If you’re unsure whether and when you should lodge tax returns on behalf of a deceased person and their estate, ask yourself this question: if these were my personal financial affairs, would I have to lodge an income tax return? The deceased person (and their legal representative) has the same requirements to lodge a return as any individual taxpayer does.
The tax-free threshold ($18,200 for the 2024-5 financial year) applies to a date of death return and to an estate return.
After three years, an estate loses access to the tax-free threshold, but it can still access progressive marginal tax rates.
Ask yourself:
- Is the taxable income above the tax free threshold?
- Did the deceased person or the estate pay, or have tax withheld?
- Was the deceased person conducting a business?
If the deceased person has either paid tax in any form or had tax withheld, and had income above the tax free threshold, it is a good indicator that the executor may have an income tax obligation.
The deceased person and estate are treated as separate taxpayers. Each will have their own tax file number (TFN)) and each is entitled to the full tax free threshold in the year of death. The Income Tax Assessment Act 1936 (ITAA) does not pro rate this entitlement, so both returns would be eligible for the full tax free threshold.
Estate returns are excluded from the Medicare levy of 1 .5% on any undistributed income (s 215(s) Income Tax Assessment Act 1936 (ITAA)).
A taxpayer who was in business has an automatic obligation to lodge a tax return regardless of the income levels of the business, including if the business was trading at a loss.
This obligation excludes business income generated from a private trust or a company.
The obligation includes business income generated from trading as a sole trader or as a partner of a partnership. Trust distributions and private company dividends are also included when assessing if a taxpayer had an obligation to lodge a tax return.
Date of death return
This return is prepared for the period from the beginning of the taxpayer’s financial year (normally 1 July) to their date of death.
The executor or administrator should check whether income earned during this period is greater than the tax-free threshold.
If the executor or administrator determines that there is no obligation to lodge an Income Tax Return, they should lodge a Non-Lodgement Advice with the ATO.
This form and the date of death return (also called a ‘final tax return’) advise the ATO that the taxpayer is deceased and that no further returns are required.
At this time, the executor or administrator should also determine and address any outstanding tax obligations the deceased had at the date of death.
Deceased Estate Return
This return relates to the administration period of the estate. An estate return is required if the estate has derived any income during the year. The executor or administrator must determine if the estate has or will have any tax obligations, then meet these obligations.
If the estate has tax obligations, the executor or administrator must apply for a separate TFN to that of the deceased person.
A deceased estate will be taxed using standard adult marginal rates for a period up to three years. The Commissioner can however remove this concession if they believe that the estate administration is being unnecessarily delayed.
Taxpayers in receipt of fully franked dividends could be eligible for a refund of the franking credits even if their income did not reach the tax free threshold.
Should I lodge anyway?
There are two schools of thought when it comes deciding whether to lodge an income tax return. Neither is technically incorrect, so this should be decided on a case by case basis.
In Australia income tax is assessed on a self-assessment basis, meaning the Commissioner ordinarily accepts at face value the details of the return lodged, but has the right to undertake an audit on any return. The ATO’s right to audit is generally limited to either 2 or 4 years. The two year amendment period generally relates to taxpayers with more basic affairs. In situations where a taxpayer is conducting a business, holds a rental property, or is a beneficiary of trust income, the audit period will be extended to 4 years. Once a return is lodged, the clock starts ticking. When the relevant time period elapses, any unintended omissions or errors within the return are quarantined.
Given the uncertainty of the executor’s personal responsibility of income tax after an estate has been distributed, some executors opt to avail themselves of the protection of this quarantined period by physically lodging a return even when the income is below the tax free threshold.
There is an argument that the estate should not be unnecessarily burdened with the cost of preparing unnecessary tax returns. On the other hand there is an argument that it is hard to recover funds from beneficiaries to meet subsequent tax debts after the estate has been distributed.
In the case of fraud or tax evasion, the Commissioner’s time in which to amend returns is unlimited.
Any mistakes you make in administering a deceased estate won’t become apparent until after it’s too late for you to fix them. Contact us for professional advice: it can make a huge difference in minimising or avoiding legal issues, ensuring proper distribution of your assets, and protecting your hard-earned assets. It can help save your family thousands of dollars in legal fees and taxes after your death.
