Tax Tip 311: Taxation of a Dead Person

Yes, the dead have to pay tax too!

After someone dies, they have to file a tax return up to the date of their death. They will get their normal tax free threshold for this. Their estate will then have to file a tax return for the rest of the financial year and the estate will get a separate tax free threshold for this.

Dead people can’t themselves file tax returns, so it would be their legal personal representative that does it for them.

The estate can last for 3 tax years with separate tax free thresholds for each.

But once the administration of the estate has come to an end it will be the beneficiaries who are taxed on the income, and this can occur before the relevant property is even transferred into their names as it is from the date that they become presently entitled to the income.


Example

Moe died on 1 June.

His executor, under his will is Ned. Probate is not granted till October though.

Ned must attend to Moe’s last tax return from 1 July 2019 to 1 June 2020 – which can can’t do until Oct after probate is granted.

Ned must also do the estate tax return from 1 June 2020 to 30 June 2020.

The following year Moe’s business returns $50,000 profit. It is the estate that is taxed on this, but the first $18,200 is tax free.

Moe’s will left the business to Homer and Ned delays administering the estate because he is slack so it goes over to 30 July 2021 before all the debts are paid and the administration is complete. The estate gets a $18,200 threshold on the for days from 1 July to 30 July 2021 and then the income is taxed in the hands of Homer. The business is not transferred to Homer until 30 Dec 2021 – but this doesn’t change the tax outcome.

 

Inconsiderate dastard!

 

Can the tax man garnishee your gold teeth after you been laid? Or does the parlour get first dibs?

 

I find that garnishes tend to stick between the teeth. Floss is your friend.

 

And to make it even more fun on death the ATO throw the tax agent off their system and you cant access the taxpayer data. Until the executor is appointed who then has legal capacity and is the Legal Personal Representative to reappoint the tax agent. A simple matter like claiming super death benefits can trigger this.

Estate taxes can be very confusing for many people and we suggest a discussion and advice so many issues can be addressed. Usually no reason to race in but once everyone feel comfortable with the formalities. The estate may not even need to lodge a return or apply for a new TFN after death if there is insufficient income. This could save Ned the hassle although knowing Ned he will make a fussarooney about it. But refundable franking credits etc could also be reason why a smaller income may well justify a return. One new sting I found is claiming deductions for super contributions. If you die before making the election well you lose the deductibility in most instances as your LPR cant claim the deduction and most super funds may have already paid the death benefit.

One of the trickier bits is super death benefits. Its easily overlooked when paid out to adult kids rather than a spouse. This will trigger a tax issue whether it flows from the fund to beneficicary or if it goes through the deceased estate. And if it flows through the estate the estate isnt taxed on that part but the beneficicary will need to allow for their share. Crazy eh ? It is one remnant of death taxes in Australia. Its often a 15% + medicare issue. And invariably medicare levy surcharge for some. Wise estate planning will avoid that and seek to pay super proceeds to a spouse if possible.

 

So the saying “ only certain things in life are death and taxes” is defInitely true!
Most probably think it is “death or taxes” but looks like the taxman still gets you.

 

Most people inherit a tax liability associated with an asset and have little idea (or quickly forget). One of the limited exceptions is a home owned by deceased that was their home at death. In that case they likely inherit the market value at death and even can sell within 2 years and not trigger a further gain subject to tax. Same doesnt apply other than to pre-CGT assets of the deceased. All post CGT assets will have a tax liability associated

eg Mary has a parcel of 10,000 CBA shares worth $640,000. Mary dies. Her three children inherit her shares as her sole asset. What did those shares cost ? Her executors do some digging and find Mary acquired these in 1991 on the initial float. The shares cost $5.40. They have inherited assest worth $640,000 with a potential untaxed capital gain of $293,000 ie up to $137K. But each child will only pay tax if and when they sell.

 

Or even worse, if one of the kids was a non-resident at the time of the death. CGT even K3

Tax Tip 299: CGT Trap if Leaving Shares on Death to a Non-Resident Beneficiary Tax Tip 299: CGT Trap if Leaving Shares on Death to a Non-Resident Beneficiary

 

But if Mary US located kids inherits shares its all tax free provided she doesnt own more than 10% of CBA. Go figure.
A US tax resident wont pay AU CGT other than on real property or indirect real property (eg property trust units)

 

It would be taxed in Australia in the final tax return of the deceased - a deemed disposal. How it is taxed overseas will depend on the laws of the country of residence

 

Yes Terry - I had added a extra para to the post and closed it accidentally..I was to say ....but a tax advantaged entity will trigger the deemed disposal rule. Timing is everything (if you know death may be imminent of course).

I encountered a person with terminal cancer. On his death bed he disposed of (just) enought shares to aborb his significant accrued realised and unrealised CGT losses (as they end of death) and he also made sure sufficient proceeds were sold so cash could be passed to a non-resident beneficiary and bypass the deemed disposal. He revised his will to cater for all this and died within 3 days. Saved the family a lot of tax.