Is there an inheritance
tax in Australia?
There are no inheritance or
estate taxes in Australia is the
bold statement appearing on the
Australian Taxation Office (ATO)
website page headed Deceased
But is that statement true or false? Have inheritance and
estate taxes returned under different names following the
abolition of inheritance taxes?
In this article we review –
- Death duties and estate duties that in the past,
taxed inheritances in Australia
- Capital gains tax and super death benefits tax that
potentially tax inheritances in Australia
Part 1 – What were
inheritance taxes in Australia?
They say that death and taxes are the only two
certainties in life.
But that cannot be said for death taxes / inheritance
taxes in Australia. They are abolished in 1982, after
raising considerable tax revenue for 100 years from 1880.
Every so often, there are calls to reintroduce
inheritance taxes. So in this Part 1 we examine the
inheritance taxes which have been abolished – which were
called death duty and estate duty, and why
they were abolished. In Part 2, we examine the new taxes
that tax wealth on death which have replaced inheritance
Death Duty was introduced in NSW in the Stamp
Duties Act of 1880. Not long afterwards, Victoria,
Queensland and the other States followed and introduced
their own Death Duty. It was also known as Probate Duty,
Succession Duty, Estate Duty, Estate Tax, Inheritance Tax or
Death Duty was payable on the value of the deceased’s
assets as at the date of death.
The Stamp Duties Act 1920 (NSW) (which replaced
the Act of 1880) provided in section 101:
“In the case of every person who dies [domiciled in
New South Wales] … death duty shall be assessed and paid
— (a) upon the final balance of the estate of the
deceased; … and (b) upon all property forming part of
the dutiable estate.”
The “dutiable estate” was all-encompassing: the family
home, other real estate, bank accounts, bonds, shares,
jewellery, artworks and personal possessions were included.
Debts due and payable were deducted to determine the “final
balance of the estate”.
But that was not all. “All property forming part of the
dutiable estate” included deathbed gifts and gifts made
within three years before death in the dutiable estate (the
When death duty was introduced in NSW, it was assessed at
a flat rate of 1% of the value of the dutiable estate, for
all persons dying on or after 1 July 1880.
In the Act of 1920, the rate was increased to flat
2% for small estates of up to £1,000, progressively
increasing to a flat 20% for large estates, that is, estates
with a value above £150,000. Lower rates applied when the
estate was bequeathed to a widow, widower, dependent child,
a public hospital, or a charity for the relief of poverty or
In 1965, the rate was a flat rate of 3% for small estates
up to $2,000, increasing to 15% for a mid-range estate of
$54,000, and increasing to a top rate of 32% for large
estates above $200,000 in value. The estate value for these
tax brackets had not been raised since the 1940s despite
As a result, in the 1960s a tax planning industry grew up
to assist wealthy people to restructure their assets to
avoid high death duties. Some set up corporations and trusts
in Australia, others moved their assets and domicile to tax
havens such as the Bahamas, Cayman Islands, Monaco,
Singapore and Hong Kong. Tax revenue from death duty started
But the real driver for abolition of death duty was that
the value of the family home was included in the estate.
With the high inflation of the 1970s, modest estates
consisting of a family home and some savings were worth
$54,000, attracting a flat 15% death duty. They were taxed
twice – once when the home was left to the spouse, and again
when left to the children.
Queensland led the abolition of death duty in 1978. As a
result, significant numbers of retirees sold up their homes
in Sydney and Melbourne and moved their domicile and money
to the death duty ‘tax haven’ of the Gold Coast.
It was apparent to all that 100 years after it was
introduced, death duty had become a political liability
and abolition was a necessity.
Death duty was abolished in South Australia and Western
Australia in 1980, in Victoria and New South Wales in 1981
and in Tasmania in 1982. Abolition was supported by the
major political parties.
Estate Duty was an inheritance tax paid at the
Federal level and was payable in addition to State death
duty. It was introduced by the Australian Government to
finance World War I.
The Estate Duty Assessment Act 1914 (Cth) which
provided in section 8(1):
“… estate duty shall be levied and paid upon the
value … of the estates of persons dying after the
commencement of this Act” [i.e. after 21 December 1914]
The dutiable estate comprised all real and personal
property in Australia.
In addition, gift duty was payable at the Federal level
on asset transfers by living persons, to discourage estate
duty avoidance by giving the estate away before death.
The top tax rate was initially 20%. Later it was
increased to 27.9%. When combined with death duty, estate
duty meant that inheritance taxes as high as 50% of the
value of the estate were payable, resulting in many family
homes, farms and businesses needing to be sold or go into
debt to pay the death taxes.
This scale from 1949 illustrates the NSW death duty and
the Federal estate duty payable when an estate passed to a
widow and children:
Estate duty was abolished on and from 1 July 1979, sixty one
years after the end of World War I.
Australia has the distinction of being the first rich
country in the world (along with Canada) to abolish
inheritance taxes. Other counties are following this trend.
19 countries have abolished inheritance taxes, including:
Israel inheritance tax in 1981, New Zealand estate duty in
1992, Portugal inheritance tax in 2004, Hong Kong estate tax
in 2006 and Singapore estate tax in 2008.
