After they’re gone: finalizing taxes

Sorting out the tax affairs of a deceased person may seem like a daunting task, especially with laws varying between Australian states and territories. However this guide should help you finalize various “loose ends”– from lodging tax returns to how any liabilities should be sorted out.

Order of administrative events

Following the death of a person, administrative events usually play out in this order:

• Funeral
• The deceased person’s will nominates an executor, or an administrator is appointed by the Supreme Court.
  • If the deceased person died without leaving a valid will (known as dying “intestate”), letters of administration need to be obtained from the Supreme Court appointing someone to administer the deceased’s estate. The assets of the deceased person are then distributed in accordance with the succession laws of the states and territories of Australia, which generally means the estate passes to the deceased person’s next of kin.
• Probate – when a bank or other institution requires formal proof of the executor’s right to administer the will – applied for and granted by the Supreme Court
• Assets vested in the executor who administers the estate which normally include the following stages:
  • date of death and trust tax return lodged
  • initial stage – net income of estate is applied to reduce debts (including tax liabilities) etc
  • intermediate stage – part of the net income of estate that is not required to pay debts etc may be paid to beneficiaries
  • final stage – debts etc are paid or provided for in full and net income and assets of the estate are distributed to beneficiaries.
  • Administration of estate completed.

There are a number of people who need to be contacted following the death – see the Department of Human Services for a downloadable list.

State trustees

Depending on which state or territory the deceased person lived in when they died, the law applying to assets and income will vary. The Public Trustee Office in your state or territory holds information regarding inheritance laws.

• Western Australia
• South Australia
• Northern Territory
• Tasmania
• ACT
• Victoria
• Queensland
• New South Wales

Death duties

There are no death duties in Australia. However, some of the transactions which occur as a result of a person’s death may give rise to amounts which are taxed as income. The tax consequences are different from the perspective of:

• the deceased estate
• the executor, or
• a beneficiary of the deceased estate.

Definition of a deceased estate

Property and other assets, such as money in bank accounts, superannuation, life insurance, shares, and personal goods, as well as the sources of some types of income which belonged to a person who has died are referred to as their deceased estate. There are also some assets that may not be included in the deceased estate because the deceased person had made other arrangements to distribute those assets.

An estate is held in what is considered to be a trust, from the time a person dies, until property and assets are transferred to beneficiaries.

If you are made an executor of an estate, you may also be referred to as the ‘trustee’ (or executrix, trustee administrator or legal personal representative) and you are the person who administers the deceased estate with regards to the deceased’s will and/or in the best interest of the beneficiaries. The executor helps to tie-up any loose ends and finalize the deceased person’s personal affairs.

If no executor has been appointed by the deceased person’s will to administer their estate, the Supreme Court is able to step in to appoint one. The Court will also step in if the person nominated to be executor is not able to carry out their duties.

Responsibilities of an executor

• locates the will
• arranges the funeral
• applies for probate
• obtains a death certificate
• informs investment bodies of the death

• checks insurance policies – home, contents, car, life and health
• checks superannuation policy
• informs Centrelink
• locates and assesses the value of assets
• pays debts, income tax and funeral expenses
• transfers assets and pays stamp duty, and
• distributes the surplus to beneficiaries.

If you have been appointed as an executor of a deceased person’s estate, you will be responsible for carrying out the wishes and terms contained in the deceased person’s will, or – where no will exists – be responsible for complying with the relevant inheritance laws. You will also have responsibility for managing the deceased estate’s tax affairs.

Choosing an executor

An executor’s duties may not cease when the final distribution of the estate has been made. Where children are involved, the executor may have to continue in role of trustee until the children have all turned 18. The executor may also have to continue in his or her role as trustee where income from an estate is payable to beneficiaries over the course of their lifetime.

Importantly, it is also worth knowing that in administering a deceased estate, the executor may need to dispose of some or all of the assets of the estate. This disposal of assets is subject to the normal tax rules that apply to any other disposal of assets.  This means that any capital gain or loss the executor makes on the disposal is subject to income tax under the capital gains tax (CGT) rules.

If a beneficiary sells an asset they have inherited, the normal CGT rules also apply, with special rules typically applying in work out the cost base.  Other special rules may also apply such as working out whether the CGT 50% general discount applies.

Ramifications of not having a will

A situation called “intestate” occurs in cases where the deceased died without a valid will. In an intestate event, the Supreme Court needs to be contacted to obtain letters of administration so that someone can be appointed to administer the deceased estate in accordance with state and territory succession laws.

The distribution may not produce the result that a person would wish, as generally, the estate passes to the deceased person’s next of kin. If you do not leave a valid will, your estate could end up in the wrong hands, which can add to the grief people may be experiencing, and could also result in costly legal battles.

Superannuation and life insurance payments

Superannuation and life insurance payments sometimes form part of the deceased estate. If there are beneficiaries specified under the policies, the payments may go directly to the beneficiaries without going through the deceased estate.

In these cases, the beneficiaries may pay tax on the income directly.  Where the payments go to the trustee, in some instances the trustee may have to pay tax before distributing the rest of the payments to the beneficiaries.

Jointly owned assets

Depending on the type of co-ownership, assets that are jointly owned do not automatically form part of the deceased estate. The categories of co-ownership are:

• joint tenancy – where, if a joint tenant dies, their share of the asset is extinguished, and this cannot be passed on to the estate, leaving the surviving owner as the sole owner (the family home owned by husband and wife is a typical example), and

• tenancy-in-common – where, if a tenant-in-common dies, their share of the asset passes to their deceased estate, and the executor deals with that share in the asset.

In the case of real estate, the title deed is a good indicator as to the type of co-ownership. Under common law, the joint tenancy of real estate is presumed where no evidence of contrary intention exists. For assets like shares and bank accounts, generally the type of ownership is not stipulated, whereupon documentation showing the purchase or contract of the assets will offer clues.

Not happy with result?

If you believe you have a claim on a deceased estate, or are a creditor, and believe you are owed money from the deceased estate, you are able to contest the will before probate usually (although it is possible also after probate has been granted, but is more difficult).

It’s completely natural to feel overwhelmed by the administration tasks involved in sorting out someone’s affairs. However, there are free financial and counselling services which can help you get your affairs in order and help you plan your future. The Department of Human Services provides a good starting point.

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