Published: 29 March 2026 | FY 2025-26 Tax Guide
Capital Gains on Inherited Shares: Your Complete Australian Tax Guide for 2025-26
Inheriting shares from a loved one can provide a meaningful financial legacy, but it also brings important tax considerations that many Australians find confusing. Unlike inheriting cash, which has no immediate tax implications, inherited shares carry potential Capital Gains Tax (CGT) obligations that can catch beneficiaries off guard when they eventually decide to sell. Understanding how the ATO treats inherited shares is essential for making informed decisions about your portfolio and avoiding unexpected tax bills.
The good news is that inheriting shares itself is not a taxable event — you won't owe the ATO anything simply for receiving the shares. However, when you sell those inherited shares, you may need to pay CGT depending on various factors including when the deceased originally purchased them, when you sell them, and your own financial circumstances. This comprehensive guide will walk you through everything you need to know about capital gains on inherited shares for the 2025-26 financial year, including how to calculate your tax liability, what records to keep, and strategies to minimise your tax burden.
Do You Pay Tax on Inherited Shares in Australia?
The simple answer is that inheriting shares is not a taxable event in itself. When you receive shares through a deceased estate, whether directly or via a testamentary trust, you don't pay tax on the inheritance. Australia abolished federal inheritance taxes in 1979, so there is no tax payable simply for receiving assets from a deceased person's estate. This means you can inherit shares without immediately worrying about a tax bill from the ATO.
However, the situation changes when you decide to sell those inherited shares. At that point, Capital Gains Tax may apply depending on several key factors: when the deceased originally acquired the shares (before or after the introduction of CGT on 20 September 1985), whether the shares qualify for any exemptions, how long you've held them, and your own tax residency status. Understanding these factors is crucial for estimating your potential tax liability. You can use our take-home pay calculator to understand how capital gains might affect your overall financial position.
It's also important to note that while you hold the inherited shares, any dividends received are taxable income in your own name, not the deceased's. This means you'll need to declare dividend income on your tax return, and you may be eligible for franking credits if the company has paid tax on its profits. Keeping accurate records of all dividend payments and any associated franking credits is essential for proper tax reporting.
Understanding Cost Base for Inherited Shares
The most critical concept when dealing with capital gains on inherited shares is the cost base. Your cost base is essentially what the ATO considers you "paid" for the shares, which is used to calculate any capital gain when you sell. For inherited shares, special rules apply that can significantly impact your tax liability. Getting this calculation right is crucial because an incorrect cost base can lead to either overpaying tax or facing ATO penalties for underpayment.
For shares acquired by the deceased before 20 September 1985 (pre-CGT assets), the cost base is generally the market value of the shares at the date of death. This can be highly beneficial because any capital growth that occurred during the deceased's lifetime is effectively disregarded for tax purposes. You only pay CGT on any increase in value from the date of death to when you sell. For shares acquired after 20 September 1985 (post-CGT assets), you typically inherit the deceased's original cost base — meaning you use what they actually paid for the shares plus any eligible costs.
| Scenario | Cost Base Determination | CGT Implications |
|---|---|---|
| Shares acquired by deceased before 20 Sept 1985 | Market value at date of death | CGT only on growth after death |
| Shares acquired by deceased after 20 Sept 1985 | Deceased's original purchase price + costs | CGT on full gain from original purchase |
| Shares held for 12+ months by beneficiary | As above, with 50% discount eligibility | 50% reduction in taxable capital gain |
| Shares sold within 12 months of inheritance | As per relevant cost base above | Full capital gain taxable (no discount) |
The 50% CGT Discount on Inherited Shares
One of the most valuable tax concessions available for inherited shares is the 50% CGT discount. This discount allows you to reduce your taxable capital gain by half, provided you meet certain eligibility criteria. For inherited shares, the key requirement is that the combined ownership period — the time the deceased held the shares plus the time you hold them — must exceed 12 months at the time of sale.
This means if your parent held shares for 5 years before passing away, and you hold them for another 6 months before selling, you qualify for the 50% discount because the total ownership period exceeds 12 months. The discount is applied to your gross capital gain after subtracting the cost base from your sale proceeds. For example, if you sell inherited shares for a $50,000 profit and qualify for the discount, only $25,000 is added to your taxable income. This can make a significant difference to your income tax liability, especially if you're in a higher tax bracket.
It's important to note that the 50% discount is only available to Australian residents for tax purposes. If you're a non-resident when you sell the shares, you generally cannot access this concession. Additionally, the discount does not apply to companies or certain other entities — it's primarily designed for individual taxpayers. Understanding how this discount works can help you make strategic decisions about when to sell inherited shares to maximise your after-tax returns.
