One of the most commonly overlooked areas of managing an estate is tax. Contrary to popular belief, tax doesn’t simply go away when a person dies. Tax debts are still owed, and returns must be completed to avoid an audit or outstanding debt to the Australian Taxation Office.
While we recommend engaging an accountant with experience in deceased estates, it can be a good idea to know whether there is a need to lodge a return at all before paying an accountant’s fees.
Typically, two types of tax returns are required when administering a deceased estate. These are individual tax returns and estate tax returns.
Individual Return on a Deceased Estate
Often, a person will pass away without having lodged their tax return for the current financial year. As a return is still required, the executor must complete the individual return, known as the Date of Death return.
An individual return is required if the deceased person:
- had tax withheld from their income;
- had taxable income that exceeds the tax-free threshold (which in Australia is $18,200.00);
- had tax withheld from interest or dividends (usually when the deceased person hasn’t provided a Tax File Number); or
- failed to lodged tax returns in prior years. If the deceased person has any outstanding returns from previous financial years, a return will also need to be completed for those years.
Estate Return on a Deceased Estate
An estate return is for the income received by the person’s estate rather than the individual themselves. Generally, income received after a person has died will fall into an estate.
The estate is treated as a Trust for tax purposes, with the executor or legal personal representative being the trustee.
As with an individual tax return, the need to lodge a return is dependent on whether the estate receives any income (for example, rent from a property or dividends from shares) and whether that income is below the tax-free threshold.
To lodge a return for a deceased estate, the executor will need to apply for a Tax File Number (TFN) for the estate itself. It cannot be lodged under the deceased person’s name.
It’s important to note that a return will need to be lodged for every year the estate remains unfinalized and is receiving income. For example, if rent is received across two financial years, then returns need to be lodged for both of those years.
However, a return is not required if all of the following criteria are met:
- The deceased person died less than 3 months before the end of the financial year;
- No beneficiary is presently entitled to a share of the income of the deceased estate;
- The taxable income of the estate is less than the individual tax-free threshold; and
- All beneficiaries of the estate are Australian residents.
Even if the above criteria are met, it may be prudent to lodge a return to ensure taxation records are kept up to date.
Once the returns are lodged, the ATO will assess and determine whether any tax is refundable or payable. It is good practice to wait for the final assessment to be conducted before attempting to wrap up the estate, as there may be monies that need to be paid to the ATO.
The executor of the estate must address any tax issues before wrapping up an estate. Failure to do so may mean the executor is personally responsible for any outstanding tax debts.
Who pays tax on Estate Assets?
Payment of tax on estate assets is subject to a variety of rules and exceptions. However, the general rule is that either the executor or beneficiaries who are presently entitled to the estate and are Australian residents over 18 (for tax purposes) and not under a legal disability will pay tax on the net income received from an estate. They will pay by way of the estate return or with a beneficiary’s individual return.
While an accountant can help prepare the requisite returns, an experienced estate lawyer can help assess whether returns are required, as well as manage the estate in general. For assistance with the administration of an estate, please get in touch with our experienced Estates team.