When a loved one dies, the last thing you want to think about is taxes. Unfortunately, paying taxes is a necessary process of winding up the estate, so it’s in your best interests to understand the process. There is no death tax in Australia, but you should be aware of several other tax implications.
For example, if the deceased owned property, there may be capital gains tax payable on the sale of that property. There may also be income tax implications if the deceased had income-producing assets, such as investments that continue to generate income while the executor administers the estate.
While it’s vital that you seek professional advice from a legal practitioner and a tax agent, here’s a basic rundown of the different deceased estate tax rates in Australia and how they may apply to your situation.
What is a Deceased Estate?
A deceased estate is the property of a person who has died, including any assets or liabilities the deceased may have owned. The estate executor is responsible for administering the estate and distributing the assets according to the deceased’s wishes.
The executor of the estate is also responsible for ensuring that all debts and taxes owed by the deceased are paid before distributing the assets among the beneficiaries.
Until the executor can distribute the deceased’s assets to the nominated beneficiaries, the executor holds the assets plus any income produced after their death in a trust structure.
Does a Deceased Estate Pay Tax in Australia?
The simple answer to the question is no – Australia has no such thing as a death tax. That doesn’t mean, however, that there aren’t any tax obligations regarding a deceased estate.
For example, if the estate includes any income-producing assets, then there may be income tax payable on those assets. Similarly, if the executor needs to dispose of a capital gains tax (CGT) asset, it may trigger CGT liability.
How Does Income Tax Apply to Deceased Estates?
Settling a deceased estate can be a complex and time-consuming process, often taking anywhere from 6 to 12 months – sometimes even longer. During this time, it’s not uncommon for income to still flow into the deceased person’s estate.
For example, the investment property might still bring in rental property, or the estate may receive a dividend payout from shares the deceased held.
If this is the case, the estate is treated as a trust for tax purposes and the executor must report the deceased estate income to the Australian Tax Office (ATO).
What are the Deceased Estate Tax Rates?
Based on the deceased estate tax rules that the ATO proposes, if the estate generates income while the administration process is underway, the executor of the estate must lodge an income tax return for each financial year that it takes to finalise the estate and distribute the estate.
Generally, an executor won’t have to lodge a tax return if the total income of the estate is less than the tax-free threshold, which is currently $18,200.
In most cases, the ATO taxes undistributed income in a trust at the top marginal tax rate, but when the executor or trustee lodges the first tax return for the deceased, they can apply for a concessional tax rate – which is the same as the individual income tax rates.
The concessional tax rate will only apply for the first three years. Different deceased estate tax rates will apply if it takes longer to finalise the estate. It’s also worth noting that deceased estates can’t benefit from tax offsets such as the low-income tax offset, and the medicare levy won’t be payable.
Meagan passed away on 2 May 2022. The first income year for her estate will run from 3 May 2022 to 30 June 2022.
The second income year for Meagan’s estate will run from 1 July 2022 to 30 June 2023, and the third income year will be from 1 July 2023 to 30 June 2024.
If Meagan’s deceased estate earns less than $18,200 taxable income during these years, the estate won’t have to pay any tax or file a tax return. If she doesn’t benefit from the full tax-free threshold, her individual income tax rates will apply.
If, however, the executor has not finalised the estate by the end of the third income here, the following marginal tax rates will apply:
Taxable Income Thresholds
$0 – $416
$417 – $670
50% of the excess over $416
$671 – $45,000
$127.30 plus 19% of the excess over $670. If the deceased estate taxable income exceeds $670, the entire amount from $0 will be taxed at the rate of 19%
$45,001 – $120,000
$8,550 plus 32.5 cents for each $1 over $45,000
$120,001 – $180,000
$32,925 plus 37 cents for each $1 over $120,000
$180,001 and over
$55,125 plus 45 cents for each $1 over $180,000
When Will Capital Gains Tax Apply?
When you dispose of or sell an asset, you make a capital gain or a loss. Your capital gain is the difference between what it costs to acquire the asset and what you receive when you dispose of it. Capital gains tax (CGT) is a tax on the capital gain or profit you make from selling or disposing of an asset.
Usually, assets that form part of the deceased estate will transfer to a beneficiary in accordance with the deceased person’s wishes. The ATO allows the executor to disregard CGT on any capital gain (or loss) if the asset passes:
- to the executor;
- to a beneficiary; or
- from the executor to the beneficiary.
The beneficiary won’t pay capital gains tax on their inheritance either, unless they sell the property two years after acquiring it. Various rules apply to capital gains tax on inherited property, so make sure to consult a tax agent to help you understand your obligations.
Alternatively, you might be interested in reading our guide to the 5 Things To Know About Gifting and Inheritance Taxation.
If the asset in the deceased estate doesn’t transfer to a beneficiary and is sold instead so that the executor can distribute the profits to the beneficiaries, the sale will be a CGT event for tax purposes. This means that the normal capital gains tax rules will apply, and the estate may have to pay CGT.
There are several different types of taxes that may apply to a person’s estate after they die. In Australia, there is no death tax, but there are still active obligations to pay tax on any income the deceased’s assets generate after they pass away. Capital gains tax may also apply to selling different assets in a person’s estate.
While it’s not ideal to have to be thinking about estates and taxes when you’re grieving the loss of a loved one, you might find comfort in understanding exactly how the process works so that there are no surprises when the executor eventually finalises the distribution of the estate.
We aimed to provide a basic insight into deceased estate tax rates in Australia, but if you have any questions, get in touch with a tax agent at KNS Accountants and Business Advisors today.
We understand the importance of accuracy and timeliness when it comes to tax returns, and we will work with you to ensure that your return is filed correctly and on time. We also offer various other comprehensive tax services, including tax planning and advice, tax audits, and representation before the ATO.
Regardless of your tax situation, our team at KNS can provide the assistance you need. Contact us today to learn more about how we can help.