Non-resident beneficiaries and tax
When someone dies and leaves behind an estate with assets that earn income, the way the income is distributed and taxed can be quite different depending on whether those inheriting (the beneficiaries) are Australian residents or not[1].
With a non-resident beneficiary, tax may apply on income from investments held by the estate, which is to be withheld by the estate and remitted to the Australian Taxation Office (ATO) before being passed on to the beneficiary. The non-resident withholding tax must be processed either via the estate’s instalment activity statements or via income tax returns. All deceased estates have to pay tax annually for as long as they exist – that is, until all assets have been distributed to beneficiaries.
The good news is that certain categories of income are free of withholding tax for non-resident beneficiaries. These include:
- Franked dividends
- Unfranked dividends classed as “conduit foreign income” (CFI) – that is, foreign-sourced income from an Australian corporate entity
- Foreign-sourced income direct from a foreign-based entity
- Capital gains on non-taxable Australian property (for example, shares or managed funds), since K3 CGT would have applied earlier.
For certain other categories of income, however, an Australian resident estate (that is, where the executor is an Australian resident) is required to withhold income from a non-resident beneficiary via the instalment activity system. These categories are:
- Interest (10%)
- Non-CFI unfranked dividends (15%, or 30% when no double taxation agreement applies).
Non-resident withholding tax is classed as a ‘final tax’ and does not need to be declared in the estate’s tax return.
However, an Australian resident estate is required to declare categories of income received by a non-resident beneficiary if they are not tax-exempt or had withholding tax taken. These categories are:
- Rental income
- ‘Other’ income from managed funds (for example, an investment property held in a trust)
- Capital gains on taxable Australian property (for example, the sale of a house).
[1] An ‘Australian resident’ doesn’t have to be an Australian citizen or even to work in Australia – this status is usually based on the fact that they have a permanent home in Australia and not overseas. Conversely, an Australian-born Australian citizen who decides to live overseas automatically becomes a ‘non-resident’.