When a loved one passes away, the emotional toll can be overwhelming, and the last thing you may want to focus on is taxes. However, navigating the tax implications is a crucial part of administering an estate. While Australia does not impose a death tax, there are other important tax considerations that may arise, including capital gains tax and income tax.
For instance, if the deceased owned property, capital gains tax may be applicable on the sale of that property. Similarly, income-producing assets, such as investments that continue to generate income during the administration of the estate, may have associated income tax implications.
Given the complexity of these matters, it is essential to seek professional guidance from both a legal practitioner and a tax agent. Below is a basic overview of the key tax considerations related to deceased estates in Australia, to help you better understand the process and how it may apply to your specific situation.
What is a Deceased Estate?
A deceased estate refers to the property and assets left by an individual upon their death, including both tangible assets and any outstanding liabilities. The executor of the estate is responsible for managing the administration process and ensuring that the assets are distributed according to the deceased’s wishes, as outlined in their will.
A deceased estate may also include a superannuation death benefit, which is a payment made by a superannuation fund to a dependent beneficiary or to the estate’s trustee when the fund member passes away.
The executor has a fiduciary duty to ensure that all outstanding debts and taxes owed by the deceased are settled before distributing the remaining assets to the beneficiaries. Until distribution occurs, the executor holds the estate’s assets, including any income generated posthumously, in a trust.
Does a Deceased Estate Pay Tax in Australia?
In Australia, there is no death tax. However, that does not mean a deceased estate is exempt from tax obligations.
For example, if the estate includes income-generating assets, income tax may be applicable on the income produced during the administration of the estate. Additionally, if the executor is required to sell any capital gains tax (CGT) assets, the sale could trigger a CGT liability. Furthermore, consideration should be given to whether the deceased had already satisfied tax obligations on specific components, such as superannuation death benefits, which may impact the estate’s overall tax responsibilities.
How Does Income Tax Apply to Deceased Estates?
Settling a deceased estate can be a complex and time-consuming process, often taking 6 to 12 months—sometimes even longer. During this time, it’s not uncommon for income to still flow into the deceased person’s estate.
For example, the investment property might still generate rental income, or the estate may receive a dividend from shares the deceased held.
If this is the case, the estate is treated as a trust for tax purposes and the executor must report the deceased estate income to the Australian Tax Office (ATO).
What are the Deceased Estate Tax Rates?
Based on the deceased estate tax rules that the ATO proposes, if the estate generates income while the administration process is underway, the executor must lodge an income tax return for each financial year that it takes to finalise and distribute the estate.
The taxable component of superannuation death benefits can significantly impact the tax obligations for beneficiaries and the estate. Understanding the rules around the taxable component is crucial for managing potential tax liabilities.
Generally, an executor won’t have to lodge a tax return if the total income of the estate is less than the tax-free threshold, which is currently $18,200.
In most cases, the ATO taxes undistributed income in a trust at the top marginal tax rate, but when the executor or trustee lodges the first tax return for the deceased, they can apply for a concessional tax rate—the same as the individual income tax rates.
The concessional tax rate will only apply for the first three years. If the estate is finalised later, different tax rates will apply. It’s also worth noting that deceased estates can’t benefit from tax offsets such as the low-income tax offset, and the Medicare levy won’t be payable.
Example
Meagan passed away on 2 May 2022. Her estate’s first income year will run from 3 May 2022 to 30 June 2022.
The second income year for Meagan’s estate will run from 1 July 2022 to 30 June 2023, and the third income year will be from 1 July 2023 to 30 June 2024.
If Meagan’s deceased estate earns less than $18,200 taxable income during these years, the estate won’t have to pay any tax or file a tax return. If she doesn’t benefit from the full tax-free threshold, her individual income tax rates will apply.
When Does Capital Gains Tax Apply?
Capital Gains Tax (CGT) is levied on the profit made from the sale or disposal of an asset. The capital gain is the difference between the cost of acquiring the asset and the proceeds received upon its disposal. If the asset is sold for a profit, CGT is applied to that gain.
In addition to CGT, it is important to consider the tax implications related to superannuation death benefits. The tax obligations associated with inheriting superannuation assets depend on several factors, including the beneficiary’s dependency status, the nature of the benefit (whether a lump sum or income stream), and whether the superannuation is taxable or tax-free.
Typically, assets from a deceased estate will be transferred to a beneficiary in accordance with the deceased’s wishes. The Australian Taxation Office (ATO) allows the executor to disregard CGT on any capital gain (or loss) if the asset passes:
- To the executor;
- To a beneficiary; or
- From the executor to the beneficiary.
As a result, the beneficiary will not be required to pay CGT on their inheritance unless the asset is sold more than two years after acquisition. However, various rules apply to CGT on inherited property, so it is advisable to consult with a tax professional to understand the specific obligations.
If an asset within the deceased estate is sold by the executor, rather than transferred directly to a beneficiary, to distribute the proceeds, this will trigger a CGT event for tax purposes. In this case, the standard CGT rules will apply, and the estate may be liable for CGT.
Frequently Asked Questions (FAQs)
Do I need to pay tax on inherited money in Australia?
In Australia, there is no inheritance tax. The federal inheritance tax was abolished in 1979, meaning beneficiaries are not required to pay tax on the value of assets or money inherited from a deceased person’s estate.
However, while there is no inheritance tax, other tax implications may arise depending on the nature of the inherited assets. For instance, if you inherit property and later sell it, you may be subject to capital gains tax (CGT) on any profit made from the sale.
What happens to the deceased’s debts?
Debts do not disappear when a person passes away. The executor of the estate is responsible for settling any outstanding debts using the assets of the estate before distributing the remaining assets to the beneficiaries, in accordance with the deceased’s will.
The typical process for settling debts involves:
- Identifying all outstanding debts, including mortgages, loans, and credit card balances.
- Notifying creditors of the death and providing them with the required documentation.
- Paying off debts using the estate’s assets, starting with secured debts (e.g., mortgages) and moving to unsecured debts (e.g., credit card balances).
- If the estate does not have sufficient assets to cover all debts, the executor may need to sell assets or negotiate with creditors.
- Once all debts are settled, the remaining assets can be distributed to beneficiaries.
The executor must manage debts properly to ensure the estate is administered correctly and beneficiaries receive their entitlements.
How long does it take to settle a deceased estate in Australia?
The time it takes to settle a deceased estate in Australia can vary significantly based on factors such as:
- The size and complexity of the estate
- The clarity and validity of the deceased’s will
- The number and location of beneficiaries
- Any disputes or challenges to the will
- The efficiency of the executor in managing the estate
On average, it takes around 6 to 12 months to settle a deceased estate, but in more complex cases, such as when there are multiple properties, international assets, or many beneficiaries, the process may extend to several years.
The main stages of settling a deceased estate typically include:
- Obtaining a grant of probate or letters of administration
- Identifying and valuing the estate’s assets
- Paying any outstanding debts and taxes
- Distributing the remaining assets to beneficiaries
- Finalising the estate and providing a final accounting to beneficiaries
Executors should keep beneficiaries informed throughout the process and seek professional advice from legal practitioners and tax agents to ensure the estate is administered in compliance with Australian laws.
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How can we help?
If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.
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The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
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