Updated 23 October 2026
Wills - Potential Problem #10: Not Considering Taxes
Australia has no general inheritance or estate tax. A beneficiary does not pay a tax simply because they inherit money or property. However, tax can arise from income earned during administration, the disposal of inherited assets and some superannuation death benefits. The ATO’s guidance for beneficiaries makes this distinction clear.
For NSW families, the practical question is what each beneficiary will receive after the applicable liabilities have been met. A will should work with ownership records, superannuation nominations and tax advice. The 2026–27 Federal Budget reforms add another reason to review those arrangements, particularly where investment properties, businesses or trusts are involved.
1. Separate the deceased’s tax affairs from the estate’s income
An executor may need to arrange the deceased person’s final tax return and outstanding earlier returns. The final return covers the period from 1 July of the relevant income year to the date of death. Income arising after death, such as rent, interest and dividends, is dealt with separately through the estate’s tax arrangements.
A deceased estate may need its own tax file number and trust tax returns. Whether income is assessed to the estate or a beneficiary depends on the administration stage and entitlement to that income. Receiving an estate distribution can therefore involve different tax treatment for inherited capital and estate income. Keep records that distinguish them.
The deceased-estate tax concessions generally apply for the first three income years where the trustee is assessed. These are not three tax-free years. Individual rates and the full tax-free threshold generally apply, without tax offsets or Medicare levy. Different rules apply from the fourth income year.
A short first income year still counts. For example, if someone dies in March 2026, the estate’s first income year ends on 30 June 2026 and its third ends on 30 June 2028. The concession does not continue until March 2029. Executors should obtain advice early rather than assume delay has no tax consequences.
2. Understand the two-year rule for an inherited home
A qualifying inherited dwelling may be sold with a full capital gains tax exemption if the relevant conditions are met and settlement occurs within two years of death. Signing a sale contract within two years is not enough for this particular deadline. The period starts at death, not when probate is granted.
The ATO’s inherited-property guidance considers when the deceased acquired the dwelling, its main-residence and income-producing use, and residency requirements. The rule does not exempt every investment property or give all estate assets a two-year tax holiday.
If administration or a dispute delays a sale, assess the position promptly. An extension of the two-year period, another exemption pathway or a partial exemption may be available. Passing the deadline does not automatically create a penalty or tax on the entire sale price. Late lodgment or unpaid tax can raise separate compliance issues.
3. Preserve the records needed to calculate a gain
Death does not automatically reset every asset’s tax cost base to its current market value. For many assets acquired by the deceased on or after 20 September 1985, their cost-base history remains relevant. Different rules can apply to pre-CGT assets and qualifying homes. Check the ATO’s inherited-asset cost-base rules before assuming a valuation determines the taxable gain.
Keep purchase contracts, acquisition expenses, improvement records, share statements and relevant valuations. These records can matter years after the estate is distributed. Investment property, shares and cryptocurrency should be reviewed asset by asset. A beneficiary may inherit an asset without an immediate CGT liability but face tax when it is later sold.
4. Check superannuation separately
Superannuation does not automatically pass under the will. The fund’s rules and a valid death-benefit nomination can affect who receives it. Eligibility to receive a super death benefit and dependency for tax purposes are separate questions. An adult child may be an eligible recipient without being a tax dependant.
Under the ATO’s superannuation death-benefit rules, a lump sum paid to a tax dependant is generally tax-free. A financially independent adult child may pay tax on taxable components. The components and payment arrangements matter; there is no single inheritance-tax rate for every super benefit.
Nominating your legal personal representative can direct the benefit to your executor for estate administration, subject to the nomination’s validity and fund rules. It does not automatically make the payment tax-free. Where the benefit goes through the estate, the beneficiaries who are expected to benefit remain relevant to its tax treatment.
5. What changed in the 2026–27 Federal Budget?
Position at 23 October 2026: some Budget measures are already enacted with future application dates; others remain proposed. They should not be described as a new general tax on the value of an inheritance.
Capital gains tax: the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received assent on 26 June 2026. The core reforms apply from 1 July 2027. For affected gains accruing from that date, the 50% CGT discount is replaced by inflation-based treatment, with a minimum 30% tax rate, subject to exemptions and transitional rules.
Treasury’s Budget overview explains that the new arrangements concern gains accruing from 1 July 2027 when realised. They do not impose 30% tax on every inherited asset’s gross value. Executors need advice on the asset, relevant dates, available exemptions and who is assessed before deciding to sell or transfer it.
Discretionary trusts: legislation introduced on 14 October 2026 proposes a 30% minimum tax on discretionary-trust income from 1 July 2028. The Treasurer’s second-reading speech identifies proposed exclusions for deceased estates and discretionary testamentary trusts established for genuine testamentary purposes. The bill also contains further CGT and negative-gearing implementation provisions.
Those exclusions require careful checking against the legislation and the trust’s terms. Do not assume every trust created by a will qualifies, or that the October bill is already law. The practical response is to review existing wills and trust structures with legal and tax advisers, while checking commencement dates and later amendments before implementing changes.
6. Compare the inheritance after tax
Illustration only: a parent intends to treat two children equally. One receives cash; the other receives shares with the same market value but a substantial unrealised gain. If the shares are later sold, the second child’s after-tax outcome may be different. Equal headline values do not necessarily produce equal spendable inheritances.
A coordinated plan should consider whether assets will be transferred or sold, which part of the estate bears particular liabilities and whether sufficient cash will remain to meet them. The will can allocate responsibilities within the estate, but it cannot override tax law. This example is hypothetical, not a reported court decision.
7. Coordinate the will, administration and tax advice
NSW transfer duty also needs attention. Deceased-estate concessions depend on the transfer meeting the applicable requirements. A family agreement to redistribute property differently can change the duty outcome. Overseas assets or beneficiaries may introduce foreign taxes and Australian residency or withholding issues; obtain advice in the relevant jurisdictions.
Before distributions, identify liabilities, obtain the necessary tax calculations and retain an appropriate reserve. Keep beneficiaries informed about timing and why funds are being held. Review the plan when ownership, family circumstances, residency or tax rules change, rather than waiting until an executor must resolve competing expectations.
CM Lawyers can help coordinate your will and estate administration with advice from your accountant or registered tax agent. Contact our Marrickville team to discuss your assets, beneficiaries and the documents needed for a practical estate plan.
This article provides general information, not personal tax advice. The relevant law and transaction dates must be checked for your circumstances.
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