Can the ATO take an inheritance?
Short answer
Yes, once it reaches you. Money you inherit is not protected from a tax debt. When it lands in your bank account the ATO can take it with a garnishee notice, and it can even garnishee the executor before distribution. If you are bankrupt when the inheritance arrives, it goes to your trustee. Before the estate is distributed, the deceased's own tax debts are paid first.
Before the estate is distributed
Two different tax debts can touch an inheritance, and people mix them up.
- The deceased's debt. The executor must lodge any outstanding returns for the person who died and pay their tax debts from the estate before beneficiaries receive anything. Beneficiaries do not inherit a tax debt personally, but the pool they share can be smaller. See what happens to tax debt when you die.
- Your debt. A garnishee notice can be issued to anyone who holds money for you or may hold money for you in the future. An executor holding your share fits that description. In practice the ATO rarely knows an inheritance is coming, so this is uncommon, but it is legally possible.
Asking the executor to delay or redirect your share to avoid the ATO is a bad idea. A gift or transfer made to defeat creditors can be unwound, and an executor who cooperates exposes themselves.
Once the money is yours
An inheritance paid into your account is simply money. Nothing on the bank statement marks it as protected. If you have an overdue debt and the ATO issues a bank garnishee, the inheritance can be taken up to the amount of the debt. If a continuing notice is already on the account, a percentage of the deposit goes straight to the ATO.
Inherited property is different. The ATO cannot take real estate directly. Its path to a house is the long one through court judgment and bankruptcy set out on our can the ATO take my house page, and it only ever reaches the interest you own.
If you are already bankrupt, an inheritance received before discharge is after acquired property. It vests in the trustee and is used to pay creditors, including the ATO. You must tell the trustee about it.
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Using an inheritance to deal with the debt
For many people an inheritance is the first realistic chance to clear a tax debt that has been growing at 11.43% a year, compounding daily, with interest that is no longer deductible. The options usually worth comparing:
- Pay the debt in full and ask for GIC remission on the interest, which is more likely to be granted when the principal has been cleared.
- Pay a lump sum and put the balance on a payment plan, which stops enforcement and may earn a partial remission.
- If the debt is far larger than the inheritance, get advice before paying anything, because paying some creditors ahead of others just before an insolvency can be unwound.
What usually matters is speaking to the ATO before the money arrives rather than after a garnishee has found it.
What to do next
- If an inheritance is coming and you owe the ATO, check your account balance and any notices now, before the money lands.
- Decide whether to pay in full, pay a lump sum with a plan for the rest, or get advice if the debt dwarfs the inheritance.
- If you are bankrupt, tell your trustee about the inheritance. Not disclosing it is an offence.
Related questions
Do I inherit a parent's tax debt?
No. A tax debt belongs to the person who died and is paid from their estate by the executor before anything is distributed. If the estate cannot cover it, the shortfall is not passed to beneficiaries. You can end up with less than expected, but not with a debt.
Can I put an inheritance in someone else's name to keep it from the ATO?
You can, but it does not work. A transfer of money or property made with the main purpose of defeating a creditor can be clawed back, with no time limit in bankruptcy, and it destroys your credibility with the ATO when you later need to negotiate. Using the money to settle or reduce the debt is almost always the better outcome.
Inheritance coming and a tax debt waiting?
Free, confidential help using it to close the debt on the best terms.
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