We all know Benjamin Franklin’s quote “In this world, nothing is certain except death and taxes.” But as only an accountant can be macabre enough to find amusing, tax continues after death – even once you’re dead, the Australian Taxation Office (ATO) still requires you to lodge a tax return! Ok, so clearly not the deceased person, but their legal representative (usually the Executor) must assume that responsibility.
I won’t go through the entire legal process of how an estate is administered – I’m an accountant not a lawyer after all. But from a tax point of view, there are a few specific requirements.
Once probate has been granted and the Executor is able to start administering the estate, they will probably need to apply for a Tax File Number (TFN) for the Estate. This is required where the estate isn’t settled within a financial year and there is income being earned. For example, without a new TFN, banks are required to withhold tax on interest.
The ATO must be informed that the person is deceased using a form. This same form also is used to add the Executor as an authorised contact so that they are able to deal with the ATO directly. It will be necessary to lodge a final tax return for the deceased. This must include all income from the beginning of the financial year up until the date of death. If the deceased earned less than the tax free threshold, no tax return is required to be lodged, but the ATO must still be notified. So for example, any interest, dividends, salary, rental income etc which was received prior to the date of death goes into the final tax return. Deductions incurred prior to death can also be claimed (eg donations, work related expenses, etc). The full tax free threshold is available for the year, regardless of the date of death. Medicare levy is also payable for the full year.
An estate tax return is then completed from the day of death until the end of the financial year. Any income actually received after the date of death, must be included in this return. This includes salary and wages, dividends, interest, rental income etc. Again, deductions incurred after death can also be claimed (eg interest on a mortgage associated with a rental property). A full year threshold is also available but no Medicare levy is payable for the year and low income tax offsets are not available. If it is less than three years, the estate will usually be taxed in the same way as an individual – that is at normal marginal rates. It is the Executor’s responsibility to pay the tax from the estate assets.
One of the most complicated areas around deceased estates is where there are assets which are subject to capital gains tax. A capital gains event (and therefore tax) is not triggered by the person’s death. The triggering of a capital gain event will depend on whether the assets are sold by the estate or transferred directly to a beneficiary. Different rules apply depending on whether the asset is pre or post CGT and how long the person held the asset. It’s important that if you are the executor of an estate and the Will does not specify how assets are to be distributed, that you seek both legal and tax advice so that beneficiaries are not disadvantaged.
While most people don’t want to talk about death and what will happen when they’re gone, please, please make sure you have a valid and current will. It makes things far easier for those left behind if they know your wishes. If someone dies without a Will (intestate), the Court must appoint an administrator and there are rule about how distributions can be made, regardless of what the deceased wanted. Yes, there are do it yourself kits out there, but why leave it to chance – the best thing to do is to see a legal specialist.
If you’d like to chat about your tax and finance, I offer FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your taxes!