Taxes and deceased estates

What is the role of an Executor or Administrator?

A deceased's Legal Personal Representative (i.e. Executor or Administrator) is responsible for finalising the affairs of the deceased and their estate. One crucial element is that of attending to any tax payable by the Deceased or by their Estate.

From a tax standpoint, a Legal Personal Representative is responsible for:

1. Notifying the Australian Tax Office ("ATO") of the passing of the Deceased
2. Locating the Deceased's Tax File Number ("TFN")
3. Preparing and lodging any outstanding tax returns the Deceased failed to submit and paying all outstanding tax obligations
4. Preparing and lodging a Date of Death Income Tax Return (if required)
5. If a tax return is required for the Estate, applying for an Estate TFN, and preparing and lodging Estate Income Tax Returns
6. If the Deceased was registered for an Australian Business Number ("ABN") or Goods and Services Tax ("GST"), preparing and lodging a final Business Activity Statement, and cancelling the ABN and GST registrations

Is a Tax Return Required?

The Deceased and their Estate have essentially the same requirements to lodge a tax return as any other taxpayer. The most effective way to assess whether a tax return is required is to ask yourself: 'If this were my own financial circumstances, would I need to lodge a tax return?'

When assessing whether a Date of Death Income Tax Return or an Estate Income Tax Return are required, consider the following three questions:

1. Did the Deceased or the Estate pay tax or have tax withheld (e.g. receive a salary or franked dividends)?
2. Is the taxable income (including capital gains) over the tax free threshold?
3. Did the Deceased conduct a business or have an ABN?

If you answer 'yes' to any of the above questions, then it is highly likely an income tax return will be required.

Date of Death Tax Return

Where the Deceased was lodging tax returns up until their passing, a Date of Death Income Tax Return will likely be required for the part of the financial year from July 1 to the date of death.

If you determine that there is no need to lodge a Date of Death Tax Return, then you should consider lodging a Non-Lodgement Advice with the ATO. A Non-Lodgement Advice notifies the ATO that no tax return will be lodged and ensures they do not mark the Deceased as having outstanding tax returns.

Estate Income Tax Return

An Estate Income Tax Return, if required, covers any income earned (including capital gains) after the passing of the Deceased during the period of the administration of the Estate.

An Estate Income Tax Return may not be required where:

1. The Deceased passed away less than three (3) months before the end of the financial year
2. There is no beneficiary presently entitled to a share of the income of the Estate
3. The net income of the Estate is less than the tax free threshold, and
4. There are no non-resident beneficiaries of the Estate.

If an Estate Income Tax Return is required, the Executor or Administrator will need to apply for a Tax File Number ("TFN") for the Estate (separate to that of the Deceased's personal TFN).

Business Tax Affairs

If the Deceased was registered for an ABN or GST, you will need to lodge a final Business Activity Statement. You will also need to cancel the ABN and GST registrations.

If the Legal Personal Representative continues to conduct a business, which was owned and operated by the Deceased, then you will need to apply for a new ABN and, if applicable, GST registration on behalf of the Estate.

Capital Gains Tax

In the majority of cases, a transfer of assets on death to a Legal Personal Representative or beneficiary will not attract Capital Gains Tax ("CGT"). There are exceptions to this and it is important to seek legal or accounting advice during the period of estate administration to ensure any adverse tax consequences are minimised, if possible.

Where assets that the Deceased purchased after September 1985 are transferred to a Legal Personal Representative or beneficiary, the capital gain or loss is deferred until the asset is subsequently on-sold to a third party. In these circumstances, the asset being disposed of is deemed to have been acquired by the Legal Personal Representative or beneficiary at the cost base of the Deceased.

Where assets that the Deceased purchased before September 1985 are transferred to a Legal Personal Representative or beneficiary, the CGT exemption also applies. In this circumstance, the cost base is taken to be the market value of the asset at the date the Deceased passed away.

When assets of the Deceased (e.g.real estate or shares) are sold by the Legal Personal Representative, then capital gains tax may be payable by the Estate, in the same way that the Deceased may have had to pay capital gains tax if he or she had sold such assets during their lifetime.

Superannuation Death Benefits

If the Deceased held superannuation, and after their death this superannuation is paid to the Estate, then tax may be payable on the payment if the ultimate recipient is not a ‘tax-dependant’ (e.g. adult children). A number of factors are taken into consideration when determining the amount of tax payable (if any), and it is recommended that the Legal Personal Representative seek advice from an experienced tax professional.

How Sharrock Pitman Legal can assist

If you require assistance identifying whether a Date of Death or Estate Income Tax Return are required, or if you require assistance with an estate more generally, please feel free to contact our Wills and Estates Law team on 1300 205 506 or via email sp@sharrockpitman.com.au. Alternatively, please completed the form below.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

Liability limited by a scheme approved under Professional Standards Legislation.