April 07 - Tax Accounting

What You Need To Know About Deceased Estates

A morbid topic, yes – but deceased estates are relevant at some point in everyone’s lives and it’s important to have a basic understanding of what they are and what the tax consequences are before you find yourself needing to know.

What is a deceased estate?

When a person dies, they typically hold assets that have monetary value such as property and cars, cash and shares, insurance policies and sometimes loans against these assets. The combination of these balances is what forms a deceased estate.

What happens to an estate when someone passes away?

Most people think of deceased estates as a distribution of assets to the individual’s chosen beneficiaries. However, the debts and loans held by the individual at their time of death often continue and need to be paid for out of the estate.

If the individual has a will in place at the time of death, it will typically include details of their nominated Executor – the person who has been chosen to manage payments of any debts as well as distribute any assets in accordance with the wishes of the deceased.

How do tax and deceased estates work?

The Executor or chosen administrator of the estate is responsible for arranging the lodgement of any tax returns, including declaring any relevant income on assets held by the estate. If the deceased person was carrying on a business, there may be additional obligations and lodgements to attend to. Any tax obligations must be finalised and paid before distributing the remaining assets of the estate. The administration process of a deceased estate can take 6-12 months, or sometimes longer.

What are the tax consequences if you are the beneficiary of a deceased estate?

Even though there are no inheritance or estate taxes as such in Australia, there may still be tax obligations that arise as a result of:

  • Disposing of an asset that you inherited from a deceased estate (potential capital gains tax consequences)
  • Receiving income such as interest, dividends and rental income from assets such as shares or property that you inherited

If it is deemed that you are ‘presently entitled’ to the income of a deceased estate, you need to include it in your tax return. For example, if the deceased person owned a rental property that continued generating rental income after their death, as the beneficiary you may become presently entitled to that rental income and therefore need to include it in your own tax return.

There are also issues to consider when receiving superannuation death benefits as a beneficiary. The super fund’s trustee typically determines who is to receive the benefits, and the tax consequences depend on many things including:

–          Whether you were a dependant of the deceased according to tax law

–          Whether the super death benefit is paid as a lump sum or income stream

–          What the components are in the super fund (i.e. whether or not the super fund itself has already paid tax on the benefit being paid to the beneficiary)

What else is there to know?

If the deceased has no will in place, the result can be complicated and expensive, and the court may determine who will manage and be entitled to the estate.

It is worth seeking both legal and financial/taxation advice in relation to estate planning, as well as the tax consequences for beneficiaries, to ensure that all considerations have been made in relation to assets, and so that the process is as seamless as possible when the time comes.

If you need tax advice, you know where to find us. We can also put you in touch with excellent legal counsel.