Cash, a house or shares from a parent's estate is not taxed in itself. Tax can apply when you sell inherited assets, when you receive their Super, and on the income your inheritance earns from here.
Property, shares and Super
Inherited property. If you inherit your parent's home, you may be able to sell it without capital gains tax if the sale settles within two years of their death. Where your parent bought it after 20 September 1985, it must have been their main residence and not used to produce income just before they died. After two years, capital gains tax may apply, although the ATO can extend the period in exceptional circumstances.
Inherited shares. Not taxed when you receive them. When you sell shares the deceased bought after 20 September 1985, capital gains tax is generally worked out on their original purchase price, so shares held for decades can carry a large built-up gain.
Inherited Super. As a financially independent adult, the taxable component is taxed at up to 17% when paid to you as a lump sum, deducted before you receive it.
What should you do with the money?
- Pay down your mortgage. A guaranteed, tax-free return equal to your interest rate.
- Contribute to Super. After-tax contributions up to $130,000 a year, or up to $390,000 under the bring-forward rule, depending on your balance. Under $500,000, you may be able to use unused concessional caps and claim a deduction.
- Invest outside Super. More flexible, with earnings taxed at your marginal rate.
- A combination. Often the right answer, balancing debt, tax and access to your money.
Where people get caught out
- Selling inherited property too late and losing the capital gains tax exemption.
- Parking the money in a bank account for years while deciding what to do.
- Forgetting the Age Pension. An inheritance counts under the assets and income tests.
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