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. SatayKing

    SatayKing Well-Known Member

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    So basically, putting asise any resemblence of politiness, the LPR is going to carry the can for some selfish individual who, for whatever reason, didn't care about lodging tax returns?
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yep. One of the first issue an executor should consider is contingent tax liabilities along with actual assets and liabilities. Application for probate needs to consider the tax liability. I am often asked by lawyers and executors to give consideration to the taxpayers tax affairs ie a form of tax clearance.

    Most are just a date of death return. For older people there may not even be that but when we see a person with investments and reasonable income and no returns it does ring alarms. Then there are unusual cases - One so complex it needed advice from the Commissioner. The ATO waived all returns (massive breaches of super laws prior to taking their own life) and asked a final death return with $0 income so they could close the file on the taxpayer. You cant flog a dead horse is the expression ?
     
  3. Terry_w

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

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    Not really.

    They are not liable for the general tax debts of the deceased, but where they distribute the estate and don't keep enough to pay for the tax the deceased owed then they can be liable.
     
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  4. SatayKing

    SatayKing Well-Known Member

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    Thank you for your views, gentlemen. Always informative and interesting.
     
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  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes good point. The executor has limited liability. If the executor determines that the tax issue would deplete the estate assets to a negative etc then the trustee may need a discharge of the estate to discharge those liabilities first. The beneficiaries may get zero if assets are less than liabilities. The executor wouldnt be liable for the remaining debt

    But if they paid all the assets to beneficiaries then the ATO may explore the executor liability which may only be limited to the amount paid to beneficiaries.

    I saw this with a solicitor who gave 50% of the estate in cash to brother A and inspecie shares for 50% to brother B. Problem was the attached tax liabilities on the shares meant B received 38% of the estate. B sued for the shortfall and costs. The PI insurer paid. And the Law Soc took disciplinary action.
     
  6. Trainee

    Trainee Well-Known Member

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    So should the will specifically tell the executor to distribute say 50/50 taking into account tax liabilities? But that might depend on when the beneficiary sells and what rate they are paying then.
     
  7. Terry_w

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

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    No need
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The accrued tax liabilities that exist at the date of death are a element of the value of the shares inherited. If the executor sells all the shares then they will distribute the cash left after they pay the tax due. Inspecie distribution should be no different. The value distributed is adjusted for the net value of the shares ON THE DATE DISTRIBUTED. Its also reason why all beneficiaries should be paid at the same time. If 50% of shares were distributed to Barney today and then the market crashed 50% the distribution to Wilma of the other 50% would be a concern. As its not 50%. The constant re-appraisal of the estate is a part of the administration. And then when complete a reporting / accounting is made.

    eg Fred owns 2000 CBA shares acquired in 1991 for $5.40. He dies on 30 June 2019.
    Executor can sell the shares today for $81.94 realising $163,880. However the tax payable by the executor is $16,800. The executor probably would also file a date of death return and one post death to get refund of further franking credits
     
  9. Terry_w

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

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    Who wears the tax will depend on the terms of the will and/or what happens. If an executor sells the shares it will trigger a CGT event for the estate and it will wear the tax and this may reduce the residue of the estate or it may come out of someone's direct share. if the executor passes the shares to the beneficiary under the will no CGT will be triggered, but the beneficiary will inherit an asset pregnant with CGT.
     
  10. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes true - legal matters are often black & white but depends on the calibre of who reads it. . Had a solicitor I work with admit the way a will was drafted (DIY) meant he had little choice. Will basically said shares went to A and then rest and residue of the estate went to B & C in equal shares
     
  11. Trainee

    Trainee Well-Known Member

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    This is only an issue if the beneficiary saddled with the unrealised taxable gains sues, right?
     
  12. Terry_w

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

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    No. Think you have misunderstood something.
     
  13. Trainee

    Trainee Well-Known Member

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    Understand that if a person dies with shares with a lower cost base than the market price, cgt may have to be paid when the shares are sold. This may be by the estate, beneficiary or testamentary trust depending on when the assets are sold, how assets are distributed and the executor’s decisions.

    the question is say the will states 50/50 to 2 beneficiaries by value. Is the definition of value the market value of the assets (say, cash and listed asx shares)? Or should it include some adjustment for the potential cgt on the shares?

    if the shares go to A and cash go to B, each worth 500k at date of death, A might end up with cgt liability. But this is not an issue unless A makes a claim?
     
    Last edited: 18th Dec, 2019
  14. Silverghost

    Silverghost Well-Known Member

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    Thanks, that's very helpful. I think the take home message is to flee in the opposite direction as fast as possible if someone who's tax affairs are not in order asks you to be their executor.
     
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  15. Terry_w

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

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    No, no need to run as if you do everything properly you (LPR) will not be liable for the tax debts of the deceased.
     
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  16. Terry_w

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

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    If the deceased drafted their will this way it is just bad luck for A. They can't sue the deceased, but they could potentially make a family provision claim if they feel they have not been adequately provided for. but this could happen even with equal shares after tax - or even if they got say 80% of the assets.
     
  17. Silverghost

    Silverghost Well-Known Member

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    While that may be the ultimate outcome, there is potentially significant complexity and time in resolving the tax affairs of the deceased. This is on top of what may already be an onerous task as executor in practice.

    Personally I would not be morally comfortable leaving this type of problem to someone else when I die, so equally I wouldn't be keen to take on someone else's tax mess that they should have sorted themselves while they were alive.
     
  18. Terry_w

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

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    That is certainly the case. being an executor is a thankless task. I wouldn't do it other than for an immediate family member.
     
  19. SatayKing

    SatayKing Well-Known Member

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    Be somewhat of a mess if there was no Will in place. Then if the deceased didn't bother about tax returns why would they bother with a Will? You could be the deceased only living beneficiary. So who ya gonna call?

    The ins and outs of this are absorbing. Big share portfolio, withholding tax as no TFN is provided, franking credits, CGT. Awesome.

    Such fun and games.
     
  20. Tony3008

    Tony3008 Well-Known Member

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    Presumably the executor (if a family member) has the option of engaging an accountant to sort everything out - effectively at the cost of the residual beneficiaries. Might though end up like Dickens' 'Bleak House' [when the estate is finally settled all the money had gone on lawyers]. My executor is my solicitor (no family here) and I'm well aware that his fees will be well into five figures.
     
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