Unfortunately, having to deal with managing a deceased estate is a task many of us will have to shoulder at some stage in our lives — but having some familiarity with what’s involved beforehand will hopefully ease the burden.
It is worth remembering that the law that applies to the assets and income of a deceased person depends in large part on which state or territory they lived in when they died. Also note that the information presented here mainly looks at tax responsibilities (which are a federal obligation). Speak to this office for guidance on the best avenue of inquiry when administering an estate.
What the estate comprises
The property and assets belonging to a person who has died, called their deceased estate, may include real estate, money in bank accounts, shares, and personal possessions. Some types of income can also form part of the deceased estate. However, some assets will not be included because the deceased may have made other arrangements to distribute them or own the assets as a joint tenant.
The deceased estate holds the assets of the deceased in trust from the time of the death of the person concerned until the transfer of the property and assets to their beneficiaries as nominated in their will. It is administered by either:
- an executor appointed in the person’s will, or
- an administrator appointed by the Supreme Court.
Superannuation and life insurance payments may or may not form part of the deceased estate. If there are stipulated beneficiaries under the policy or super trust deed, payments may go directly to various beneficiaries without going through the deceased estate.
Being an executor
If you have been appointed as an executor or administrator of the estate, you will be responsible for managing the deceased estate’s tax affairs, as well as:
- carrying out (executing) the terms of the deceased person’s will
- complying with the relevant inheritance laws, where there is no will.
The executor or administrator (this information applies equally to both) is responsible for administering the deceased estate in the best interest of the beneficiaries nominated in the will (or if no will exists, the deceased person’s next of kin or other person according to a state or territory law). The executor more or less takes over the role of the deceased person and winds up their personal affairs. Tasks usually performed by an executor include:
- locating the will
- applying for probate
- obtaining a death certificate
- informing investment bodies of the death – these might include banks, building societies, and share registries
- informing Centrelink and other government bodies, such as the Tax Office
- locating assets and having their value assessed
- paying debts, income tax and funeral expenses
- transferring assets and paying stamp duty
- distributing the surplus to beneficiaries.
There are generally no death duties in Australia. However, tax may be payable on certain income or capital transactions that arise as a consequence of a person’s death.
Any tax liability that may be generated from your role as executor is separate from your own personal tax liability. Therefore don’t include any of the income of the deceased person or deceased estate in your own personal tax return (except for any trust income you may receive as a beneficiary). Another item that may potentially have to be declared is any fee charged to the estate for executor services performed (ask this office for more guidance about this). As an executor, your tax responsibilities include:
- lodging a final return, and any outstanding prior year returns, for the deceased person
- lodging any trust tax returns for the estate
- providing beneficiaries with the information they need to include distributions in their own returns and, in certain cases, paying tax on their behalf.
As the executor of a deceased estate, you may need to lodge a final tax return on behalf of the departed. If they did not lodge prior-year tax returns, it will need to be determined whether they are necessary. If so, you need to prepare and lodge them, and of course consult this office should you require help with these tasks. There may be a number of reasons why you may have to lodge a personal tax return for the deceased for example, they may have had:
- tax withheld from the income they earned
- earned taxable income exceeding the tax-free threshold
- tax withheld from interest or dividends because no tax file number (TFN) was quoted to the investment body
- lodged returns in prior years.
Capital gains tax (CGT) implications
When the assets of a deceased estate are distributed, a special rule applies that allows any capital gain or loss made on a CGT asset to be disregarded if the asset passes:
- to the executor
- to a beneficiary, or
- from the executor to a beneficiary.
However, if an executor sells a CGT asset of the deceased estate and then distributes the proceeds to the beneficiaries, the sale is subject to the normal CGT rules and a tax liability may arise. Basically this means, in most cases, the transfer of CGT assets into a deceased estate and then out to their beneficiaries should not incur an income tax liability.
Superannuation death benefits
In most cases, when a person dies, their superannuation fund will pay their remaining super to their nominated beneficiary, which is called a “super death benefit”.
If there are no binding death nominations, then the trustee of the super fund will decide how the benefit will be paid. Depending upon the trust deed of the superannuation fund, and rules and regulations operating for superannuation, the trustee may pay it to the deceased estate, then the executor will deal with it accordingly. However, the super is not part of the will (except in NSW).
If you are a dependant of the deceased, you do not need to pay tax on any component of a superannuation death benefit if you receive it as a lump sum (if you receive it as an income stream you may need to pay tax on it). Also do not include it on your tax return as income. If you are not a dependant and you receive a death benefit it must be as a lump sum. The item is taxable as follows generally:
The maximum tax rate for lump sums paid to non-dependants is: Taxed element of the benefit, 15% plus Medicare levy; untaxed element of the benefit, 30% plus Medicare levy.