What to Do With Inheritance Money in Australia?

Receiving an inheritance is a significant life event, often bringing a mix of emotions alongside new financial considerations. For individuals in Australia, understanding how to approach these funds can lead to a more secure financial future. This article offers general guidance on managing inherited money.

Understanding the Inheritance and Initial Actions

Inheritances can arrive in various forms, including cash, shares, real estate, or superannuation death benefits. Each type of asset carries its own set of considerations for the beneficiary. A thorough understanding of the specific assets received is an important first step.

The legal process of estate distribution, often involving probate, grants the executor authority to manage the deceased’s assets. Executors ensure assets are distributed according to the will’s instructions, a process that can vary in duration depending on the estate’s complexity. Beneficiaries should be aware of the general timeline for distribution, which can range from a few months to over a year.

In Australia, inheritance money itself is generally not considered taxable income to the recipient. However, any income generated by the inherited assets after they are received, such as interest or dividends, will be subject to taxation.

Gathering all relevant documentation, including copies of the will, grant of probate, and statements for inherited assets, is a practical initial step. This documentation helps in future financial planning. Considering professional advice from a legal or financial expert early in the process can help clarify specific entitlements and obligations.

Developing a Strategy for Your Inheritance

Approaching an inheritance with careful thought rather than immediate action is a prudent strategy. Hasty decisions made under emotional duress may not align with long-term financial well-being.

Defining clear financial goals is a central component of this planning process. These goals might range from establishing an emergency fund to saving for a home, funding education, or preparing for retirement. Understanding what you want to achieve helps direct the allocation of inherited funds.

Assessing your current financial standing provides a foundational understanding before making any large decisions. This involves reviewing existing debts, the adequacy of your emergency savings, and your overall budget. A clear picture of your financial health helps identify areas where the inheritance could provide the most benefit.

Prioritizing how the funds could be used involves weighing options against your defined goals and current financial situation. This could mean using a portion to reduce high-interest debt, building an emergency fund, or saving for a significant purchase like a property down payment. The decision should reflect your most pressing financial needs and future desires. Understanding your personal risk tolerance and time horizon also guides the strategic allocation of funds.

Navigating Investment and Savings Options

Once a strategy is in place, exploring various savings and investment options becomes the next step for managing inherited funds in Australia. High-interest savings accounts offer a secure place to hold funds while earning a modest return. Term deposits provide a fixed interest rate for a set period, offering predictability.

Using inheritance money for debt reduction can yield immediate financial benefits by reducing interest payments. This applies to various forms of debt, including mortgage principal, personal loans, or outstanding credit card balances. Eliminating or significantly reducing debt frees up future cash flow.

Contributing to superannuation, Australia’s compulsory retirement savings scheme, is another option for long-term growth. Both concessional (pre-tax) and non-concessional (after-tax) contributions have annual caps and can enhance retirement savings. These contributions are generally preserved until retirement age.

Direct share investments allow individuals to own a stake in publicly listed companies, offering potential for capital growth and dividend income. Managed funds pool money from many investors to invest in a diversified portfolio of assets, managed by professional fund managers. Exchange Traded Funds (ETFs) are similar to managed funds but trade on stock exchanges, often providing diversified exposure to markets or specific sectors. Property investment, whether residential or commercial, represents another avenue for capital growth and potential rental income, often requiring a substantial initial outlay.

Inherited funds can also facilitate significant personal purchases, such as contributing towards a home deposit or funding educational pursuits. These investments can enhance personal well-being or future earning potential. Each option serves different financial objectives and risk appetites.

Tax Implications of Managing Inherited Assets

While the initial receipt of an inheritance is generally not taxed in Australia, subsequent actions taken with inherited assets can trigger tax obligations. Capital Gains Tax (CGT) becomes relevant when an inherited asset, such as property or shares, is sold at a profit. The CGT applies to the difference between the sale price and the asset’s cost base.

For inherited assets, the cost base is typically established as the market value of the asset on the date the deceased passed away. Keeping accurate records of the asset’s value at the time of inheritance is important for future CGT calculations.

Income generated from inherited funds or assets is subject to income tax. This includes interest earned from savings accounts, dividends received from shares, or rental income from an inherited investment property. These earnings must be declared as part of your assessable income in your annual tax return.

Gifting inherited money to others does not incur gift tax in Australia. However, gifting large sums can have implications for recipients who receive social security benefits, as Centrelink may assess these gifts under their means testing rules. This can affect eligibility for certain payments.

Maintaining thorough records for all transactions related to inherited assets, including initial valuations, purchase and sale details, and any income generated, is important for accurate tax reporting. Seeking professional tax advice tailored to your specific situation can help ensure compliance and optimize financial outcomes.