Tying up loose ends

To make it easier to finalise deceased estates, there have been some improvements in the ATO’s guidance for managing the tax affairs of deceased estates.

First of all, there is now a telephone option to notify the ATO that a taxpayer has passed away. You can phone 13 28 61 to give the ATO an “unofficial” notification of a death, which will stop mail being issued until the official notification of death is received. The official process to notify the ATO can be done online or by mail or in person (see these options here).

The ATO has also provided a direct channel for public trustees to consult with its experts via its Complex issues resolution service (see more here).

Importantly, the ATO has put together a checklist to assist practitioners in covering all the relevant decisions (which is reproduced below, or follow this link for the ATO checklist online).

Taking care of a deceased estate: The basics
After a person dies, and the usual arrangements are completed, there will come a time when other matters, such as tax and superannuation issues, must be looked after. The person who takes on the responsibility for administering a deceased estate is commonly referred to as the executor, but could also be known as an administrator or a legal personal representative.

One of the necessary steps in the process, and generally the first action to take, is to obtain probate. Basically, this is a court-issued document that confirms that the person whose affairs are being looked at is in fact deceased — and therefore cannot hold bank accounts, shares, property and so on — and that the person appointed executor in their will is legally entitled to wind up said affairs.

One of the central matters to take care of is the final tax return. The ATO refers to this particular return as a “date of death tax return”, which is lodged on behalf of the deceased. For non tax agents, The ATO states that these must be lodged on a paper return for an individual. All the normal individual assessment conditions apply. That is, the same tax rates, income thresholds, withholding conditions, lodging requirements and so on. (More info)

The date of death tax return will be the last document to require the deceased’s particular individual tax file number (TFN). Upon completion, this TFN will not be used again

There are a few other differences to remember when completing this return. The executor will need to label the return as being for a “deceased estate”, sign the tax return on behalf of the deceased, and show the name of the taxpayer as “The legal representative of <their name>, deceased”. Also, answer “no” at the question “Will you need to lodge an Australian tax return in the future?”.

Assessable income earned or derived, and deductible expenses incurred, up to the date of death should be included in the return. But income earned and deductible expenses incurred after the date of death (for example from investments and such) will need to be dealt with in the deceased estate’s trust return — not in this final individual tax return. The treatment of capital gains or losses would be dealt with in a similar way (here’s some ATO guidance on this).

If the deceased person had accumulated losses at the date of death, these can be offset against income in the final tax return (capital losses may be offset against capital gains) but can’t be carried forward into the deceased estate. Ordinary losses, as well as capital losses, that can’t be offset in this final tax return will lapse.

The ATO will usually send the ensuing notice of assessment to the executor, which should show any refund owing, or any tax liabilities. There may in some cases be a requirement to withhold amounts from the assets or income of the deceased estate to pay any tax liabilities.

To ensure everything is taken care of, below is the ATO’s checklist to help gather all the loose ends that can crop up with a deceased estate. If the deceased person also carried on a business, this will also need to be taken care of.

7 point checklist

• Did the person have a will?

Yes. Determine who is the executor or administrator of the will. See next point.

No. Contact the public trustee in your state or territory to determine if they will act on behalf of the deceased person. If so, they will take the action required.

• Has probate been obtained by the executor?

Yes. See next point.

No. You may need to provide further information if you wish to establish authority to deal with the tax affairs of the deceased person. See next point.

• Officially notify the ATO of the person’s death

Complete the “Notification of a deceased person” form (download it here). This form:

• officially notifies the ATO of the person’s death
• can be used to establish authority to deal with their tax affairs.

If you notify the ATO online, you will need to attend an Australia Post outlet for an interview and present a copy of the death certificate and supporting documents. Otherwise, you will need to send certified copies by mail. Alternatively, if you are the executor or administrator and you have appointed a legal practitioner to act on your behalf, they can provide the ATO with all this information. You are not required to formally notify it of their appointment however the ATO may contact you to verify this detail.

The ATO may also attempt to match individual records to Births, Deaths and Marriages data. See next point.

• Do you need to lodge a final individual tax return?

Yes. This return should cover the period from the previous July 1 to the date of death. It is also wise to check for outstanding income tax returns for previous years. See next point.

No. Complete a “Non-lodgment advice form” and send it to the ATO. On the form, where it asks for “Reason for not lodging a tax return” write “Deceased” and the date of death. See next point.

• Do you need to lodge a deceased estate tax return?

Yes. Generally it will be best to seek advice. See next point.

No. If all of the above has been completed, no further information is required by the ATO.

• Obtain a tax file number (TFN) for the deceased estate

As a deceased estate is considered a trust, a “TFN application for a deceased estate” form will be required (here it is). See next point.

• Lodge the deceased estate tax return(s)

A trust tax return will need to be completed (here’s some ATO guidance on this). Each financial year will require another such return to be lodged until the deceased estate has been fully administered and no longer has a tax liability.