Being appointed as an executor of someone’s Will comes with significant responsibilities, including navigating complex taxation requirements. Understanding these obligations early can save time, money, and legal complications when administering a deceased estate.
If you are an executor of a person’s Will it is your job to gather the assets of their estate, pay any liabilities (including completing any outstanding tax returns) and distribute the assets of the estate in accordance with the deceased person’s Will. The term “executor” is often interchangeable with the term “administrator” or “legal personal representative”.
We start by acknowledging that we are lawyers, not accountants, and we are not able to provide taxation advice. The purpose of this article is to provide some insight into taxation matters that an executor or administrator should be aware of when administering a deceased person’s estate.
Common Tax Issues in Estate Administration
Generally speaking, taxation issues can arise in the context of deceased estates in several key circumstances:
Capital Gains Tax Implications
Capital gains tax liabilities may arise when an estate asset is sold. Usually, the sale of the deceased person’s principal place of residence will not give rise to a CGT liability provided that the property is sold within two years of the deceased’s date of death. In limited circumstances, for example if there is some delay due to litigation, this time period can be extended however that is at the discretion of the ATO.
Further, if a property that is not the deceased’s principal place of residence is sold or shares are sold the result of which is that the estate receives a capital gain then capital gains tax might be payable and an estate tax return might be necessary.
Superannuation Considerations
Superannuation is a concessionally taxed environment to encourage people to fund their own retirement. Essentially, you pay far less tax on money that you have in superannuation as an incentive to invest in your own retirement.
The result of that is that if following a deceased person’s death a non tax-dependant beneficiary receives their superannuation then the beneficiary will most likely have to pay tax on some or all of the money they have received. This includes if superannuation monies are paid to the deceased’s estate and then passed to a non tax-dependant beneficiary under the deceased’s Will.
Outstanding Tax Returns and Income
Ordinarily, if a deceased person has stopped completing tax returns in the years preceding their death because they are not earning income that requires returns to be completed, there will be no date of death tax return or estate tax return required. If however a deceased person was still working when they die and completing regular tax returns or earning income in retirement that required the completion of tax returns then it is the responsibility of the executor to ensure that a date of death tax return is done for the deceased.
Understanding Date of Death vs Estate Tax Returns
We have referred above to “date of death” tax returns and “estate” tax returns.
A date of death tax return is a tax return for the deceased individual. An estate return is a return for the estate in circumstances where the estate has earned income that requires a return to be completed.
The Importance of Professional Advice
As you can see, tax considerations in deceased estate administration can be complex.
As an executor, you need to be alive to these issues and consider taking accounting or taxation advice from an appropriately qualified professional (not your lawyer) before distributing the assets of the estate to the beneficiaries.
Need guidance with estate administration in NSW? Our experienced Penrith legal team can help you navigate the complex requirements of being an executor, ensuring you meet all legal obligations while protecting the interests of beneficiaries. Contact us today to discuss your estate administration responsibilities and get the support you need during this important process.
