Nothing is certain in life except death and taxes! There are important issues for an executor to consider when dealing with deceased estates and their taxes. Upon obtaining Probate or Letters of Administration, 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:
- Notifying the Australian Tax Office ("ATO") of the passing of the Deceased
- Preparing and lodging any outstanding tax returns the Deceased failed to submit and paying all outstanding tax obligations
- Preparing and lodging a Date of Death Income Tax Return (if required)
- If a tax return is required for the Estate, preparing and lodging Estate Income Tax Returns, and
- 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.
When is a Tax Return Required?
A deceased person 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?
2. Is the taxable income over the minimum income threshold?
3. Was the taxpayer conducting a business?
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 of the Deceased.
If you determine that there is no need to lodge a Date of Death Tax Return, then you should lodge 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 down as having outstanding tax returns.
Estate Income Tax Return
An Estate Income Tax Return aligns itself with the administration period of the Estate, that is, any income earned after the passing of the Deceased. However, it is likely an Estate Income Tax Return will not be required where:
- The Deceased passed away less than 3 months before the end of the financial year
- There is no beneficiary presently entitled to a share of the income of the Estate
- The net income of the Estate is less than $18,200, and
- 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).
Final Business Activity Statement
If the Executor or Administrator 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").
Where assets 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. Under 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.
Assets purchased prior to September 1985 are also exempt from CGT. However, the cost base is then taken to be the market value of the asset as at the date the Deceased passed away.
If you require assistance identifying whether a Date of Death or Estate Income Tax Return are required, or simply need assistance with estate administration, please feel free to contact our accredited specialist Wills and Estates team on 1300 205 506 or complete 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.
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Mitchell is the Managing Principal of our law practice.
He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.