Overview
Australia is a multicultural country with around thirty percent of our population born overseas and a further 20% who are first generation Australians (with one or both parents born outside of Australia).
Many migrants to Australia choose to retain assets they have overseas or may later inherit assets from overseas relatives. Because of this diversity, Australians frequently look to have provisions in their wills to include family members or loved ones who live overseas.
Death duties or inheritance taxes are not applicable in Australia; nonetheless, there are other taxes that could impact your estate after your passing:
- income tax applicable on income earned in your estate; and
- capital gains tax on the sale of assets.
What are the potential financial and tax ramifications that could occur if a beneficiary or executor named in your will lives outside of Australia?
Foreign Executors
Your Will appoints an executor who has legal control over the assets in your estate after you die. This person is also known as your legal personal representative (or LPR). Their duties basically consist of filing for probate, gathering assets, paying outstanding debts and taxes, and distributing the estate assets to beneficiaries in accordance with the Will.
If none of the executors you have named are Australian residents as defined by Australian tax regulations, your estate will be considered a “non-resident trust,” which could have some unanticipated tax consequences for your estate.
These consequences are:
- Loss of the annual tax-free threshold of $18,200.00, which the estate can normally claim for three years from the date of death.
- Potential loss of the 50% discounting available on any capital gain on the sale of “Taxable Australian Property”, including real estate.
- Potential loss of the principal place of residence exemption for the sale of the PPR after death (normally available for 2 years from the date of death).
As such, your estate may be subject to higher taxes than it would be if the LPR had been an Australian resident for tax purposes.
One solution to reduce the potential tax consequences on your estate is to designate an executor who resides in Australia. If there are no options for you in Australia among friends and family members, then you may consider appointing professional executors such as trustee companies, accountants, or lawyers. Interestingly, not all of the executors need to be an Australian resident. Your estate will not be considered a “non-resident trust” and will not be subject to the previously described tax ramifications provided that at least one executor is an Australian resident for tax purposes.
Overseas Beneficiaries
If a beneficiary named in your will lives overseas, there may be other tax consequences to consider.
Some tax implications are:
- Non-taxable Australian property transfers, like Australian shares, may lack the usual capital gains tax rollover, potentially triggering tax liabilities for your estate.
- Transferring Australian real estate to overseas beneficiaries can entail several hurdles, including approval requirements from the Register of Foreign Ownership of Australian Assets and potential tax obligations like the Absentee Owner Surcharge Land Tax. Further, rental income from transferred property may be subject to higher non-resident income tax rates.
- Overseas beneficiaries may forfeit the 50% capital gains tax discount upon property sale.
Transferring cash to overseas beneficiaries incurs no tax liabilities in Australia. If your will provides your executor with the flexibility to sell Australian assets, settle taxes at resident rates (with at least one Australian resident executor), and then distribute tax-free cash to beneficiaries, then this may be a preferable estate planning strategy.
Get Professional Advice
The taxation aspects of a deceased estate are sufficiently complex to require expert professional advice. Both willmakers with foreign aspects to their estates and executors appointed to administer such an estate with should seek legal and accounting advice to ensure that tax obligations are fully understood and can be accounted for.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
If you need assistance with your international estate planning or need to gain clarity regarding your obligations as a legal personal representative of a deceased estate, contact our office to speak to our experienced legal team on 03 9592 3356, submit an enquiry via email office@citypacific.com.au, or contact us here.
