As part of their estate administration duties, an executor of a Will or an administrator is responsible for managing the taxes of the deceased estate for the time that it is in their custody. The Executor or Administrator is also responsible for lodging a tax return for the deceased person and estate for the financial year.
This includes preparing and lodging any of the deceased person’s individual tax returns outstanding from previous financial years, a date of death tax return, and a deceased estate tax return. If you are an executor or administrator, you may only need to complete one of these, or a combination of these as one tax return, depending on your circumstances.
This simple guide explains how to lodge a tax return for a deceased estate and the individual. It also provides a brief overview of capital gains tax on deceased estates and inheritance tax. If your situation is complex, you may need professional taxation advice to help you understand all the tax implications for the estate and the types of taxes that may apply.
1. Notify the Australian Tax Office (ATO) of the death.
If the deceased person has ever lodged a tax return and has a Tax File Number, the Australian Taxation Office (ATO) will need to be notified of their death. You can fill out the online ATO Notification of a Deceased Person form here. Alternatively, you may also download a paper form here.
Fill it out and mail it to the ATO, along with certified copies of relevant documents, to the address on the form.
You’ll then need to make an interview appointment at any Australia Post retail branch within 30 days and bring with you an original or certified copy of the Will, Letters of Administration or Grant of Probate. Learn more about Letters of Administration and Grant of Probate in our article here.
2. Compile Inventory of Asset & Liabilities.
The deceased estate will be made up of various Assets and Liabilities (debts or expenses). Before you start preparing any tax return, you will need to begin compiling an inventory of all of these, to help understand the estate's financial value.
The most common estate components may include bank accounts, trusts, investments and real estate, mortgages, personal loans and other debts.
3. Determine tax on inheritance.
Where property has been inherited from a deceased estate, there is no inheritance tax in Australia. However, some taxes may apply to the estate.
You may need taxation advice to help you understand all the tax implications and the types of taxes that may apply to the deceased person and to the estate, including capital gains tax and taxation implication in other countries. It will also make things easier if you can advise the beneficiaries of possible tax implications when known.
Transfer of deceased estate assets.
As part of the deceased estate administration, funds and assets may be transferred in the following three ways:
- from estate to beneficiary
- from estate to Executor/Administrator/Next of Kin in trust, or
- from Executor/Administrator/Next of Kin to beneficiary.
Varying tax rules may apply in each of these instances, and who pays these taxes may also differ. Below are the various types of taxes, as outlined by the ATO, that may apply to beneficiaries or a deceased estate:
Income tax is the most common form of tax, payable by anyone in Australia who is required to pay tax on earnings of any kind. This is commonly through a salary, business or partnership income, rental income, interest, and investment returns or dividends.
If the estate is generating income in the deceased's sole name during the estate administration process, for example through bank account interest, rent from investment properties and other investment dividends, then income tax applies.
If the deceased person owned and ran their own business that is sold or gifted to a beneficiary, the new business owner will need to ensure that company tax continues to be paid.
Capital gains tax.
Capital gains tax is the tax paid on any profit from the sale of certain assets, such as real estate or shares. Generally, capital gains tax doesn't apply when you inherit an asset. However, it may apply when the asset is sold, as it is applied to the difference between the asset's value when acquired and what it is sold for.
When someone makes a capital gain, it is added to their assessable income and may significantly increase the tax they need to pay when it comes to their personal annual income tax return. However, there are two exceptions to this rule, where the beneficiary sells the inherited property within two years of the deceased person's date of death, or if the inherited property is gifted to a beneficiary who lives outside of Australia.
Capital gains tax can be complicated, so you may need to consult with an accountant or financial representative if you have any questions. You can also call the ATO on 13 28 61 or visit the ATO website, which also has some helpful information.
Capital gains tax on real estate.
Whether real estate was the deceased person’s principal place of residence or an investment property will impact the potential capital gains position of the deceased’s estate. If the deceased person’s home was sold during the estate administration process, it is likely that capital gains tax will not apply. This may change if the property was not the principal place of residence of the deceased.
