If you get an inheritance in Australia, the first thing you should do is get independent professional financial advice that’s based on your personal financial situation, needs and goals. We’re not financial advisers, but here is some general information for you to consider.
Understand any tax implications
There is no inheritance tax in Australia, but what you do with inherited property or other assets that you inherit can have tax implications. This means that you don’t have to pay any upfront tax on the inheritance you directly receive, but:
- You will have to pay tax on any future income you earn from your inheritance at your marginal tax rate. This income can include interest on lump sum payments, the future dividends on any shares you inherit, or future rental income from an investment property.
- You will have to pay tax at your marginal rate if you transfer inheritance funds into your super and you exceed your concessional contribution cap. You will have to pay tax at the highest marginal rate if you contribute an inheritance amount to your super fund and you exceed the total super balance limit. This limit is currently $1.7 million.<meta charset="utf-8" />
- You may have to pay capital gains tax (CGT) on an asset that you inherit if you sell it at a profit or if you transfer property to your self-managed super fund. A tax accountant will be able to give you specific advice based on your situation, including tax-effective asset sale and/or investment strategies.
- You will not have to pay CGT on the sale of inherited property if it was the deceased person’s principal place of residence and you sell it within two years of inheriting it.
Understand any Age Pension implications
If you are currently receiving a full or part Age Pension and you receive an inheritance, then you should contact Services Australia within 14 days. Your inheritance may affect your eligibility to receive the Age Pension or the amount you receive based on the Income and Assets tests.
Take the opportunity to update your own will
Receiving an inheritance can be a timely reminder to update your own will. Death is inevitable for all of us, so your will should be as up to date as possible. And if you’ve received a sizable inheritance, then you should take the opportunity to review your will to reflect any additional assets that you now have.
An up-to-date will is one less thing for your family and friends to worry about when you are gone because it will make your wishes clear about the transfer of your assets.
Use your inheritance wisely
Receiving an inheritance can be life-changing. Ways to use an inheritance wisely include:
- Investing to create an additional income stream if you or your partner are retired or approaching retirement.
- Paying down any debt if you and or your partner still have any.
Both of these strategies can help to set you up for retirement ‒ or enhance the lifestyle you can lead in retirement if you’re already there.
Resist the temptation to blow all of your inheritance money on a world trip unless you are already comfortable financially. Once the money is spent, it’s gone, so consider whether you would be better off investing it to help you to live a more comfortable life for longer, rather than having some short-term fun.
But if you are already comfortable financially, then there’s nothing wrong with having fun with some or all of your inheritance. You could also:
- Use some of it to help younger family members to get established financially (for example, by helping with a home deposit).
- Donate to worthy charities.
Or blow the lot on a holiday house the whole family can use.
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