Death And Taxes When Is A Tax Return Required For A Deceased Estate?

Executors of deceased estates are often confused about whether and when to lodge tax returns on behalf of the deceased person and their estate.

Ask yourself: if these were your own personal financial affairs would you have an obligation to lodge an income tax return? The Deceased (and their representative) has fundamentally the same requirements to lodge a return as any individual taxpayer.

Both a date of death return and estate return are eligible for the same tax free threshold (in 2023 it is currently $18,200).

It should be noted that whilst an estate return has access to this tax free threshold, it does lose the tax free threshold after a period of three years, but still has access to progressive marginal tax rates.

The fundamental questions are really as follows:

Did the Deceased or the Estate pay, or have tax withheld?
Is the taxable income above $18,200?
Was the taxpayer conducting a business?

If the taxpayer has either paid or had tax withheld, and has income above the tax free threshold, the Estate could be eligible for a tax refund or potentially have a tax liability.

Generally, if a taxpayer has paid tax in any form, then it is a fair indication that the executor may have an income tax obligation to consider.

As noted above, both the Deceased and Estate are treated as separate taxpayers (each will have their own separate Tax File numbers (TFN)) and accordingly both are entitled to the full tax free threshold in the year of death.

The Income Tax Assessment Act (ITAA) does not pro rate this entitlement, so both the returns would be eligible to the full $18,200 tax free threshold.

Moreover, that Estate Returns are specifically excluded from the Medicare levy of 1 .5% on any undistributed income under S 215(s) of ITAA 1936.

A taxpayer who was in business has an automatic obligation to lodge a tax return regardless of the income levels of the business, and this would include if the business was trading at a loss.

It is important to note that this obligation does not include business income generated from either a private trust or company, but rather relates to business income generated from trading as either a sole trader or as a partner of a partnership.

Trust distributions and private company dividends would however be included when assessing if a taxpayer had an obligation to lodge an income tax return.

Date of Death Return

This Return is required to be prepared for the period from the beginning of the taxpayer’s financial year (normally the 1st of July) to their respective date of death.

Any income earned during this period should be reviewed to determine if the taxpayer has any tax obligations, i.e. their income for the period is greater than $18,200.

If the LPR (Legal Personal Representative of the Deceased – this includes their Executor) determines that there is no obligation or need to lodge an Income Tax Return, then they should lodge a Non-Lodgement Advice with the ATO.

Both this form and the date of death return (sometimes referred to as ‘the Final Return’) are the medium to advise the ATO that the taxpayer is now deceased and that no further returns are required.

The LPR should also ensure that they determine any outstanding tax obligations the Deceased had at their date of death, and appropriately address these at this time.

Deceased Estate Return

This Return aligns itself with the administration period of the Estate and as noted above is the responsibility of the LPR, who must determine if the Estate has or will have any tax obligations, and then ensure that these obligations are met.

If the Estate does have tax obligations, then the LPR must apply for a separate tax file number (TFN) to that of the Deceased. We note that the ATO has indicated on their website that an estate return is required if the Estate has derived any income during the year.

The ITAA provides for a deceased estate to be taxed using standard adult marginal rates for a period up to three years. The Commissioner does however have the ability to remove this concession if it is believed that the estate administration is being unnecessarily delayed; in particular to take advantage of lower marginal rates than beneficiaries may be subject to within their own names.

It is worth noting that taxpayers in receipt of fully franked dividends could be eligible for a refund of the associated franking credits even if their income did not reach the tax free threshold.

We have seen this at times missed by both the taxpayer and subsequently the LPR. It can easily accumulate in size to thousands of dollars of missed tax refunds.

Should I lodge anyway?

There are two schools of thought when it comes deciding to lodge an income tax return, and neither is technically incorrect, so this should be decided on a case by case basis.

In Australia income tax is assessed on a self-assessment basis, meaning the Commissioner ordinarily accepts at face value the details of the return lodged, but does have the right to undertake an audit on any return. This right to undertake an audit is limited by the ITAA in S 17 0 (1) to either a 2 year or 4 year period.

This means that as such, once a return is lodged, the clock physically starts ticking and when this time period elapses any errors or unintended omissions within the return are essentially quarantined.

The two year amendment period generally relates to taxpayers with more basic affairs such as salary and wages, bank interest and dividends. Whereas in situations where a taxpayer is conducting a business, holds a rental property or is a beneficiary of trust income, then this audit period will be extended to 4 years.

Given the uncertainty of the Executor’s personal responsibility of income tax after an estate has been distributed, some executors opt to avail themselves of the protection of this quarantined period by physically lodging a return even when the income is below the tax free threshold.

There is an argument that the estate should not be unnecessarily burdened with the cost of preparing unnecessary tax returns, but equally an argument that it is hard to recover funds from beneficiaries to meet subsequent tax debts after the Estate has been distributed.

Finally it should be noted, that in the case of fraud or tax evasion that the Commissioner has an unlimited time frame in which to amend Returns.

Therefore Executors should take seriously their obligation to finalise the deceased’s and the estate’s tax affairs. When in doubt, an Executor can never be criticised for taking professional advice.

Estate administration can get complicated quickly and hiring a professional can save time, stress, cost and risk-exposure both to the estate and the Executor.

A lawyer specialising in Probate and the administration of deceased estates should be appointed to assist the Executor.

Genders and Partners is the oldest law firm in South Australia, established 1848. Contact us to learn how to protect yourself, your family and your assets by assisting you to administer a deceased estate, by visiting our website today and schedule a free no obligation telephone consultation to find out how we can help you and yours.

Remember – any mistakes you make in administering a deceased estate won’t become apparent until after it’s too late for you to fix them. Get proper advice, and do it right.

Founded in 1848, Genders & Partners is the oldest law firm in South Australia. They choose to specialise in just a few areas of law closest to most families, so that they can provide the legal services that matter most to you and your family.

Choosing the right estate administration lawyers can make a huge difference in ensuring proper distribution of your assets after death, minimising or avoiding any legal issues that may arise, and protecting your hard-earned assets. Most importantly, it helps save your family all the trouble, as well as thousands of dollars in legal fees and taxes, after your death.

Download their free eBook: “7 things you must know about probate and estate administration” here.