Understanding the tricky bits of planning your estate across different countries can be challenging, particularly when trying to grasp how taxes work in this scenario. Concepts like where you live, where you’re legally tied to, and how income is sourced are important for figuring out how taxes will apply. This handy guide dives into what these terms mean, looks at how agreements between countries can affect taxes, and explains things like capital gains tax and what happens to superannuation when someone passes away. Plus, it shares smart tactics to help reduce your tax burden while planning your estate internationally.

Domicile, Residency and Source Rules

When planning your estate on an international scale, understanding the concepts of domicile, residency, and source rules is essential, especially when it comes to taxation.  These terms might seem interchangeable, but they have distinct legal meanings and implications that can significantly impact how your estate is taxed across different jurisdictions. 

Concept	Importance
Domicile	Refers to the country considered your permanent home. It’s where you intend to return to, even if living abroad for years. It is determined by long-term intentions, not current residence. Domicile is crucial for inheritance tax laws, as many countries base these laws on the deceased’s domicile at the time of death. To learn more about the importance of domicile for international estate planning, read our detailed article here.
Residency	Typically where you physically live and work. Unlike domicile, which is about long-term intentions, residency is usually determined by where you spend most of your time in a given year. Residency affects both income tax and estate tax, with different countries having varying rules on taxing residents versus non-residents.
Source Rules	Govern where income or assets are considered to originate for tax purposes. These rules are vital in international tax planning, as they determine which country has the right to tax your income or assets. This means that income from assets located in another country might be taxed in the country where the asset is located, even if you are a resident elsewhere.

Double Tax Agreements (DTAs)

Double tax avoidance treaties are agreements between two countries that aim to avoid the double taxation of income or assets. Without such treaties, individuals could be taxed by both countries on the same income, leading to a heavier tax burden. These treaties outline which country has the right to tax certain types of income, gains, or assets and often provide relief by allowing a credit or exemption for taxes paid in one country against the tax liability in the other.

Australia has entered into double tax avoidance treaties with many countries around the world. These treaties outline how income and assets are taxed when an individual has ties to both Australia and another country. 

When it comes to estate planning, these treaties can have a significant impact in several ways:

1. Reducing Double Taxation: If you have assets in both Australia and another country, a double tax avoidance treaty can help ensure that your estate is not taxed twice on the same asset. For example, if you own property in both Australia and another country, the treaty may determine which country has the primary right to tax the property, helping to avoid a situation where both countries claim taxes on the same asset.
2. Clarifying Tax Obligations: These treaties help clarify where and how much tax needs to be paid. For instance, if you are an Australian resident with assets overseas, the treaty can provide rules on how those assets will be taxed, ensuring that your estate complies with tax laws in both Australia and the other country. This helps avoid unexpected tax bills and ensures that your estate planning is on solid legal ground.
3. Planning Opportunities: By understanding how Australia’s double tax treaties work, you might find opportunities to structure your estate in a more tax-efficient manner. For example, the treaty may allow for a credit for taxes paid in one country against taxes owed in Australia, potentially reducing the overall tax burden on your estate.
4. Avoiding Legal Conflicts: These treaties help prevent disputes between Australia and other countries over who has the right to tax certain assets or income. By clearly defining the tax obligations in both countries, the treaties reduce the risk of legal conflicts, which can save your estate from lengthy and costly legal battles.

Capital Gains Tax (CGT)

Capital Gains Tax (CGT) plays a significant role in international estate planning for Australian residents, particularly when dealing with inherited assets from abroad. CGT generally does not apply when you inherit an asset. However, when you sell an inherited asset, CGT implications can arise depending on the type of asset:

• Non-Property Assets: For most assets that are not property, standard CGT rules apply.
• Property: If the inherited asset is a property, it may qualify for the main residence exemption from CGT, potentially reducing or eliminating the CGT liability.
• Collectables and Personal Use Assets: These assets are subject to CGT unless they were acquired for less than the specific thresholds for these types of items.

Determining the Cost Base of the Asset

If the inherited asset is not fully exempt from CGT, you will need to determine its cost base to calculate any potential capital gain when you sell it. The cost base is typically determined based on the value of the asset either:

• When the deceased originally acquired it, or
• When the deceased passed away.

