Death and taxes: What happens when I die?

A death in the family is a very difficult time for all involved. Apart from the emotional burden, there are numerous administrative tasks that need to take place.

There are some important things you should know about inheritance, death, and taxes in Australia.

Here are some of the main steps family members need to be aware of:

Inheritance

In Australia there are no taxes on inheritances or deceased estates.

A person’s assets can pass directly to those they name in their legal will without the involvement of taxation authorities.

Outstanding tax obligations after death

While there are no death taxes in Australia, there is an obligation to pay tax for ordinary earnings on investments if a person passes away.

A tax return is required if a deceased individual has tax withheld on their income in the year they pass. The same applies if their taxable income was greater than the tax-free threshold of $18,200.

There may be other obligations if a person who is deceased was a sole trader or is involved with a business.

Any outstanding debts to the Australian Taxation Office (ATO) will need to be paid from the assets of the deceased estate – with it being good practice by the executors handling the deceased estate to set aside more than adequate funds/provision for funds to be paid to the ATO, prior to assets being distributed or transferred to the deceased beneficiaries.

Contacting the ATO

The person responsible for administering a deceased estate is known as the ‘executor’ (or administrator) of the will.

The ATO recognises an executor or administrator as a legal representative of the deceased person’s estate. It is a common assumption that a spouse or immediate family member can contact the ATO for all tax-related matters for a deceased relative.

However, unless the person is named as an authorised contact, they may not be able to deal with the account. Often, the executor is the best person to contact the ATO as they have automatic legal standing.

Hidden death taxes

While there are no direct taxes on death, family members must understand certain tax rules to avoid a significant tax bill.

Be sure to pay attention to each of the below:

Superannuation

If a person dies and their superannuation benefits are left to a non-dependant (such as their adult children), then the ATO will levy a 15 per cent tax (plus Medicare Levy) to the taxable portion of the person’s superannuation balance.

As an example, Leo passes away with a superannuation balance of $200,000, of which $150,000 is taxable. That means before his adult children David and Barry receive it, the ATO will tax the taxable component of Leo’s super which is $150,000 at 17 per cent (tax of 15 per cent + 2 per cent Medicare Levy) – making that a total a tax liability of $25,500.

There are some ways to avoid or minimise paying that 15 per cent tax, but they are dependent on individual circumstances.

It’s important to review your financial situation as you move into later life. This helps ensure your wealth passes according to your wishes and that your beneficiaries aren’t left with a higher tax bill that otherwise might have been reduced by considering various strategies that could have been undertaken earlier in life.

Capital gains tax (CGT)

Capital gains tax (CGT) is another tax to be aware of.

CGT is a tax levied when a person sells an asset like shares or an investment property.

In many wills, the family home in which the deceased lived in may pass on to the beneficiaries of the will. This is often a spouse or other family members. If that family member were then to sell the home in the future, they may be liable to pay CGT on the sale proceeds.

Capital gains tax (CGT) exemptions

There are exemptions to the CGT housing rules for beneficiaries of a will. The exemption covers dwellings bought on or after September 20, 1985.

If the dwelling/home was bought after September 20, 1985, then CGT does not apply if the home is sold within two years of it being inherited or if the person who inherits it uses it as their main residence while it is owned.

If the deceased purchased the property before September 20, 1985, but you inherited it after that date, certain conditions need to be met to exempt you from CGT on inherited property.

You’d need to sell the property within a two-year period. A two-year window allows you to be exempt from CGT if you sell the property that was the main residence of the deceased, regardless of whether you used the property as your family home (main residence) or to generate income.

Administering a deceased estate

As executor of a deceased estate, you need to understand your tax obligations including:

• Notifying the ATO that you have been appointed as executor
• Lodging a final return, and any outstanding prior-year returns, for the deceased person
• Lodging any trust tax returns for the deceased estate
• Providing beneficiaries with the information they need to include distributions in their own returns and, in certain cases, paying tax on their behalf
• Paying tax on the income of the deceased estate.

Preparing a valid will

If someone dies without a valid will, this is called ‘dying intestate’, and their assets are distributed according to the inheritance laws of the states and territories of Australia.

In such a case, there is a risk that the undocumented intentions of the deceased person may not be fully acted on.

Planning ahead can avoid this result. When preparing a will, the will maker and their advisers can assess opportunities to manage the tax implications for beneficiaries.

Estate planning and your responsibilities

Estate planning involves developing a strategy to deal with your assets after you die – such as the legal instruments and structures, such as a will, you put in place to transfer your assets in the event of death.

If you intend to nominate someone to act as your executor, ensure they have the sufficient knowledge and skills.

Lastly, be prepared to seek assistance from external advisers on more complex tax issues.

Talk to the tax experts

When it comes to navigating the tax rules in the event of a death, the team at LDB Group can guide you in the right direction.

To find out more, give us a call on (03) 9875 2900 or complete the contact form below.