The deceased had not lodged a tax return for 31 years

Discussion in 'Accounting & Tax' started by Terry_w, 9th Dec, 2019.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Some poor executor on a deceased estate was left with a bit of a mess:

    He said about 18 months ago one of the cases that he took on was for a family member of a man who died, and at the time of his death, had not lodged a tax return for 31 years.
    A man didn't lodge a tax return for 31 years — but someone had to after his death

    Executors/Administrators can be personally liable if they do not lodge tax returns for the deceased.
     
  2. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Its not uncommon.

    The executor is best to make full disclosure to the ATO - ATO may just close the book on it. There may be some LIMIT info available through prefill data but its often trivial. In many I have seen its investment income and CGT issues and often difficult to ascertain. If its with a broker etc then the history may be available at least for part. Best to look back at least 6 years....Where prefill is available. A tax agent may help.

    The ATO will often look back up to 6 years and make a judgement call on this. They cant prosecute a dead person and the executor may be unable to make any reasonable estimates. The ATO then closes the book...Often the TFNs are already closed but that doesnt mean the executor can ignore it.

    I recall one where a lady passed away and had never lodged. Her unknown portfolio was a few mil so the ATO required the returns lodged. It was a massive reconstruct job going back to 1985 and each year thereafter. Microfische at NSW library and registry data etc... And a hand written book! !
     
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  3. MTR

    MTR Well-Known Member

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    Wow
    So the estate does not wear penalties??
     
  4. Silverghost

    Silverghost Well-Known Member

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    The article suggests that the personal assets of the executor/administrator are at risk if the dead person has unpaid taxes. Not sure what this means in practice. Say if the deceased hasn't paid tax for 20 years and has a tax liability of $3m and negligible assets in their estate, is the executor/administrator just responsible for filing a return and paying tax out of the deceased's estate? Or are their own assets at risk to make up the tax shortfall?
     
  5. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    ATO doesnt tend to penalise dead people in practice since the penalty of failure to lodge cant be complied with by a deceased person. The estate executor is their legal personal representative and is trying to fix things. Of course it depends on the value involved. A age pensioner who hasnt lodged for a few years with a trivial issue is different to someone who had a property portfolio and several unreported CGT events in the past few years.

    The ATO can issue a default assessment too. They can "make up" the assessable income using known information and the executor may need to provide it to be incorrect within 28 days by lodging a return. The default basis adds 75% penalty !! And cant later be objected to or amended.
     
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  6. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    No its would mean that the probate lodgement would show a deficiency of net assets. Its part of probate for the tax liabilities to be determined. Its not uncommon to see income tax, land tax and rates that are unpaid.

    If a deceased person had $1m of tax debts from failure to lodge and report cap gains etc and had a $2m house then the estate assets could be substantially affected by tax debts. The ATO could even whack a caveat on the property if it was a disputed tax position prior to death (eg a court action for a tax scheme). The executor may become the party to the action.
     
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The LPR needs to arrange for any outstanding taxes to be paid. If there is a shortfall the estate can enter bankruptcy. If they have done everything properly their personal assets will not be at risk.
    BUt if the LPR ignores the tax of the deceased and winds up the estate not doing tax returns and paying taxes etc they will be personally liable for the debts owed.
     
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  8. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes. Section 244 of the Bankruptcy Act 1966. Its unlikely the ATO would petition this. They can't get blood from a stone. Maybe jointly held property / assets with a spouse can be exposed ???
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    All the usual bankruptcy laws would apply. Shares of property owned by a spouse could potentially be attacked under the laws of resulting trusts, transfers to defeat credits clawed back, under market value transfers, improperly set up discretionary trusts etc.
     
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  10. Silverghost

    Silverghost Well-Known Member

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    Out of interest, what about property held as a joint tenant by the recalcitrant taxpayer, say a PPOR owed with a spouse? As that wouldn't be an estate asset once they die does this mean it is beyond reach of the ATO at that point?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    assets owned as JT are not estate assets, they pass to the survivior outside the will. But where bankruptcy is involved a JT is severed into TIC in equal shares, so creditors such as the ATO could get their hands on half of hte property, at least.
     
  12. Silverghost

    Silverghost Well-Known Member

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    So if the ATO only becomes aware of the unpaid tax after the person dies, they could claw back the deceased's interest in the family home previously owned as joint tenants? That is, even though it passed to the surviving spouse at death under ordinary property law principles and never formed part of the estate assets?
     
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  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes
     
  14. spludgey

    spludgey Well-Known Member

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    That's very interesting. So you could offer old people $20,000 for 1% of their property. They'd think it's a great deal, as their house is worth less than $2M, but after they die, you get 100% of the property!?
     
  15. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    No the issue refers to joint tenancy and Terry explained what occurs when one of the JTs is declared bankrupt. Their tenancy becomes 50% TIC with the trustee in bankruptcy involved. The bankrupts share is now exposed.
     
  16. spludgey

    spludgey Well-Known Member

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    So my perfect evil plan isn't going to work? :(
     
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  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Start dating older people now. Get them to suggest buying a house together, go in as joint tenants, using their other property as security....
     
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  18. Trainee

    Trainee Well-Known Member

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    For most people the lesson is prevention better than the cure.
     
  19. Silverghost

    Silverghost Well-Known Member

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    Definitely, but you could still be lumped with someone else's tax problem when they die.
     
  20. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The following ATO guide to tax liabilities of a deceased provides reason why the role of executor may be fraught with peril if discharge of prior tax obligations has been ignored or poorly managed. The executor may also be liable for other tax liabilities eg an amended notice, a cancelled tax benefits etc

    Legal Database
     
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