Eligibility for CGT Discount or Indexation

Australian residents, including individuals, trusts, and super funds, may be eligible for a CGT discount on assets held for 12 months or more. When it comes to inherited assets:

• If the deceased acquired the asset on or after 20 September 1985, you can treat it as though you have owned it since they acquired it, which may qualify you for the CGT discount.
• If the deceased acquired the asset before 20 September 1985, you can treat it as though you have owned it since their date of death.

If the deceased passed away before 21 September 1999, you might opt to index the cost base for inflation up until 21 September 1999 instead of using the CGT discount. Indexation adjusts the asset’s cost base to account for inflation, potentially reducing the capital gain.

Winding Up a Deceased Estate

When administering and winding up a deceased estate, the legal personal representative (usually the executor) may need to dispose of some or all of the estate’s assets. In such cases, any capital gain or loss made by the legal personal representative is subject to the usual CGT rules.

Unapplied Capital Losses

If the deceased had any unapplied net capital losses at the time of their death, these losses do not transfer to beneficiaries or the legal personal representative. As a result, you cannot use these losses to offset any capital gains you may make.

Keeping Records of Inherited Assets

It is crucial to keep accurate records when you inherit an asset. These records should include:

• The date the deceased acquired the asset.
• The asset’s value or cost.
• Any costs related to the asset that you or the legal personal representative incur.

These records will help you accurately calculate CGT if you later decide to sell the asset. For assets acquired before 20 September 1985, you will need to know the asset’s market value at the date of the deceased’s death. If the asset was acquired on or after 20 September 1985, you will need records of the deceased’s cost base for the asset.

Assets Passing to Foreign Residents

If an asset passes to a foreign resident, CGT is triggered in the deceased’s estate at the time of their death if:

• The asset was acquired by the deceased on or after 20 September 1985 (the start of CGT).
• The deceased was an Australian resident at the time of death.
• The asset is not considered taxable Australian property in the hands of the foreign resident beneficiary.

The capital gain or loss is calculated based on the market value of the asset at the date of death and must be reported in the deceased’s final tax return.

Assets Passing to Charities and Super Funds

When a CGT asset passes to a tax-advantaged entity, such as a charity or a complying super fund, CGT is also triggered in the deceased’s estate at the time of death.

A tax-advantaged entity can include tax-exempt entities like churches or charities, as well as trustees of complying super funds, approved deposit funds, or pooled super trusts.

The capital gain or loss is calculated similarly, using the market value of the asset at the date of death. However, a capital gain or loss from a testamentary gift can be disregarded if the gift is made to a deductible gift recipient and would have been income tax deductible if it had not been a testamentary gift.

Understanding CGT and its implications is crucial for effective international estate planning. While developing your international estate planning strategy, make sure to consider the tax impact of both domestic and foreign assets and utilise available tax treaties to avoid unnecessary tax liabilities. Proper structuring of assets and timing of sales can significantly influence the overall tax outcomes for beneficiaries.

Estate Planning

Australia once imposed estate taxes, commonly referred to as death duties, which were levied by both state and federal governments. These taxes were applied to the transfer of assets upon death. However, by 1984, all such duties were abolished, largely due to various economic and political pressures. This abolition significantly impacts international estate planning, as it simplifies the process of transferring assets upon death, without the need to account for estate taxes.

Currently, there are no inheritance or estate taxes in Australia. This means that when assets are passed on after death, they are not subject to any additional tax specifically related to inheritance.

Although there are no estate or inheritance taxes, there are still potential tax obligations associated with the assets you inherit:

1. Capital Gains Tax (CGT): If you decide to sell or otherwise dispose of an asset that you inherited from a deceased estate, CGT may apply. The amount of CGT depends on factors such as the type of asset, its cost base, and how long it has been held.
2. Income Tax: Any income generated from inherited assets, such as dividends from shares or rental income from property, is subject to regular income tax. These earnings must be declared in your tax return and will be taxed at your applicable income tax rate.

Super Death Benefit

When a person who has superannuation (super) passes away, the super fund’s trustee is responsible for determining who will receive the benefits. The payment made from the super fund after the person’s death is referred to as a ‘super death benefit.’

