After a loved one passes away, the last thing you want to think about is lodging a tax return. However, this step is essential for closing the deceased’s estate, and as the executor or next of kin, it might feel stressful and overwhelming.
To help you get everything under control, here are five easy steps to help you lodge a tax return for a deceased estate.
Five steps to lodge a tax return for a deceased estate
1. Create an inventory of assets and liabilities
Before you can distribute a deceased’s estate and file a tax return, you need to put together a complete inventory of all assets and debts in the estate to understand its financial value. Then, you will know how much the estate may owe in taxes. The inventory of assets should include property, shares, stocks, and liabilities such as credit, debt and outstanding tax returns from previous years.
2. Notify the ATO
Before you can lodge a tax return for a deceased estate, you need to apply for a grant of probate or letters of administration. Either court-issued document will prove to the ATO that the executor or next of kin can legally manage the estate.
After the application is approved, you need to notify the Australian Taxation Office about the deceased’s death with a Notification of a Deceased Person form. This step only applies if the deceased has lodged a tax return previously and has a Tax File Number.
3. Determine tax on inheritance
There is no inheritance tax in Australia when a beneficiary inherits property, but taxes may apply to the estate. Depending on the size of the estate, you might need tax advice to help you understand the types of taxes that apply.
Tax rules and who pays the tax varies depending on how you transfer the deceased’s assets. There are three common ways to transfer assets. These include:
- Estate to beneficiary
- Estate to executor or next of kin in trust
- Executor or next of kin to a beneficiary
Types of tax
To help you better understand what you might need to lodge a tax return for, here are several types of taxes.
- Income tax. If the estate in the deceased’s sole name generates income during the estate administration process, then income tax applies.
- Company tax. If the deceased person owned a business and that business goes to a beneficiary, the new business owner needs to continue to pay the company tax.
- Capital gains tax. Capital gains tax is tax paid on any profit from the sale of certain assets. Generally, capital gains tax applies when the executor sells an asset, and there’s a difference between the asset’s value when acquired and the selling price.
- Capital gains tax on real estate. Capital gains tax on a property will apply depending on whether the property was the deceased’s primary place of residence or if it was an investment property.
- Superannuation tax. Superannuation doesn’t automatically form part of the deceased’s Will. However, if a non-dependent person receives the deceased’s superannuation benefit, a Death Benefit is paid as a lump sum. This lump sum is not exempt from taxes.
- Other taxes. There’s technically no tax on inheritances or gifts in Australia because it’s not considered income. However, if the funds earn interest in the beneficiary’s name, tax may apply.
4. Prepare date of death tax return
After informing the ATO of a person’s death and receiving the confirmation and recognition of yourself as the authorised contact, you’ll need to prepare the deceased’s tax return for the current tax year and any outstanding tax returns from previous years.
This tax return is called the date of death tax return and covers the financial year in which the person died from 1 July up to the date of death. This tax return is different from the trust tax return for the deceased estate.
If you complete a tax return on behalf of a deceased person, you must use the ATO paper forms rather than submitting the form online.
5. Lodge a trust tax return for the deceased estate
After submitting the date of death tax return and paying all debts and bills, you submit a final trust tax return for the deceased estate. However, this return is only necessary when the sale of assets resulting in capital gains generates profits over the Australian tax-free threshold.
Here are a few scenarios where this might happen:
- Sold appreciating assets such as a real estate
- Interest from bank accounts, shares or investment
- Received income from a business
You’ll need to obtain a tax assessment that identifies how much tax is payable from the estate.
Lodging a tax return for a deceased estate
Tax returns are complicated when filing them for yourself, let alone having to file one for a deceased estate. However, this article serves as an excellent step-by-step guide for lodging a tax return for a deceased estate, including useful links and updated information regarding Australia’s regulations to make the process easier for you.