Australian Estate Taxes – Background
Death and Taxes Income tax rules as they apply to deceased Estates can be quite complex so we’ll try to run through them in an easily understandable manner below.
When a person dies, their Will controls what happens to their assets according to their wishes. An Estate Trust is automatically created to own and control the deceased’s assets. The Estate is run by the Executors. Executors can be one or more persons. Effectively, the Executors are responsible for ensuring the deceased wishes are acted upon.
Because the Estate Trust is not a “legal entity”, it requires a Trust or Trustees to administer it. In all but the most complex cases, the Executors are also usually the Trustees.
The rules relating to the Estate are set out in the Will. Once the assets of the deceased are known, they are valued at date of death, recorded and probate is granted.
Some of the assets may consist of income earning assets like bank deposits that earn interest income, shares that earn dividends, property that earns rent etc. Some of the assets may also consist of non-income earning assets like a family home, jewellery or other property.
From a tax perspective, the following must occur:
- The deceased assets and liabilities must be researched and valued at the date of death;
- A final income tax return must be lodged for the deceased for the financial year in which the person died;
- An initial income tax return must be prepared for the Estate at 30 June 2019 if the person died with asset holdings other than say a house and bank account. A new Tax File Number for the Estate must be applied for.
The most complicated process for the above is often point no.1 as this can take the most time to gather and compile.
To assist with this, we would generally require:
- When the deceased home (if any) is sold, a copy of the Settlement Statement for the sale. The sale of the home can take up-to two years after the date of death before there’s any tax implications. If the home is specifically willed to a beneficiary and it becomes their principal place of residence, no tax applies.
- Bank account balances at the date of death including any money on Term Deposit. When probate is issued the Trustees need open a bank account in the name of the Estate and have all existing account balances transferred to it. Sometimes however, funds can be transferred to a Solicitor’s Trust Accounts.
- If the Deceased had shares in Companies, advice must be provided to the Share Registry of the new tax file number for the Estate.
Australian Estate Taxes – Income tax returns
As mentioned above, a final income tax return for the deceased from the beginning of the financial year to their date of death must be lodged. Generally, we can obtain most of the information to include information directly from the tax office.
Australian Estate Taxes requires a deceased Estate tax return to then be prepared from Date of Death to 30 June 2019 and annually from then until it is finalised. The tax office gives deceased Estate’s up to three years from the date of death or when the Estate is fully administered, whichever is earlier to be concessionally taxed. This means that from the date of death, the deceased Estate’s tax return is taxed at the same rates as an Adult. This can be beneficial because Adult tax rates come with annual tax-free thresholds. At or before the conclusion of three years, either the deceased Estate should be fully administered and shut down or it must distribute its income to the beneficiaries listed in the will to save income tax.
Death and Taxes – Accounting for the Estate
Some wills list separate beneficiaries entitled to the residual Estate and we believe appropriate financial records should be prepared including an Income and Expenditure statement and Balance Sheet listing all of the Estate’s assets and liabilities at date of death for transparency, to properly execute Executors and Trustees duties and record keeping. This entails valuing the Estate’s shareholdings (if any) at date of death and accounting for dividends and interest. The amount of dividends and interest is then accumulated by the Estate, added to the value of the Estate (often referred to a Corpus) and then when finally known, distributed to the beneficiaries listed in the Estate.
In some circumstances, it can be beneficial from a tax perspective to distribute income before the Estate is finalised as beneficiaries under the age of 18 in receipt of Estate income are taxed as adult beneficiaries, therefore getting tax free thresholds. However, the income of the Estate from the date of probate must be either fully distributed or fully accumulated.
The dates of birth for anyone under the age of 18 listed as beneficiaries would be required and may possibly have to apply for tax file numbers for them also.
Some more complex and wealthy Estates include the establishment of Testamentary Trusts upon death under the terms of the will. The Testamentary Trust(s) receives a fixed-entitlements of both Capital and Income from the Estate when fully administered. As these are Fixed Trusts, they don’t require Family Trust Elections. Testamentary Trusts are established to protect the beneficiary’s interests in the Estate from creditors and can also have significant tax benefits where beneficiaries under the age of 18 are included.
Superannuation Funds’ generally contain Binding Death Benefit Nominations (BDBN) as to how the Superannuation Fund’s assets are to be distributed at date of death. The Estate or beneficiaries individually can be nominated as receiving the proceeds of Superannuation Fund Assets and there are significant tax benefits applicable if planned for correctly. Generally, Lawyers and Financial Planners are involved in this process to ensure the correct legal aspects of the person’s wishes.
NBC are experts at Accounting for Deceased Estate’s, tax planning and Estate Tax administration. Through our professional associations with Lawyers and Financial Planners, we can assist to guide you through the decision-making process when considering your Will and the options available to you.