). 

So, does that mean the wealth passed down from one generation to the next is entirely tax-free? 

It’s a question we often get asked at H&R block. And the answer is well, maybe. But it does depend on the way in which the wealth is passed down. Let’s take a closer look from the parents and adult children’s perspective.

How does lifetime transfers of assets work?

If you transfer assets – other than cash, which isn’t subject to capital gains tax – to your family while you’re still alive, this will trigger a capital gains tax (CGT) charge to you. 

It’s based on the difference between the market value of the asset at the time of transfer and its cost base (typically the original acquisition cost). 

But, if you have either brought forward capital losses or current year capital losses, you can transfer CGT assets (such as shares and property) to your family while you’re still alive. You can then use those capital losses to offset the capital gains which will arise. 

So, you get to transfer the assets tax-free and your family will also benefit because they’ll acquire the assets at a higher CGT base cost. This means lower CGT bills for them when they ultimately sell the assets (they will acquire the assets for market value as a result of the lifetime transfer). 

Remember, not all assets are subject to CGT. I’ve already mentioned cash (which can be gifted tax-free) but other assets like cars and collectables are also included. 

Collectables include:

• artwork

• jewellery

• antiques

• coins or medallions

• rare folios, manuscripts or books

• postage stamps or first day covers.

To be CGT free, the collectable must meet one of these three criteria:

• You acquired the collectable for $500 or less.

• You acquired a share in the collectable for $500 or less before 16 December 1995.

• You acquired a share in the collectable when the collectable had a market value of $500 or less.

What about transfers arising on death?

Inheriting assets from a deceased person does not in itself have any immediate tax implications when the assets pass:

• to the deceased person’s beneficiary – for example, a child, spouse or other family member

• to their executor

• from the executor to a beneficiary.

Remember, there is no inheritance tax in Australia.

This “rollover relief” applies to the transfer of any asset which is otherwise subject to CGT such as shares or property. 

Note: cash and collectables are once again excluded and the family home is also typically excluded, more on this below.

This means that if you inherit assets on the death of a relative, the capital gain on the asset is not taken into consideration at the date you inherited the assets. You won’t have to pay CGT until you actually dispose of them – which could be some time away.

When you inherit an asset, the value at which you inherit it (which will be deducted from your proceeds when you go to sell, to give you a capital gain or loss) depends on when the relative first acquired it:

• If the asset was first acquired before 20 September 1985, you inherit it for its market value at the deceased’s date of death. You need to hold on to the asset for at least a further 12 months to claim the 50% CGT discount. 

• If the asset was acquired on or after 20 September 1985, you inherit it for its original cost to the deceased (the price they originally paid). The 50% CGT discount is available to you from the date of death – there is no minimum holding period. 

Here's an example, say some shares were bought in 1980 for $10,000. Let’s say the shares were valued at $40,000 when passing to the beneficiary upon the death of the original holder in 2024. No tax is payable on receiving this inheritance. 

But, if the beneficiary then sells the shares for $50,000 in 2025, a tax liability would arise for $10,000. The $50,000 proceeds less their market value at the date of death, $40,000). 

If the shares were held by the beneficiary for more than 12 months in total, starting from the date of death, then the beneficiary would also be eligible for the 50% CGT discount. This means that the CGT will be $5,000 ($10,000 x 50%). 

Now let’s say the shares were bought in 1990 but all other figures remain the same as the previous example. There would still be no capital gains tax liability on the death of the individual, but the beneficiary will be subject to capital gains tax of $40,000 when they ultimately sell the shares. 

This is worked out as sales proceeds of $50,000 less original cost of $10,000 (based on the cost of the shares when they were first acquired). Because the deemed date of acquisition was back in 1990, the 50% CGT discount applies straight away, so the beneficiary could sell them immediately and still get the discount. 

In this scenario, the CGT after the discount has been applied will be $20,000. ($40,000 x 50%). 

Important: in these examples, the $10,000, $5,000 and $20,000 are not a tax bill but a tax liability. How much you’ll end up paying in tax depends on your marginal tax rate (tax bracket you’re in). The higher your marginal tax rate, the bigger proportion you’ll be taxed on the capital gains. 

Here’s the same example visually presented: 

What about the deceased’s family home?

Special rules apply to the property in which the individual lived as their main residence which allows the property to be disposed of entirely CGT-free. These rules generally allow a full or partial exemption from CGT using the main residence exemption where either the executor or the beneficiary disposes of the property after death.

The executor or beneficiary can obtain a full exemption from CGT where the property is a pre-CGT dwelling where either of these conditions is met: 

• The dwelling is sold within two years of the date of death. 

Note: it’s possible to extend this where there is a problem in meeting the two year condition, eg where the will is challenged or settlement of the contract of sale is delayed or falls through for reasons outside the taxpayer’s control.

• The dwelling was the main residence of either the deceased spouse or someone who had a right to occupy the dwelling under the terms of the will for the entire period – from the date of death until the settlement date when the dwelling is eventually sold.

For post-CGT dwellings, the rules are the same except the first condition (above) is modified such that the property must have been the deceased’s main residence just before death and was not at that time being used for income producing purposes.

A partial CGT exemption may be available where the Legal Personal Representative (LPR) (such as a solicitor) or beneficiary does not qualify for a full CGT exemption.

Note: there is a two year time limit after the date of death within which the LPR or the beneficiary must sell the house to be entitled to the full main residence exemption. If the sale happens later than this, there will only be a partial exemption.

What about superannuation?

After the family home, super is likely to be the biggest asset in most people’s estate. 

In most cases, when a person dies, their super fund will pay their remaining super to the person they have nominated as their beneficiary. Super paid after a person's death is called a 'super death benefit'.

The tax on a super death benefit depends on:

• whether the person receiving the benefit is a dependent or non-dependent of the deceased person

• whether the benefit is paid as a lump sum or super income stream

• whether the super is taxable or tax-free and whether the super fund has already paid tax on the taxable component

• the age of the person receiving the benefit

• the age of the deceased person when they died.

As a general rule, death benefits paid to dependents are tax-free though the table below shows in detail how death benefits are applied when paid to a dependent of the deceased:

Note: MTR = marginal tax rate (the tax rate / bracket determined by one’s income).

The table below shows how death benefits are applied when paid to a non-dependent of the deceased. As a general rule, tax is payable at a higher rate when paid to a non-dependent.

Who is a tax dependent?

A dependent of the deceased includes:

• a surviving spouse or de facto spouse

• a former spouse or de facto spouse

• a child of the deceased who is under age 18

• any other person who was financially dependent on the deceased

• any person who had an interdependency relationship with the deceased.

All other recipients would be non-dependents. So, super paid out of the deceased estate to brothers, sisters, parents or adult children would normally be taxed at non-dependent rates. 

This is unless there was some form of financial dependency between the deceased and the recipient (for example, the recipient was living with disability and financially supported by the deceased).

Bottom line

Whether your assets are shares, property or superannuation, the possible tax implications to both you and any of your beneficiaries should be considered. And for this reason it’s important that you get professional help from a qualified tax specialist. 

While assets can be passed from one generation to the next tax free, this is not always guaranteed. Being informed means you’re aware of any tax implications that could impact generational wealth.  

Go deeper: 

• Do you know what the tax implications are for gifting children? 

• What are the tax implications of inheriting property after a death?

Financial disclaimer

The information contained on this web page is provided by Compare Club Australia Pty Ltd, authorised representative of Alternative Media AFSL number 486326. It is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should consider whether the advice is right for you and refer to the Product Disclosure Statement before making a decision in relation to a financial product.