Foreign Resident Executors and Beneficiaries in your Will - Potential tax consequences

Introduction

Australia is a multicultural society, with 29.5% of the population being born overseas. It is therefore common for Australians to wish to include overseas family members in their Will.

Although there are no death duties or inheritance tax in Australia, the following usual taxes may apply to your estate after your death:

• income tax on any income earned from your assets; and
• capital gains tax on the sale of your assets.

This article explains some additional tax and financial consequences which may apply after your death, if an executor or beneficiary in your Will resides overseas.

An overseas resident who is an Australian citizen may still be considered a foreign resident by the Australian Taxation Office, if they do not meet the relevant criteria as set out in the tax legislation.

Executor living overseas

An executor is the person (or persons) appointed in your Will to have legal authority over your assets after your death. In summary, the role of your executor is to apply for a grant of probate, collect your assets, pay any debts and applicable tax, and to then distribute your estate to your beneficiaries in accordance with your Will.

If none of the executors in your Will are Australian residents (as defined in the relevant tax legislation), then upon your death, your estate will be considered a ‘non-resident trust’. This could lead to the following tax consequences:  

• Your estate will lose the tax-free threshold of $18,200.00 per year (normally available for three years after death).
• Your estate will pay tax at the higher non-resident rate on any income earned from your Australian assets after your death.
• Your estate may not be entitled to the 50% capital gains tax discount on the sale of any ‘Taxable Australian Property’ (eg real estate).

As a result, your estate could end up paying more tax than it otherwise would have, had the executor been an Australian resident.

If you are concerned about the additional tax which may be payable, then you could appoint an Australian resident as the executor of your Will. If you do not have any family or friends in Australia who would be suitable as the executor, then you could appoint a professional executor, such as a solicitor or accountant, or a ‘trustee company’, such as State Trustees (in Victoria).

It is not necessary for all of the executors in your Will to live in Australia. Provided at least one of your executors is an Australian resident, then your estate will not be considered a non-resident trust, and will not be subject to the additional tax consequences as outlined above.  

Beneficiary Living Overseas

If any beneficiary in your Will resides overseas, then the following potential tax and financial  consequences could arise after your death:

• If non-taxable Australian property (eg Australian shares) are transferred from your estate to the beneficiary, then the usual capital gains tax rollover will not be available, and your estate may have to pay capital gains tax upon the transfer.
• If Australian real estate is transferred from your estate to the beneficiary:  
  • Before receiving the asset, if the beneficiary is not an Australian citizen or permanent resident, the beneficiary may need to apply for approval from the Register of Foreign Ownership of Australian Assets (‘the Register’). The application fee is significant and will depend on the value of the property. As an example, at the date of this article, the application fee is $42,300.00 for an established residential property worth between $1-2 million. If the property is transferred to the beneficiary without an application to the Register first being made, then significant financial penalties, and even criminal penalties, can be imposed on the beneficiary.
  • For property in Victoria - the beneficiary may be subject to the Absentee Owner Surcharge Land Tax. At the date of this article, the tax is 4% of the land value (if valued at $50,000.00 or above), payable each year, in addition to usual annual land tax. Australian citizens and permanent residents do not have to pay this tax, even if they reside overseas.
  • The beneficiary may have to pay the higher non-resident rate of income tax on any rental income earned from the property.
  • If the beneficiary later decides to sell the property, then they may not be entitled to the 50% capital gains tax discount.

If cash is transferred to a beneficiary who resides overseas, then no tax is payable on the transfer (in Australia). It may therefore be preferable for your Will to give your executor the option to:

1. sell your assets in Australia first;
2. pay any applicable tax from your estate at Australian resident rates (as long as at least one of the executors is an Australian resident);
3. transfer the cash to the beneficiaries, tax free.

Conclusion

Appointing executors or beneficiaries who reside overseas in your Will can lead to significant tax and other financial consequences for your estate and your beneficiaries. These risks can be avoided or minimised through proper advice and careful drafting of your Will. Contact our Accredited Specialist estate planning lawyer if you require assistance. Alternatively, please contact our office on 1300 25 506 or email sp@sharrockpitman.com.au.

Further Reading

Taxes and Deceased Estates

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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.

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