Calculating Capital Gains on Inherited Shares
Calculating your capital gains tax liability on inherited shares involves several steps, and getting accurate figures is essential for proper tax reporting. Let's walk through a practical example to illustrate how the calculation works. Suppose you inherited shares from a parent who purchased them for $20,000 in 2010. At the date of death in 2024, the shares were worth $50,000. You decide to sell them in 2026 for $60,000.
Because the shares were acquired by the deceased after 20 September 1985, your cost base is the deceased's original purchase price of $20,000. Your gross capital gain is therefore $40,000 ($60,000 sale price minus $20,000 cost base). Since the combined ownership period (2010 to 2026) is well over 12 months, you qualify for the 50% CGT discount. After applying the discount, your net capital gain is $20,000, which is added to your other taxable income for the year.
If you're earning $90,000 annually from employment, this additional $20,000 capital gain pushes part of your income into the 32.5% tax bracket for FY 2025-26. Your additional tax liability would be approximately $6,500 plus the Medicare levy of 2%. However, if you had sold in a year when your income was lower, your marginal tax rate might be lower, resulting in less tax payable. This illustrates why timing the sale of inherited shares can be an important tax planning strategy.
Record Keeping and Reporting Requirements
Proper record keeping is absolutely essential when dealing with inherited shares. The ATO requires you to keep records for at least five years after you dispose of the shares, and given the complexity of inherited assets, it's wise to keep comprehensive documentation indefinitely. The records you need include the original purchase contract or statement showing what the deceased paid, documentation of the date of death and the market value of the shares at that time, any dividend reinvestment plan (DRP) statements, and records of all sale transactions.
If the deceased participated in dividend reinvestment plans, calculating your cost base becomes more complex. Each DRP acquisition creates a separate parcel of shares with its own cost base and acquisition date. When you sell shares, you can choose which parcels to sell to optimise your tax outcome — for example, selling parcels with higher cost bases to minimise capital gains, or selling parcels held longer to ensure eligibility for the 50% discount. Keeping detailed records of each DRP parcel is essential for this strategy.
When it comes time to report the sale on your tax return, you'll need to complete the capital gains tax schedule. This requires detailed information about the sale date, sale proceeds, cost base, and any capital losses you're applying. If you're also making superannuation contributions or have a HECS-HELP debt, your capital gain may affect other aspects of your tax position, so it's worth reviewing your overall situation. Using salary sacrifice arrangements may help offset the impact of a capital gain in some circumstances.
Tax Planning Strategies for Inherited Shares
Effective tax planning can significantly reduce the amount of tax you pay on inherited shares. One of the most powerful strategies is timing your sale to coincide with a year when your other income is lower. If you're planning to take extended leave, change careers, or retire, selling inherited shares in that lower-income year can result in substantial tax savings. The difference between selling in a year when you're in the 45% tax bracket versus a year when you're in the 18% bracket can be tens of thousands of dollars on a significant capital gain.
Another strategy involves using capital losses to offset your capital gains. If you have other investments that have declined in value, you might consider selling them in the same year you sell your inherited shares. Capital losses must be used to offset capital gains before applying the 50% discount, so the order of calculations is important. If you have accumulated capital losses from previous years, these can also be applied against your inherited share gains, potentially reducing your taxable income significantly.
For larger portfolios, consider whether holding inherited shares within a self-managed super fund (SMSF) might be beneficial. While you can't directly transfer personally held shares into an SMSF without triggering CGT, understanding the tax advantages of the superannuation environment may influence your broader investment strategy. Assets held in the pension phase of super can be sold with no CGT payable at all, which is a compelling consideration for long-term planning. Always seek professional advice before making significant decisions about inherited assets, as the rules can be complex and the consequences of mistakes can be costly.
Summary and Key Takeaways
Inheriting shares is not a taxable event in itself, but selling those shares can trigger Capital Gains Tax obligations that require careful planning. The key factors to remember are: your cost base depends on when the deceased originally acquired the shares (pre-CGT assets use market value at death, post-CGT assets use the deceased's original cost base); the 50% CGT discount is available if the combined ownership period exceeds 12 months; and timing your sale strategically can significantly reduce your tax liability.
For the 2025-26 financial year, capital gains are added to your other income and taxed at your marginal rate, which ranges from 0% to 45% plus the Medicare levy. Keeping detailed records of all transactions, DRP statements, and valuation documents is essential for accurate tax reporting and defending your position if the ATO queries your return. If you have any doubts about your obligations or the best strategy for your situation, consulting a registered tax agent or financial adviser is highly recommended.
Remember that every situation is unique, and the tax rules around inherited shares can be complex, especially when dealing with multiple share parcels, dividend reinvestment plans, or international shares. Whether you're considering selling immediately or holding for the long term, understanding the tax implications helps you make informed decisions that preserve more of your inheritance for your future.