Australian Tax on Inheritances from Estates and Trusts
If you have a beneficiary in Australia who is set to receive an inheritance from your estate or trust, it’s important to be aware of the Australian tax rules. The rules apply whether the estate or trust is based in Australia or overseas, and understanding them can help ensure your beneficiaries are not caught by surprise.
Our first blog on this subject is here: Tax Complications for Trusts with Australian Resident Beneficiaries, Trustees or Protectors
What the Australian Tax Law Says
Australian residents who receive distributions from trusts—including non-resident trusts—may have to pay tax on those amounts. The relevant law, Section 99B of the Income Tax Assessment Act 1936 (Australia), covers any benefits an Australian resident beneficiary receives from a trust. This includes both income and certain types of gains unless specific exceptions apply.
Estates vs. Trusts: Key Differences
One major difference is that estates are treated slightly differently from ongoing trusts. For an estate, the value of the estate is generally assessed at the date of the person’s death, and this is not taxed in Australia. However, if the estate continues to generate income during its administration, that income may be taxed when it is eventually distributed to the beneficiary. This includes income earned or gains made after the date of death.
For trusts, any distributions to an Australian resident are more broadly covered by the law, meaning they may be taxed unless an exception applies.
Exceptions: What’s Not Taxable
Some specific types of payments from a trust are not taxed. For instance:
• Corpus Exception: This refers to the original value of the trust's assets, like a gift made by the person who set up the trust. If a trust distributes this original amount, it is not taxed. However, if the corpus includes accumulated income or gains, those amounts could still be taxable.
• Non-Assessable Amounts: Certain types of payments, like pre-CGT (Capital Gains Tax) gains or life insurance payouts, are also exempt from tax, but these need to be clearly documented.
How Does This Affect Australian Beneficiaries?
If an Australian resident receives a distribution from a non-resident trust or estate, they could be taxed on that distribution unless they can show that it falls under one of the exceptions. The tax authorities will generally look at:
• Where the distribution came from (e.g., was it income or capital?).
• Whether the trustee has already paid tax on that amount.
• The type of asset being distributed.
Estates: Low-Risk Scenarios
The Australian tax office has issued guidelines on when it is less likely to investigate an inheritance from a non-resident deceased estate. These include cases where:
• The deceased person was a non-resident.
• The inheritance is paid within two years of the person’s death.
• The total inheritance is less than AUD 2 million.
Even in these “low-risk” scenarios, beneficiaries need to provide documentation to prove they qualify for any exceptions.
What Should You Do?
If your loved ones are resident overseas and are beneficiaries of your New Zealand trust, it's essential to vary your Trust deed and your will so that your overseas resident beneficiaries receive their inheritance from your estate and not from your Trust. Overseas tax rules are complex when it comes to trusts, so having documentation that shows that the inheritance came from your estate is crucial.
When drafting New Zealand trusts with overseas resident beneficiaries our team at Ross Holmes Virtual Lawyers Limited draft complex trust deeds and associated wills, so that the inheritances of the overseas resident beneficiaries are received from your estate, and not from your Trust. This enable your overseas resident beneficiaries to state truthfully that they have received an inheritance from your estate.
We are not taxation experts and cannot give advice on taxation. After you pass away your overseas resident beneficiaries should obtain expert taxation advice in their country of residence.
