When a loved one passes away, managing their estate can be a daunting task, especially when it comes to understanding the tax obligations involved. One critical aspect of this process is lodging tax returns for the deceased estate. This guide will walk you through the key steps, including when a trust tax return is required, how to obtain a Tax File Number (TFN) and an Australian Business Number (ABN) for the estate, and how to correctly lodge the return.
Below is an infographic for a brief overview of managing deceased estate tax returns. For a deeper understanding of the topic, check out our detailed article below the infographic.
In Australia, there are no inheritance taxes, but the estate may still have tax obligations. A trust tax return is used to report the income generated by the deceased’s estate after their death, such as rental income or share dividends. It also allows the estate to claim any tax refunds or franking credits owed. If a return needs to be lodged, the estate is treated as a trust for tax purposes. Trust tax returns may need to be lodged annually until the estate is fully administered.
This differs from:
Typically, the authorised legal personal representative (LPR) of the deceased lodges the trust tax return. You can lodge a return once you’ve notified the Australian Taxation Office (ATO) of the death, and they have recognized you as the person managing the deceased’s tax affairs. If you're not the authorised LPR, the ATO will assess the lodged returns according to the law and their internal policies.
For the first three income years after the deceased’s death, you must lodge a trust tax return if:
From the fourth income year onwards, a trust tax return must be lodged if the estate earns any income, including capital gains. Even if not required, you may choose to lodge a return, for example, to claim franking credits on dividends paid to the estate.
Consider the case of Maree, who passed away on 4 March 2024. Her son Zach, as the authorised LPR, is responsible for lodging the tax returns.
To lodge a trust tax return, the estate needs a trust TFN. If the deceased estate is running a business, an ABN is also required.
You can lodge a trust tax return using the paper form available from the ATO. If you’ve appointed a tax agent, they can prepare and lodge the return online on your behalf.
When preparing a trust tax return, include all income the deceased estate has earned since the date of death, such as:
If a capital asset passes to a beneficiary, the capital gain or loss is not included in the trust tax return, unless the beneficiary is a foreign resident, charity, or super fund.
Case Overview
In the case of Re Estate of Thompson [2021] NSWSC 1120, the executor was accused of failing to properly manage the estate's tax obligations, resulting in substantial financial losses. The estate comprised a family home valued at $2 million, a commercial property worth $1.2 million, and a diversified portfolio of shares and bonds valued at $800,000. The executor's mishandling of tax returns led to significant penalties and interest charges, diminishing the estate's value.
Behavior of the Participants
The executor, a close relative of the deceased, initially appeared diligent in managing the estate. However, due to a lack of understanding of complex tax regulations, they delayed filing the required tax returns. This delay caused anxiety among the beneficiaries, who feared that the estate might become insolvent due to accumulating penalties and interest charges.
As the months passed, the executor became overwhelmed by the mounting paperwork and ceased communicating with the beneficiaries. Desperate for answers, the beneficiaries sought legal counsel, hoping to prevent further damage to the estate. Tensions reached a boiling point when the ATO issued a notice of intent to levy additional penalties due to non-compliance, leaving the beneficiaries in a state of panic and uncertainty.
Legal Process and Court Involvement
The beneficiaries filed a formal complaint with the NSW Supreme Court, requesting the removal of the executor due to mismanagement of tax obligations. The court examined evidence of the executor’s failure to file the final income tax return, resulting in penalties of over $100,000. Additionally, the court found that the executor did not properly account for capital gains tax liabilities arising from the sale of the commercial property, leading to further financial consequences for the estate.
Financial Consequences
The estate faced severe financial repercussions due to the mismanagement of taxes. The delay in filing the necessary tax returns resulted in fines and interest charges totaling $150,000. The sale of the commercial property triggered unexpected CGT liabilities amounting to $200,000, significantly reducing the value of the estate. The legal fees associated with the court proceedings reached $120,000, further diminishing the inheritance available to beneficiaries.
Lessons Learned
Managing a deceased estate can be a complex and challenging process, and it’s not uncommon for estate tax returns to be lodged late. Various factors contribute to these delays, each with its own impact on the timeline. Below, we outline the most common reasons for late estate tax returns and provide estimated percentages to illustrate their prevalence:
These percentages are rough estimates based on typical scenarios encountered during estate administration. The actual distribution of reasons for late estate tax returns can vary depending on the specific circumstances of each estate. Understanding these factors can help executors take proactive steps to avoid delays and ensure that all tax obligations are met in a timely manner.
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