The adage “nothing is certain except for death and taxes” holds true across the world. In the unfortunate event of someone’s passing death and taxes can present a complex landscape for the deceased’s family and estate administrators. Among these complexities, the taxation of assets and income within a deceased person’s estate is a major and often confusing challenge.

Understanding a Deceased Estate

A deceased estate encompasses all assets and liabilities that belonged to a person at the time of their death. This includes properties, bank accounts, investments, personal belongings, and any debts. The process of managing these assets and liabilities, called estate administration, involves paying off debts, lodging necessary tax returns, and distributing the remaining assets to beneficiaries as dictated by the will or, in its absence, by the rules of intestacy.

The executor, named in the will, or an administrator appointed by the court if there is no will, is responsible for managing the deceased estate. Key duties include:

  • Collecting the deceased’s assets.
  • Paying off debts and ongoing expenses.
  • Lodging the deceased’s final tax return.
  • Lodging any necessary estate tax returns.
  • Distributing assets to beneficiaries.

Tax Obligations Following Death

The tax responsibilities following death are multifaceted. Here’s a breakdown of what is involved:

  1. Final Tax Return for the Deceased: The executor must file a final tax return for the period from the start of the financial year to the date of death. This return includes income such as salary, investments, and capital gains. The deceased’s personal income tax rates and tax-free threshold apply to this return.
  2. Tax Returns for the Estate: If the estate generates income after the date of death (e.g., rental income, interest from bank accounts), the executor must file tax returns for the estate. The estate is treated as a separate taxpayer and is subject to income tax, with certain concessions available.
  3. Capital Gains Tax (CGT): There is no immediate CGT when assets are transferred to beneficiaries. However, beneficiaries may be liable for CGT when they later dispose of these assets.

The Administration of a Deceased Estate 

The taxation of a deceased estate as it progresses through various stages of administration can be a complex and multifaceted process involving various legal, financial and administrative tasks. Understanding the administrative stages and their tax implications is crucial for executors and beneficiaries.

Stages of Administration:

  1. Immediate Post-Death Period: This initial stage covers the period from the date of death until the executor is granted probate (or letters of administration if there is no will).
    • Income: Before the probate, any income is treated as the deceased’s income and should be included in the deceased’s final tax return. 
    • Tax Returns: The executor must lodge a final tax return for the deceased, covering the income year up to the date of death. This return uses the deceased’s personal tax rates and tax-free threshold.
  2. Administration Period:  The administration period begins once probate or letters of administration are granted and lasts until the estate is fully administered. This period is further divided into two sub-stages: the concessional period and the post-concessional period.
    • Concessional Period (First Three Years): The estate is taxed at concessional rates designed to provide relief during the early stages of administration (see more on concessional rates below). The executor must lodge tax returns for the estate for each financial year during this period, reporting any income earned by the estate.
    • Post-Concessional Period (After Three Years): If the administration extends beyond three years, the estate is taxed at normal individual tax rates.
  3. Finalisation of the Estate: The final stage occurs when the estate is fully administered, meaning all debts are paid, and assets are distributed to beneficiaries. 
    • Distribution of Assets: The remaining assets are transferred to the beneficiaries according to the will or intestacy rules.

Special Tax Considerations

  • Superannuation: Superannuation death benefits can be tax-free if paid to a dependent. If paid to a non-dependent, they may be subject to tax. The tax treatment of superannuation can be intricate, and professional advice is often necessary.
  • Foreign Assets: If the deceased owned assets overseas, the tax implications can vary based on international tax treaties and the specific laws of the foreign country. This can complicate the tax obligations and may require specialist advice.
  • Trusts and Companies: If the deceased had interests in trusts or companies, the tax treatment can be complex. The executor may need to address various tax obligations related to these entities.

How Tax Rates Differ in the First 3 Years of Deceased Estate Returns

The tax treatment of a deceased estate can vary depending on how long the estate takes to be fully administered. For the first three years after a person’s death, special tax rates apply to the income earned by the estate, often resulting in lower tax liabilities compared to standard individual tax rates. 

First Three Years: Concessional Rate of Tax 

During the initial administration period (up to three years from the date of death), deceased estates benefit from concessional tax rates, which are the same as individual income tax rates, with the benefit of the full tax-free threshold. Deceased estates do not get the benefit of tax offsets (concessional rebates), such as the low-income tax offset. No Medicare levy is payable.

  1. Tax rates 2024-25:
    • $0 to $18,200: No tax payable.
    • $18,201 – $45,000: 16c for each $1 over $18,200
    • $45,001 – $135,000: $4,288 plus 30c for each $1 over $45,000
    • $135,001 – $190,000: $31,288 plus 37c for each $1 over $135,000
    • Over $190,000: $51,638 plus 45c for each $1 over $190,000

After Three Years: General Rates Apply

If the administration of the deceased estate extends beyond three years, the following tax rates apply. This change reflects the Australian Taxation Office’s (ATO) expectation that most estates should be administered within three years.

  1. Tax rates 2024-25:
    • $0 to $416: No tax payable
    • $417 – 611: 50% of the excess over $416
    • $612 to $45,000: $97.76 plus 16$ of the excess over $611. *If the deceased estate taxable income exceeds $611, the entire amount from $0 will be taxed at the rate of 16%
    • $45,001 to $135,000: $13,500 plus 30c for each $1 over $45,000
    • $135,001 to $190,000: $49,950 plus 37c for each $1 over $135,000
    • Over $190,000: $ 85,500 plus 45c for each $1 over $190,000

Example Scenario First 3 Income Years:

Joan passed away on 5 April 2024.
The first income year for Joan’s deceased estate is 6 April 2024 to 30 June 2024.
The second income year is 1 July 2024 to 30 June 2025.
The third income year is 1 July 2025 to 30 June 2026.
If Joan’s deceased estate earned taxable income of $18,200 or less during these years, there is no tax payable.

Understanding these tax rate differences is crucial for executors. Efficiently managing the estate to complete administration within three years can result in significant tax savings.

Tax Rates for a Deceased Estate When the Legal Personal Representative (LPR) is a Non-Resident in Australia

The taxation of a deceased estate when the Legal Personal Representative (LPR) is a non-resident, follows the same tax rates and rules as those for a resident LPR. The main difference lies in the additional compliance challenges faced by the non-resident LPR. These include ensuring proper reporting, understanding Australian tax obligations, and possibly dealing with withholding taxes. Engaging professional tax advisors can be crucial for non-resident LPRs to navigate these complexities and ensure the estate is managed in accordance with Australian tax laws.

Given the complexities involved in managing a deceased estate, particularly regarding tax obligations, seeking professional advice is highly recommended. A tax accountant or lawyer specialising in estate planning and administration can provide invaluable guidance, ensuring compliance with all legal requirements and helping to minimise tax liabilities.

Get Expert Tax Planning Advice

As an integrated professional services firm, The Quinn Group’s team of expert tax lawyers, tax accountants and estate lawyers are perfectly placed to advise on specialised tax and estate planning matters. Contact us by submitting an online enquiry form or calling us on 1300 QUINNS or +61 2 9223 9166 to schedule an appointment.