It's important to note that the date of sale (date a contract is entered into), rather than the settlement date, will determine which financial year capital gains tax will need to be disclosed.
This process can get quite complicated, particularly when there are multiple properties involved in the deceased estate. If in doubt, consult an accountant or financial representative.
Where else is capital gains tax applied?
Aside from real estate, shares, stocks, cryptocurrency and similar investments, capital gains tax also applies to personal use assets including boats, furniture valued more than $10,000 value per piece, jewellery purchased for more than $500, art collections, electrical goods and household items.
Some assets are exempt from capital gains tax, such as: property as your main residence (however there are some exceptions), a car or motorcycle, depreciating assets, and any personal use asset that was acquired for less than $10,000.
Other assets and taxes.
There is no tax on any inheritance or gift in Australia. In most cases, cash that is inherited won't attract capital gains tax when transferred to the beneficiary, as it will not be classified as income. However, funds will usually begin to earn interest in the beneficiary’s bank account, so some income taxes may begin to apply. This is also the case for any income on funds held in a trust.
Tax on superannuation.
Superannuation doesn't generally form part of the deceased estate. However, if the deceased's superannuation benefit is paid to a non-dependent person (e.g. someone other than a spouse or former spousem child aged under 18, or a person dependent on the deceased just before passing), a Super Death Benefit will be paid as a lump sum, taxed up to 32% on the taxable component.
If this is the case, the common approach is to consult with a specialist tax professional to understand the tax applicable to the estate. Tax advice is also recommended where the deceased person held a Self-Managed Super Funds (SMSF).
4. Prepare the tax return.
If you’ve already notified the ATO of the death as part of Step 1, you should receive confirmation from the ATO, via post, that you are recognised as the Authorised Contact. Once that confirmation has been received, you may act on behalf of the deceased person regarding their tax dealings.
You will likely need to prepare a tax return for the deceased person (known as a date of death tax return) and tax returns outstanding from previous financial years, as well as for the deceased estate.
If you are unable to find the documents you need, you can contact the ATO to find out if and when the deceased person's last tax return was lodged. You’ll just need to have their Tax File Number handy.
Tax returns completed on behalf of a deceased person must be completed using the ATO paper forms, rather than be submitted online. They are due for lodgement by 31 October of that financial year, for the financial year ending on 30 June (as per the usual individual tax return lodgement deadline).
When completing the tax returns, the words ‘DECEASED ESTATE’ must be written clearly on the top of the page. In some circumstances, you may need to apply for a Tax File Number for the estate.
5. Lodge a final estate tax return.
If you have worked through the above steps, you should have already filed a tax return for the deceased person and paid all debts and bills. With all debts paid, you can lodge a final estate tax return, or 'trust tax return'.
A final estate tax return is generally required if a sale of assets resulted in capital gains, where the deceased estate generated profits over the Australian tax-free threshold ($18,200 at the time this article was published). This can happen if the estate sold appreciating assets such as real estate; generated interest from bank accounts, shares or managed fund investments; or received income from a business or franked dividends; or any other form of income as defined by the ATO.
You will need to obtain a tax assessment, which will identify how much tax is payable from the estate. Once you know the amount of tax to be paid, you can choose to either pay it immediately or set aside that amount before assets are distributed to beneficiaries.
Final thoughts on lodging a tax return for a deceased estate.
As part of the estate administration process, the Executor of a Will or the Administrator is responsible for lodging a tax return for the deceased person and estate for the financial year ending on 30 June. Deceased estates are subject to the ATO's usual individual tax return lodgement deadlines (to be lodged by no later than 31 October of that year). If you are worried you will not be able to complete and submit the tax return before the deadline, call the ATO on 13 28 61 for a deferral. For further information on tax returns and taxation matters for deceased estates, call the ATO on 13 28 61 or visit the ATO website here.
If you need help with any stage of the estate planning or estate administration process, visit our Probate services here, or chat with our estate planning team on 1800 959 371.
This article is not legal advice. You should consult an estate planning professional for specific advice on your personal or financial situation.