Unlike some other jurisdictions, Australia does not have a ‘death tax’ on deceased Estates; however, there are several tax issues of which Executors need to be aware when administering an Estate. In this blog post, we will provide an overview of some of these issues.
This is intended as an introduction to Estate tax administration and Executors should obtain legal and financial advice in administering an Estate. If you have any further questions after reading this post, please contact us for further information.
Capital Gains Tax (CGT)
Death is considered a ‘rollover event’ for the purposes of CGT which is a Commonwealth Government Tax. This means that there is no CGT payable on the transfer of assets from the deceased to the beneficiary or beneficiaries nominated under the Will. There will most likely be CGT payable, however, if the beneficiaries subsequently sell that asset unless it is the Deceased’s principal residence and is sold within 2 years from the date of their death.
The amount of CGT payable, and the manner in which it is calculated, will depend on several factors, such as:
- The date of sale;
- The date on which the deceased acquired the asset;
- Whether the deceased acquired the asset before the CGT regime commenced;
- The residency of the deceased and the beneficiary; and
- For real property (land), the use of the property as either a principal residence or an income property.
For example, if you inherit a property that was the deceased’s main residence and you sell it within two years, you will be exempt from CGT. Conversely, if you inherit an investment property from the deceased and sell it after twelve months, you will likely pay CGT on half of the capital gain (the increase in value between the date of death and the sale) which will be calculated by adding that amount to the recipient beneficiaries’ “normal” taxable income.
Special rules apply for transfers to or from a foreign resident and for transfers to tax-exempt entities, such as a charity or a superannuation fund. There may also be CGT consequences where a beneficiary has been granted a life interest or remainder interest in a property which you then surrender. We recommend the seeking professional tax advice in these circumstances.
Estate Tax Returns
There are two types of tax returns that an executor may need to complete: firstly, a personal income tax return for the deceased for the year of their death, and secondly, an Estate tax return for any income that the Estate may earn in a particular year prior to the distribution of the assets of the estate to the beneficiaries or prior to “rolling” the assets into the trust(s) established by the Deceased’s Will.
When a person dies, it is important to notify the ATO, who can then advise whether the executor needs to complete an individual tax return for the deceased. You may not need to lodge an individual tax return if the deceased was not earning an amount in excess of the permitted income level of $18,200 (approx.). This tax return operates just as any tax return that a living person may complete, with the ATO assessing the tax bracket into which the deceased falls and applying any deductions and levies. You may need to lodge a tax return for earlier years too if the deceased had not done so.
If you wind up the Estate within the same financial year as the date of death, and the Estate’s income (e.g. interest earned on bank accounts) is less than the individual tax-free threshold, you will not need to lodge an Estate tax return. If the administration of the Estate takes longer, however, you may need to lodge an Estate tax return depending on the circumstances of the Estate. For larger Estates with multiple investments and income streams, it may be prudent to engage an accountant to prepare these returns for you.
Trust Tax Returns
If the Will of the deceased establishes a discretionary testamentary trust (DTT), the trustee of the trust has additional responsibilities regarding taxation.
The ATO summarises these responsibilities on its website as:
- properly understanding the tax profile of potential beneficiaries in the light of intended tax outcomes;
- The need to lodge a tax return for every financial year that the trust remains in existence;
- maintaining proper trust account records (such as trustee resolutions, detailed financial statements and reconciliations), especially where a trustee is streaming capital gains or franked dividends;
- fully documenting capital gains tax events, cost bases, and rollovers and other concessions claimed.
A DTT structure can provide many benefits in terms of asset retention and tax minimisation; for example, taxable income can be divided amongst beneficiaries, including minor beneficiaries, to prevent individuals moving up into a higher tax bracket. All trust tax issues must be managed correctly, however, to prevent any future complications, including ATO scrutiny.
We encourage individuals to make a non-lapsing binding death benefit nomination to direct their superannuation after their death. A person can choose specific beneficiaries to receive their super if they fall within the permitted class in accordance with the relevant legislation. These are (in broad terms) referred to as “dependants” and consist of spouses (including a domestic partner) and children. The alternative, especially if the desired recipients don’t form part of the permitted group, is to direct their share of the member death benefits to be paid to the executor(s) of the Deceased and dealt with in accordance with the terms of their Will.
If you are the executor of an estate and have been nominated by the deceased to receive and distribute their superannuation, it is important to be aware of how that super may be taxed. Any taxes payable on the superannuation death benefit will be your responsibility to administer.
If the Will directs that the super is to be distributed to tax dependants, it will not be taxed. Tax dependants are those who fall into the following categories:
- A spouse or de facto spouse of the deceased;
- A child of the deceased who is under the age of 18 years or who has a permanent disability, including adopted children, stepchildren and children of a de facto spouse;
- A child who is a student up to the age of 25 years; or
- Someone with whom the deceased was in an ‘interdependent relationship’, being a close personal relationship where:
- The people live together;
- One or both provide financial support to the other; and
- One or both provide domestic support and personal care to the other.
On the other hand, if the Will directs that super is to be distributed to non-tax dependants (such as adult children), tax will be payable on any taxable component of the lump-sum super. The rate of tax varies depending on the makeup of the super ‘pool’. The relevant superannuation fund administrator should be able to provide you with a breakdown of the taxed and untaxed elements of the ‘pool’.
Are you faced with obtaining a grant of Probate of an Estate with complex assets and structures, such as a discretionary trust which the Deceased established in their lifetime, investment properties owned by the Deceased or the trustee of such discretionary trust, a large superannuation pool of assets (which can also include real estate) and a Will which contains a discretionary testamentary trust? We can help with all of these issues.
Tony Kelly has nearly fifty years’ experience in estate administration. Call him today to discuss your needs as an executor.