This article is current as at 8 October 2024. Australia’s tax system and compliance requirements are always changing, and this article only contains general information. You should seek specific advice about your circumstances.
Upon obtaining a grant of probate or letters of administration, it is the responsibility of the executor or administrator to deal with the taxation affairs of a deceased estate. It is important for an executor to ensure that accounting and legal advice has been obtained before distribution, and to ensure that taxation affairs are finalised. The executor or administrator may be personally liable for any tax payable by the estate if the estate has been distributed.
Date of Death Tax Return
An executor or administrator may be required to lodge a date of death tax return for the deceased. From 1 July of the relevant financial year to the date of death of the deceased. The date of death return should include all assessable income earned up to date of death, and include all deductions incurred up to the date of death.
The circumstances in which a date of death tax return is requires is usually where:
(a) Tax was withheld from income received (e.g. PAYG withholding from employment income, interest on bank accounts/dividends where a tax file number had not been provided); or
(b) Income exceeded the tax-free threshold; or
(c) Returns were lodged in prior years;
A Medicare Levy is payable on the date of death tax return.
If a tax return is not required, a non-lodgement advice should be sent to the Australian Taxation Office.
What about a HECS/HELP Loan?
A HECS/HELP Loan to pay tertiary education is not repayable on death. A repayment may be required in the date of death tax return if your income passes the repayment threshold. Upon the final date of death tax return being completed, any HECS/HELP loan remaining (after any compulsory payment if income exceeds the repayment threshold) will be cancelled.
Estate Tax Return
Following a grant or probate or letters of administration, the administrator or executor should complete a Notification of a Deceased Person and obtain an Estate Tax File Number by completing the Tax File Number – Application for a Deceased Estate form.
A deceased estate is considered a separate taxpayer (for tax purposes, being treated as a Trust) from the individual taxpayer (being the deceased).
Income earned, and any deductible expenses incurred after the date of death are included in the estate trust return each financial year; except where a beneficiary is presently entitled to income, when in such an instance, the beneficiary would include the income in their personal tax return. At the most basic level, beneficiaries are not presently entitled whilst an estate is under administration, but that isn’t always the case, as interim distributions may give rise to a present entitlement. Specific advice should be obtained from an accountant or lawyer in respect of any present entitlement. The taxation obligations of an executor/administrator changes based on whether the beneficiary is a resident or is a minor or under legal disability.
There may be circumstances where it is advantageous for a beneficiary to be made presently entitled to income from an Estate, for example, where a beneficiary is a tax advantaged entity.
Estate Tax Rate
Ordinarily, undistributed income in a trust is taxed at punitive rates set out in section 99A of the Income Tax Assessment Act 1936. However, the Commissioner has a discretion to apply the normal adult concessional rates in respect of an Estate under Section 99 of the Act where it would be unreasonable for the punitive rates to apply.
The concessional rates are only available until the end of the tax period after the death of the deceased, plus two further tax periods.
No Medicare levy is payable on an Estate Tax return.
Finalisation of the Estate
In the year in which the Estate is fully administered, the ATO’s practice is to apportion income before and after distribution (rather than assess present entitlement as at 30 June of the relevant financial year).
There are additional rules and elections that can be made if the estate realises a capital gain in the final year of administration.
Protection of Executor / Administrator
The Australian Taxation Office can audit tax affairs after lodgement, which can pose difficulties for an executor/administrator who wishes to administer the estate, but also ensure they are protected against any future claims made by the ATO.
Practical Compliance Guide 2018/4 (‘PCG’) provides some protection to an executor/administrator in dealing with tax affairs relating to the deceased (note the PCG does not apply to the subsequent estate returns or to executors who have not obtained a grant of probate or administration).
Broadly, the PCG applies to less complex ‘low risk’ affairs, where the market value of the deceased’s assets was less than $10m at date of death, and where the deceased did not carry on a business, did not receive trust income and was not a member of a self-managed superannuation fund within the four years prior to death.
The PCG allows an executor/administrator to distribute the estate within 6 months after lodgement of the outstanding tax returns, or bringing any tax irregularities to the attention of the Commissioner of Taxation; providing the executor/administrator has acted ‘reasonably’ in respect of completing the deceased’s tax affairs.
The Taxation of Deceased Estates is complex. Suzanne Lyttleton Lawyers are specialists in Estate Administration and resolving difficult taxation issues relating to Deceased Estates. Contact one of our lawyers on (03) 9646 4477 should you wish to discuss any taxation matters relating to a deceased estate or an executor's obligations generally.
