Understanding the Tax Obligations of Executors

If you have been appointed as an executor or administrator of a deceased estate, you have taken on a role of great responsibility. While many people understand that this includes applying for probate, calling in assets, paying liabilities and distributing the estate, fewer realise that ensuring the estate tax obligations are complied with is also a part of the role.

This guide explains in plain language some of the basic tax-related duties of executors; however, we strongly recommend booking an appointment with us to ensure compliance with these obligations.

1. Start by Finding the Deceased's TFN

One of your first steps should be to look for the deceased's Tax File Number (TFN). This will help you access their tax records and lodge any required returns. You may find the TFN in personal paperwork, ATO correspondence, or on a prior tax return.

2. ATO Notification of Death

The ATO's notification of the Death of a person can be completed using this link https://www.ato.gov.au/individuals-and-families/deceased-estates/notifying-us-of-a-death-and-who-will-manage-the-estate 

3. Deceased's tax returns

As executor, you may need to lodge a final individual tax return for the deceased. This is typically required if:

• They had outstanding tax returns to be lodged
• They earned income above the tax-free threshold in the year of their Death
• They operated a business
• They had income from which tax was withheld

If no return is necessary, it is still wise to lodge a "non-lodgment advice" form. Doing so begins a six-month review period by the ATO. If you skip this step, the estate may be open to audit for up to 4 years after the last return.

4. Estate tax returns

The estate may need to lodge a tax return (separate from the deceased's individual tax return) if:

• Income was received after the date of Death above the tax-free threshold (for example, interest earned on term deposits and bank accounts, or share dividends)
• Assets are sold, and Capital Gains Tax is payable
• The estate received a superannuation death benefit, and the recipients are non-tax-exempt dependants

If the estate is required to lodge a tax return, then it will need a separate Tax File Number.

5. Interim Distributions

During the administration of the estate, you might decide to make interim distributions to beneficiaries. However, beneficiaries are liable for tax on estate income distributed to them. For example, interest earned on bank accounts or share dividends.

To avoid complications, consider keeping estate income and capital in separate accounts. Mixing funds can make it hard to determine what was income and what was capital, which could lead to issues for both you and the beneficiaries come tax time.

6. Capital Gains Tax (CGT)

Capital Gains Tax (CGT) arises when assets are sold for a gain (i.e., if sold for more than they were purchased for). If an exemption does not apply, then the gain is treated as taxable income. In the context of estates, here are some key points to be aware of:

• Cost base: The value of the asset at the time it was acquired, which determines the gain. When an asset transfers from a deceased person to an executor or beneficiary, the cost base ‘'rolls over " so that the recipient does not pay CGT unless they dispose of it.
• Primary residence: If the deceased's home is sold within 2 years of their Death, it will be exempt from CGT. The cost base is the market value at the date of Death. These two years can sometimes be extended by 18 months in exceptional cases.
• Pre-CGT assets (acquired before 20 September 1985): These are treated as if they were acquired at market value on the date of Death.
• Post-CGT assets (acquired after 20 September 1985): These keep the deceased's original cost base, ie the date of purchase.
• Shares and dividend reinvestment plans: If new shares are issued after Death under a dividend reinvestment plan, CGT may apply on any gains when these are sold. The rollover rules don't cover these newly acquired shares.

7. Superannuation Death Benefits

When super is paid to the estate rather than directly to a dependent, the ATO applies a “look-through" approach. This means tax is applied based on who eventually receives the money:

• Dependents (e.g. spouse or child under 18): Tax-free
• Non-tax-exempt dependents and non-dependents: The taxed element may be taxed at 15%, and the untaxed element at 30%

Need Help? 

Being an executor comes with essential tax responsibilities, but you don't have to do it alone. At Canberra Tax Solutions, we have helped countless clients manage deceased estates with care, professionalism, and clarity.

Book a New Client Complimentary Discovery Call with us. 

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