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Deceased Estates and Tax Consequences

Leo Colgar
Leo Colgar

Australia is a labyrinth when it comes to taxation. As if the tax laws are not complex enough when we are still alive, it becomes even more complicated after we die.

While Australia does not have an "Inheritance" or "Death" tax, there are still tax implications that need to be considered, not just for the deceased but also for the executor of their estate and beneficiaries.

The executor is responsible for its administration such as applying for a probate, calculating the deceased's assets and liabilities, collecting income and paying for the expenses associated with the estate assets and lodging the tax returns.

If during the administration of the estate, the executor receives any amount after the death, that would normally have been assessable income of the deceased person, that amount is treated as assessable income of the deceased estate to which no beneficiary is presently entitled.

The tax rates applicable to taxable income of a deceased estate differs depending on how long after the date of death that income was incurred. In other words, how long the administration process takes.

During the first three financial years, the tax is marginal tax rates that applies to everyone, as usual, however, the tax offsets may not be fully utilised. On the other hand, Medicare Levy does not apply, for obvious reasons.

If the administration goes beyond the third year, the tax free threshold is phased out eventually and reduces from $18,200 to $416.

If the death benefits are paid to the dependants as instructed in the death benefits nomination forms, it is non-assessable and non-exempt income (basically not taxable) in the hands of dependant beneficiaries.

If the deceased's employer pays their employment termination payment (ETP) to their deceased estate, the amount of tax payable by the executor depends on the taxable amount in ETP and also on dependency status of the beneciaries.

The amounts of unused leaves are taxable on the deceased person's own (final) tax return.

Finally, I like to mention the most common situation on touch base.

If you inherit a dwelling and later sell or otherwise dispose of it, you may be exempt from capital gains tax (CGT), depending on:

  • when the deceased acquired the property
  • when they died
  • whether the property has been used to produce income (such as rent)
  • whether the deceased was an Australian resident at the time of death.

If you're not exempt, or only partly exempt, you need to know the cost base of the dwelling to work out your capital gain. The cost base may be the value of the dwelling when the deceased acquired it or the value when they died, depending on the circumstances above.

The same exemptions apply if a CGT event happens to a deceased estate of which you're the trustee.

These rules don't apply to land or a structure you sell separately from the dwelling - they are subject to CGT.

This is just a brief look at the tax consequences of someone's passing away. For more details, contact our office.

Published on by BiziNet

Bright Accounting and Taxation Services

Bright Accounting and Taxation Services

Tel: 02 7200 2547
Street Address: Suite 6/208, Level 2, Foundational Business Centre, 29 Main Street Rouse Hill NSW 2155

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