Executors and trustees of deceased estates should be aware that there are various tax requirements that must be fulfilled in respect of the estate of a deceased person and that these requirements must be met before any funds or assets are transferred to the beneficiaries of the estate.
Initially, a final tax return will be required for the individual up until their date of death. This will include any income earned by the person for the period from the beginning of the financial year (1 July) to their date of death. Any tax payable in respect of this tax return must be paid from the estate funds. You may also be required to lodge any outstanding returns for prior years.
If the estate earns any income between the date of death and the time that the estate is distributed to the beneficiaries, it will be necessary to lodge a tax return in respect of the estate of the person. In these circumstances, the executor/trustee must apply for a tax file number for the trust estate, lodge a tax return for the estate and pay any tax applicable. This must be done prior to the distribution of any funds to beneficiaries. In some instances, there may be several years where a tax return will need to be lodged for the trust.
Below are some examples that explain the potential tax implications of different circumstances:
Example 1:
Mr Sample dies on 30 March 2015. At the time of his death, he is retired and his only assets are cash in a bank account and shares held in a listed company.
In accordance with his will, all his assets are to be transferred to his wife, Mrs Sample. This is done very soon after his death and no income is received from the assets between the date of death and the transfer date.
In this circumstance, a tax return will need to be lodged in Mr Sample’s personal name for any interest or dividends received from 1 July 2014 to 30 March 2015. However, as his estate did not receive any income prior to the asset transfer to his wife, the trustee will not be required to apply for a TFN or lodge a tax return in respect of the estate.
Example 2:
Mr Sample died on 30 March 2015. At the time of his death, he holds significant cash investments in term deposits and shares in several listed companies.
In accordance with his will, the shares are sold by the executor and the proceeds received, together with the funds from the term deposits are held in a bank account prior to being distributed to the beneficiaries named in the will. As the funds are held for several months, there is an amount of interest income earned on the account during the interim period.
In this circumstance, the trustee would firstly need to lodge a personal tax return for Mr Sample for the period from 1 July 2014 to 30 March 2015.
They would also need to apply for a tax file number for the deceased estate (a trust) and a tax return would need to be prepared to include the interest income and any capital gain from the sale of the shares.
It is important to note that when dealing with shares and other non-cash assets (e.g. property), the executor may need to obtain confirmation of when the deceased person acquired the asset and the cost they paid for the asset. For this reason, it is important that if you own these types of assets, you should retain this information in such a manner that they can be located upon your death.
It should also be noted that only certain costs of deceased estates are deductible for tax purposes. For example, accounting fees for preparation of tax returns for the deceased person are deductible, however funeral costs are not.
If you are the executor of a deceased estate, you should contact us to discuss the possible tax requirements to ensure that there are no delays in distributing the estate to the beneficiaries.
Plant and Associates Pty Ltd