Do You Pay Tax on an Inheritance in Australia?

Detailed Explanation

The fear that an inheritance comes with a tax bill attached is common in Australia, and mostly comes from overseas: the UK and the US both tax estates directly, and a lot of what people read about "inheritance tax" online is written for those countries. Australia's system works differently. See the Wills, Probate & Estates hub for how this question fits alongside the rest of estate administration.

Australia has no inheritance tax or death duty

Australia abolished federal estate duty in 1979, and every state had abolished its own death duty by 1982. Since then, there's been no tax charged simply because money, property, or other assets passed to you from someone who died. This applies whatever the relationship: spouse, child, more distant relative, or even a friend named in the will. What you receive isn't assessable income, and you don't report it on your tax return.

That doesn't mean tax never comes up. It comes up in two other ways: through capital gains tax if you later sell what you inherited, and through ordinary income tax on anything the inherited asset earns after you own it (rent from an inherited property, dividends from inherited shares, interest on an inherited bank balance).

CGT is triggered by selling, not by inheriting

Capital gains tax applies to the gain made when a CGT asset changes hands. The ATO generally disregards the capital gain or loss that would otherwise arise on the deceased's death itself: the legal personal representative doesn't have to treat the transfer to a beneficiary as a sale, so no CGT event happens at that point. The gain (or loss) is deferred, not cancelled. It's worked out later, when you or the estate actually sells or otherwise disposes of the asset, based on the increase in value from the date of death to the date of sale, not from whenever the deceased originally bought it.

This is the detail people most often get wrong: they assume inheriting a rental property or a parcel of shares is itself a taxable event. It isn't. The tax question only becomes real the day you decide to sell.

The pre-CGT exemption: assets bought before 20 September 1985

Capital gains tax didn't exist in Australia before 20 September 1985, so any asset the deceased bought before that date is treated as a "pre-CGT asset". If you inherit one, your cost base (the figure used to calculate the taxable gain when you eventually sell) is reset to the asset's market value on the day the deceased died, not what they originally paid for it decades earlier. Everything from that point onward is treated as a normal post-1985 capital gain calculation.

Cost base rules for everything else

For an asset the deceased acquired on or after 20 September 1985, the rule flips: your cost base is generally the deceased's own cost base on the day they died (essentially what they paid, plus eligible costs), which then carries over to you. You don't get a fresh valuation at the date of death for a post-1985 asset the way you do for a pre-1985 one; you effectively step into the deceased's tax position and the gain accrued during their lifetime becomes part of your eventual taxable gain if you sell. There's a specific exception for a dwelling that was the deceased's home, covered below.

If you go on to sell an inherited asset and have held it (combined with the deceased's own ownership period) for more than 12 months, the standard 50% CGT discount for individuals is available in the usual way.

The main residence exemption for an inherited home

A family home gets special treatment. If the deceased used the property as their main residence up until they died and it wasn't being used to produce income at that time (or they'd acquired it before 20 September 1985), you can sell it within two years of the death and pay no CGT at all, regardless of whether you lived in it yourself or rented it out during those two years. Miss the two-year window, or the property doesn't meet those conditions, and only a partial exemption (or none) may apply instead, worked out proportionally. The ATO can extend the two years in limited circumstances, such as a will dispute or a delayed grant of probate genuinely outside the executor's or beneficiary's control.

This exemption is a large part of why what happens to jointly owned property when one owner dies matters for tax as well as ownership: a jointly-owned home passing straight to a surviving joint tenant is a different CGT situation again, since there's no "inheriting" in the technical sense at all for that share.

What's different about superannuation

Superannuation death benefits aren't assets you inherit through the estate in the same way, and they aren't taxed under these CGT rules. They're paid by the fund's trustee, generally tax-free to a dependant and taxed differently to a non-dependant such as an adult, financially independent child. See how superannuation is paid out when someone dies for how that separate system actually works.

The final tax return still needs doing

None of this removes the deceased's own tax obligations. A final individual tax return covering the period up to the date of death is generally required, and the estate itself may need to lodge its own returns for income earned during administration, before any of this inheritance-and-CGT question even arises for beneficiaries. See what does an executor do in Australia for where this sits in the broader administration process.

Things to Consider

• Get advice before selling, not after. CGT calculations depend on exactly when and how an asset was originally acquired, whether it was ever used to produce income, and which exemptions might apply. For anything beyond a very simple estate, it's worth having the executor's or beneficiary's own accountant or registered tax agent run the actual numbers before a sale goes ahead, since the difference between a full exemption and a partial one can be significant.
• The two-year window is worth planning around. If an inherited home might be sold, knowing the two-year main residence exemption exists, and roughly when it started running from, can shape the timing decision rather than being discovered after the fact.
• Keep records of what the deceased paid and when. Cost base calculations often depend on purchase documents, renovation costs, and dates of acquisition that can be hard to track down years later. Locating this paperwork early, while sorting the rest of the estate, saves difficulty down the track.
• A memorial doesn't need to wait on any of this. Tax questions and CGT calculations can take weeks to resolve properly. An online memorial gives family somewhere to share memories and photos in the meantime, separate from the financial administration running in parallel.

Common Mistakes

• Assuming an inheritance itself is taxed. It isn't. Confusing Australia's position with the US or UK inheritance tax systems is the single most common misunderstanding on this topic.
• Selling an inherited home just outside the two-year window without checking. Missing the exemption by a matter of weeks, when an extension might genuinely have been available, is an expensive and avoidable mistake.
• Not tracking down the deceased's original purchase details for a pre-1985 asset. The market-value-at-death cost base for a pre-CGT asset still needs to be established and documented at the time, not reconstructed years later when the property is finally sold.
• Confusing superannuation death benefits with other inherited assets. Super is taxed under its own rules, not the CGT framework described here; treating a super payout the same way as an inherited house or share portfolio leads to the wrong answer.
• Distributing or selling assets before the estate's own tax position is settled. As with debts, an executor who moves too quickly before tax obligations are clear risks complications later. See do you inherit a person's debts when they die in Australia for the same principle applied to debts rather than tax.