Part 2 - Are Capital Gains
Tax and Super Death Benefits Tax the new inheritance taxes?
When a tax is abolished, often a new tax is introduced to
fill the revenue gap.
So it was that not long after the abolition of death duty
and estate duty, a capital gains tax was introduced in 1985.
Capital Gains Tax is a fairer tax than an inheritance tax
because it taxes the capital gain, not the capital itself,
when an asset is transferred. But it is still a tax!
When introducing the tax in 1985, the Treasurer took care
to avoid it being seen as a new inheritance tax, coming so
soon after the abolition of death duty and estate duty:
“The Government has decided that the deemed
realisation at death proposal, outlined in the draft
White Paper, will not apply. Liability for tax in the
case of death will be rolled over to successors, and
will only be assessed on any subsequent disposal.
Therefore the capital gains tax will not apply in the
case of death. … [also] a complete exemption will
apply to gains on the taxpayer's principal
residence and reasonable curtilage” [Ministerial
Statement by P.J. Keating on Reform of the Australian
Taxation System 19 September 1985]
This is an outline of the legislation:
Capital Gains Tax (CGT) is payable when you
dispose of an asset. Section 104.10 of the Income Tax
Assessment Act 1997 (Cth) provides::
“(1) CGT event A1 happens
if you dispose of a CGT asset.
(2) You dispose of a CGT
asset if a change of ownership occurs from you to
Section 128.10 makes clear that capital gains tax is not
payable in the case of death:
“When you die, a capital gain or capital loss from a
CGT event that results for a CGT asset you owned just
before dying is disregarded.”
Section 128.15 provides details:
what happens if a CGT asset you
owned just before dying:
devolves to your
legal personal representative;
a beneficiary in your estate.
legal personal representative,
or beneficiary, is taken to have acquired the
asset on the day you died.
capital gain or capital
loss the legal
personal representative makes if
the asset passes to
a beneficiary in your estate is disregarded.”
Australia is an exception in not treating death as a CGT
event. In other countries where inheritance taxes have been
abolished, death is treated as a capital gains taxing point
for capital gains tax purposes.
In Australia, the taxing point comes later, when the
inherited asset is sold.
The family home is exempt from CGT, even if it is sold
after death, provided it is sold within 2 years of death.
There is no need for a sale if the family home continues to
be occupied by a person who inherits the family home because
the main residence exemption from CGT applies.
And there is another exemption, which is that CGT does
not apply as a general rule to assets acquired before 20
September 1985 (i.e. assets owned when CGT was introduced).
Illustration if the deceased purchased
Commonwealth Bank shares when they first issued in September
1991, they would have paid $5.40 per share. If sold today,
the sale price would be about $100 per share. The capital
gain would be $94.60. A 50% discount is applied because the
shares have been held for more than one year. So one-half,
that is $47.30, is added to the taxable income of the estate
(if sold by the legal personal representative) or of the
beneficiary (if sold by the beneficiary who inherits the
Super death benefits tax is payable if a deceased
person’s superannuation balance passes as a lump sum to a
non-dependent beneficiary. This tax applies from 1 July
Superannuation balances are left outside of a Will – they
are not assets of the estate.
The superannuation balance is paid at the discretion of
the trustee of the super fund, subject to a Binding Death
Benefit Nomination (if one applies).
Super death benefits tax is payable by a non-dependent
beneficiary on the superannuation balance they receive.
Where the trustee has the choice between paying the
balance to a dependent or a non-dependent beneficiary, the
super death benefits tax may be an important consideration
in exercising the choice.
Most adult children will be non-dependents and therefore
be liable to pay super death benefits tax if they receive a
lump sum death benefit from their parent’s superannuation
balance as an inheritance (they are not allowed to receive
an income stream). The lump sum is added to their taxable
income, and they pay super death benefits tax at these
- On the taxable component of their super (taxed
element), tax at the beneficiary’s marginal tax rate or
17% (15% + 2% Medicare levy), whichever is the lower;
- On the taxable component of their super (untaxed
element), tax at the beneficiary’s marginal tax rate or
32% (30% + 2% Medicare levy), whichever is the lower.
There are some circumstances where this tax may not
apply, such as when the deceased and/or the beneficiary are
older than 60 years.
As was the case with Death and Estate Duties, concessions
apply to dependents. In this case, dependents pay no
super death benefits tax on lump sums or income streams
inherited. A dependent is defined as:
- the spouse or de facto spouse (of any sex), and any
former spouse or de facto spouse
- a child of the deceased under 18 years old (and up
to 25 years old if financially dependent) or without age
limit if disabled; or
- an interdependent person, such as a person having a
close personal relationship, living together, provided
with financial support, or providing domestic support
and personal care to the deceased
In summary, if there is no spouse or dependent child to
leave the super to, if possible, the balance should be
withdrawn before death so that it is distributed tax free
under a Will, instead of passing to a non-dependent as a
super death benefit who is facing a tax rate of up to 32%, a
rate which has not been seen since the days death duties
Conclusion – Is Australia a
tax haven for inheritance taxes
The ATO has a statement on its website. It is:
There are no inheritance or estate taxes in
The statement is true, only if your affairs are
structured to avoid Capital Gains Tax and Super Death