Some Things You Need to Know About Deceased Estates & Tax
They say that the only certainties in life are death and taxes. Well, unfortunately, taxes also need to be paid after death. Understanding deceased estate tax rates and how taxes apply to a deceased estate can help guide the succession planning process and provide clarity to beneficiaries on whether there are tax implications on their inheritance.
If you're responsible for administering the estate of a loved one, then there are also tax obligations to be completed before the final distribution of an estate is made. Below, we walk you through everything you need to know about deceased estates and taxes.
Understanding tax on a deceased estate
There is much to organise when administering a deceased person's estate, including satisfying the Australian Taxation Office (ATO)'s tax obligations. First and foremost, the ATO must be notified of a person's death. Usually, a relative, executor, legal practitioner, BAS or tax agent informs the ATO. The death certificate and other supporting documents are required to officially notify the ATO of a loved one's passing.
Deceased estate tax returns
Once the legal personal representative has accessed all the required tax information of the deceased person, a 'date of death' tax return may be required. A 'date of death' return is a tax return for the income year in which they passed away.
Trust tax return
For the purposes of tax returns, a deceased estate is considered a trust. For this reason, a Tax File Number (TFN) and Australian Business Number (ABN) are required for the estate. A trust tax return is used to report the estate's income (such as dividends or rental income) and claim any tax refund or franking credits that may be owed to the estate.
Inheritance Taxes
Australia does not hold inheritance taxes, however, depending on how assets are being passed down to beneficiaries, there may still be some tax payable. If you're a beneficiary of an estate, tax may apply to you in the following situations:
If you dispose of an asset (such as a house or shares) that you have inherited, capital gains tax may apply.
You'll still need to pay tax on dividends or income from shares or property that you inherit.
If you are presently entitled to income from a deceased estate, you're required to include it in your tax return. In most cases, a beneficiary won't be entitled to any income from an estate until it has been fully administered. However, there are cases where present entitlement will exist before the estate is finalised.
It's important to note that the deceased estate's trustee should inform each beneficiary of information such as the share of the trust income for which they were presently entitled, to include on their tax return.
Superannuation benefits and income streams
Suppose a valid death benefit nomination existed on a superannuation account at the time of the member's death. In that case, it generally means that the superannuation fund does not become an estate asset. The total super death benefit refers to the super balance and any personal insurance, such as life insurance, payable on the member's death.
Whether a beneficiary will pay tax on the death benefit depends on whether they were a tax and/or superannuation dependant under the Superannuation Industry (Supervision) Act 1991 (known as SIS dependants) and whether they receive the benefit as a lump sum or income stream.
Who pays the tax on deceased estate income?
If the estate earned income (such as dividends or rental income) after the person's death, a trust is created, and the trustee of the trust (usually the legal personal representative) is required to pay any tax on the net income of the deceased estate.
Before letters of administration or probate are granted
The trustee is required to pay tax on any of the estate's income.
Final distribution is not ready, but probate is granted
If probate or letters of administration have been granted, but the final distribution is not paid, the trustee can choose to make an interim distribution. In this instance, the beneficiary is presently entitled to the estate, in which case they are required to include their share of the net income on their tax return and cover any tax payable on the owing amount.
The estate is finalised
Once all the tax obligations have been provided for or paid in full, the remaining net income from the deceased estate can be distributed. Depending on the beneficiary's personal circumstances, either the trustee or the beneficiary themselves will be responsible for paying tax on the income.
If a beneficiary is a non-resident or under a legal disability, then the trust is legally responsible for reporting tax and paying tax on behalf of the beneficiary.
Deceased estate tax rates
Typically in Australia, the top marginal tax rate applies to a trustee who is assessed on the net income of a trust. In the case of deceased estates, though, the trustee can apply for a concessional tax rate upon the lodgement of the first trust tax return.
Under a concessional rate, the trust's tax rates will be the same as individual income tax rates, including the ability to benefit from the full tax-free threshold. The concessional period will stay in effect for three years. While no Medicare levy is payable, the trust cannot access concessional rebates or tax offsets such as the low-income tax offset.
Deceased Estate Taxable Income
How to structure your estate to minimise tax
Upon the passing of a loved one, time stands still for those closest to them, yet time does not stop for legal, tax or financial obligations associated with administering their estate. Many Australians utilise the advantage of testamentary discretionary trusts within their estate planning.
Family trusts provide your executors and beneficiaries with a greater level of flexibility and control over how your estate is to be distributed, including the income generated by the estate. On top of asset protection from creditors and ex-spouses, trusts also provide a tax-effective solution for distributing the deceased estate and the income earned on its assets to its beneficiaries.
Trusts are complex and generally require the services of a legal practitioner as they are set up within a person's will. The complexities of taxation and succession planning are best handled by financial, taxation and legal practitioners. That's why we strongly advocate to seek professional advice to assess if a trust structure is the best for your estate planning intentions.
Estate lawyers are best placed to assist with deceased estates
As leading succession and estate administration lawyers on the Sunshine Coast, we deeply understand how complicated estate administration can be for families. By the same token, we also witness first-hand the benefit of thorough estate and succession planning. Whether you're looking for a tax-effective solution for distributing your wealth after your passing or require assistance to navigate the estate administration path, we are here for you.
Contact our team to learn more about how we can support and assist you and your family.
This article is general in nature and does not constitute legal advice. If you require legal advice in relation to your personal circumstances, you must formally engage our firm, or another firm to provide legal advice in relation to your matter. Bradley & Bray lawyers takes no responsibility for any use of the information provided in this article.
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