Benjamin Franklin famously said, “Nothing is certain except death and taxes.” What he didn’t mention is that taxes often continue long after death. While Australia abolished death duties in 1979, this does not mean a person’s estate is free from tax once they die. In fact, the responsibility for meeting these obligations usually falls on the shoulders of the executor, who may also be dealing with the loss of the loved one.

Failing to comply with these requirements can lead to interest charges and penalties, adding unnecessary stress to an already challenging process. Understanding what needs to be done early can make a significant difference.

In this first part of our series, we explore the key tax considerations when someone passes away in Australia.

Notify the ATO

The executor named in the Will is responsible for managing the deceased’s tax affairs. These responsibilities include:

  • Notifying the ATO of the death.
  • Collecting financial records.
  • Lodging the deceased’s final tax return.
  • Ensuring any tax debts or refunds are settled before distributing assets.

If the estate continues to earn income after the date of death (such as rental income or investment returns) the executor must apply for a tax file number for the deceased estate. This ensures that income earned during the administration period is correctly reported and taxed.

ATO lodgement obligations

Unless death occurs on 30 June, the executor will need to lodge two separate income tax returns for the income year a person dies. The first being the deceased’s final income tax return covering the period from 1 July to the date of death, the second being the deceased estate’s first income tax return covering the remaining of the income year.

The executor should be careful in identifying all types of income and allocating each type into the correct periods, for example, bonus or unused leave paid after death, rental income covering both period, trust distribution, dividend declared before date of death and paid afterwards.

Getting these details right is critical to avoid errors that could delay the administration process or result in penalties.

Carried forward tax losses and capital losses

Any tax losses or capital losses accumulated by the deceased cannot be carried forward to the deceased estate. If these losses cannot be used in the final return, they are lost permanently.

What type of entity is a deceased estate?

For tax purposes, a deceased estate is treated as a trust and taxed under trust rules. This impacts how income and capital gains are assessed and distributed to beneficiaries. Understanding these rules is essential for accurate reporting and compliance.

Special rules apply for the first three income years of the estate. During this period, any taxable income that is not distributed can be taxed at the same rate as a resident individual, with access to the usual tax-free threshold and marginal tax rates. This concession differs to other trusts and future income years which would result in this income being subject to the top marginal rate of tax.

Australian tax residency

Determining the tax residency of a deceased estate is an important step because it influences how the estate’s

income is taxed. Residency status affects whether income is subject to resident or non-resident tax rates, eligibility for key thresholds such as the $18,200 tax-free threshold, and access to capital gains tax discounts. It also impacts withholding obligations on property sales, making it a critical consideration in managing the estate effectively.

The tax residency of a deceased estate is not determined based on the deceased’s tax residency before death, rather, it is determined by reference to the tax residency of its executor/trustee, or alternatively, the location of the estate’s central management of control.

While most Will makers do not consider this when appointing an executor, their choice can have significant tax implications. Executors should also consider the residency of beneficiaries when administering the estate.

Looking ahead

Managing a deceased estate can be complex, and tax obligations are just one part of the process. In the next issue of Personal Wealth Adviser, we will discuss topics including capital gains tax on inherited assets, superannuation death benefits and distribution strategies.

If you need guidance on administering an estate or planning, we are here to help.