The tax treatment of a super death benefit depends on several factors:

1. Dependency Status: Whether you are considered a dependant of the deceased under tax law significantly impacts the tax you may owe.
2. Type of Payment: The form in which the benefit is paid—either as a lump sum or as an income stream—affects how the benefit is taxed.
3. Tax Status of the Super: The benefit’s tax-free or taxable status, including whether the super fund has already paid tax on the taxable component, will influence the amount of tax payable.
4. Age Considerations: Your age and the age of the deceased at the time of death are also relevant, particularly for income streams, as they can affect the applicable tax rates.

If you are a dependant of the deceased, the taxable component of a super death benefit received as a lump sum is generally tax-free. However, if the benefit is received as an income stream, the tax treatment may vary depending on the factors outlined above.

If you are not a dependant of the deceased, you can only receive the super death benefit as a lump sum. The taxable component of this lump sum payment is subject to tax, but it is entitled to a tax offset, ensuring that the income tax rate applied is as follows:

1. Taxed Element: The maximum tax rate is 15% plus the Medicare levy.
2. Untaxed Element: The maximum tax rate is 30% plus the Medicare levy.

For beneficiaries who are foreign residents, the taxation of superannuation death benefits can be more complex. Australian tax laws will still apply, but the foreign resident might also face taxation in their country of residence. However, tax treaties between Australia and the beneficiary’s country may provide relief by reducing or eliminating double taxation. It’s important for estate planners to consider the tax implications in both jurisdictions to optimise the outcome for foreign-resident beneficiaries.

International Estate Planning Strategies to Minimise Your Tax Liability

When it comes to international estate planning, Australian residents can adopt several strategies to minimise tax liabilities, particularly in the context of capital gains tax (CGT), income tax, and superannuation death benefits. Here are some key strategies:

Strategy	Description
Utilising Double Tax Treaties	Leverage Tax Credits: Australia’s double tax treaties can help reduce or eliminate double taxation on assets. By understanding treaty provisions, taxes paid in one country can be credited against taxes owed in Australia, minimising overall tax liability. Choose the Right Jurisdiction: When holding or investing in international assets, opt for countries with favorable tax treaties with Australia to reduce double taxation risk and benefit from more favorable tax rates.
Timing of Asset Sales	Deferred Sale of Inherited Assets: Holding inherited assets for more than 12 months may qualify for the CGT discount, reducing taxable gain by 50%. Waiting for favorable market conditions or currency exchange rates can also lessen CGT impact. Main Residence Exemption: Inherited property may qualify for the main residence exemption, potentially eliminating or reducing CGT upon sale.
Superannuation Death Benefits	Strategic Beneficiary Designation: Designating dependents (e.g., spouse, minor children) as beneficiaries of superannuation death benefits can be tax-efficient, as payments to them are generally tax-free, minimising the estate’s tax impact and maximising benefits passed on to heirs. Consider Lump Sum vs. Income Stream: Choosing between receiving superannuation death benefits as a lump sum or income stream can affect the tax burden. Opt for the most tax-efficient form to reduce overall tax liability.
Trust Structures	Establishing Testamentary Trusts: Testamentary trusts offer flexibility and tax benefits, especially for minor beneficiaries, as income from these trusts is taxed at adult marginal rates, which can be lower than rates applied to minors otherwise. Foreign Trusts: Setting up a trust in a favorable jurisdiction for assets held abroad may provide tax benefits, including protection from double taxation and favorable CGT treatment.
Charitable Donations	Testamentary Gifts: Making gifts to charitable organisations through your will can reduce the estate’s tax liability, as these gifts are often exempt from CGT and may offer income tax deductions.
Record Keeping and Cost Base Adjustment	Accurate Record-Keeping: Keeping detailed records of acquisition costs and related expenses for inherited assets is essential for accurately determining the cost base, potentially reducing CGT upon sale. Cost Base Indexation: For assets acquired before 21 September 1999, opting for cost base indexation can reduce the capital gain and the CGT liability.
Consulting with Professionals	Engage Tax and Legal Advisors: International estate planning is complex, involving various tax laws and treaties. Consulting with professionals who specialise in both Australian and international tax laws is essential for optimising your estate plan.

Protect Your Inherited Assets with Effective Taxation Strategies. Contact Us Today.

Understanding and managing the tax aspects of international estate planning is essential to safeguarding your wealth and ensuring a smooth transfer of assets. By familiarising yourself with key tax concepts and leveraging strategic planning, you can minimise your tax liability and protect your estate. For guidance tailored to your unique situation, our law firm has a team of expert lawyers to help.