Information Centre · Probate & Estate Administration
Tax Returns for Deceased Estates: What Executors Need to Know
A practical guide to the tax obligations that follow a death — for executors, beneficiaries and the accountants who help them.
Tax does not stop when a person dies. The executor steps into the deceased's shoes for the unfinished part of the final income year, and a new taxpayer — the deceased estate — comes into existence to deal with everything that happens between the date of death and final distribution. Getting the tax right is one of an executor's most important — and most commonly mishandled — duties.
This guide walks through what executors and beneficiaries need to know about deceased estate tax returns in Australia, with particular attention to issues that arise for Victorian estates.
What Happens to a Person's Tax Affairs After Death
On the date of death, the deceased's income year is cut short. Any income earned from 1 July up to the date of death is reported in a final or "date of death" tax return for the deceased. Any income earned after death — interest on bank accounts, dividends, rent on the family home before sale, capital gains on the sale of estate assets — is reported by the deceased estate in its own return.
Two distinct taxpayers, two distinct returns, two distinct tax file numbers. Executors who treat the post-death income as belonging to the deceased are almost always lodging the wrong return.
Final Tax Return Requirements
The final return covers the period from 1 July to the date of death. It is prepared on the deceased's tax file number, using their tax rates and thresholds for that year as if they had lived to 30 June. The executor signs the return as legal personal representative.
Common items in a final return include:
- salary, wages and termination payments to date of death;
- pensions, allowances and Centrelink payments to date of death;
- bank interest and dividends received before death (or accrued and properly attributable to the pre-death period);
- rental income up to date of death;
- any capital gains realised before death; and
- deductions for work-related expenses, accountant's fees, and donations made before death.
The full tax-free threshold and offsets are available in the final return, even though the period covered is less than a full year. That is one of the few advantages — for tax purposes — of dying part-way through an income year.
Estate Tax Returns
From the day after the date of death, income belongs to the deceased estate, which is treated as a trust for tax purposes. The executor must apply for a new tax file number for the estate (a TFN distinct from the deceased's) and lodge a trust tax return each income year until administration is complete.
For the first three income years after death, an estate that is fully administered (in the sense that no asset is generating income for any particular beneficiary) is taxed at individual marginal rates with the benefit of the tax-free threshold. After three years, special rates that penalise undistributed trust income can apply — a strong incentive to finalise the estate efficiently.
Estate Tax File Numbers
The estate's TFN is applied for through the ATO's deceased estate registration process. It is a separate identifier and cannot be reused for any other purpose. Some executors try to operate the estate on the deceased's existing TFN — a shortcut the ATO will eventually unravel, often years later, with interest and possible penalties attached.
Income Earned After Death
Income earned after death falls into a few familiar categories:
- Bank interest on accounts held in the deceased's name from the day after death until the account is closed or transferred;
- Dividends with a record date after the date of death;
- Rent on investment properties or the family home during administration;
- Distributions from managed funds and trusts; and
- Capital gains on the sale of assets at estate prices above their cost base.
Capital Gains Tax Issues
When a person dies, the transfer of their CGT assets to the executor — and then to the beneficiaries — is generally not itself a taxable event. The executor and beneficiaries inherit the deceased's cost base (for assets acquired after 19 September 1985) or take the asset's market value at the date of death (for older assets and the main residence in most cases).
CGT becomes important when the executor or beneficiary actually sells an asset. The most common scenarios for Victorian estates are:
- Sale of the family home. If the property is sold within two years of the date of death, the main residence exemption usually flows through and no CGT is payable. Beyond two years, partial exemptions and special rules apply, and an extension can sometimes be granted by the ATO.
- Sale of an investment property. The estate or beneficiary calculates the gain using the deceased's cost base, and the 50% CGT discount is generally available where the asset has been held for more than 12 months in total (counting the deceased's period of ownership).
- Sale of shares. Each parcel of shares is treated as having been acquired on the dates the deceased acquired them, at the deceased's cost.
Property Sales During Administration
Selling estate property is one of the most tax-sensitive steps in an administration. Executors should consider:
- whether to sell the property as executor or transmit it to a beneficiary first;
- whether the property qualifies for the main residence exemption, and whether the two-year period is at risk;
- who will bear the CGT cost — the estate or the beneficiary — and whether the Will deals with that question; and
- the timing of contract and settlement, which determine the income year in which any gain is recognised.
Share Portfolios
Share portfolios deserve careful attention. Executors should obtain a complete history of each parcel, including acquisition date, cost, and any dividend reinvestment plan credits. CHESS-sponsored holdings require coordination with the deceased's broker. Where shares have been held for a long time, the cost base may be relatively small compared with current market value — meaning a meaningful capital gain on sale that must be planned for.
Rental Properties
For a rental property held by the deceased, the executor must report rent received from the day after death until sale or transfer, and may claim deductions for interest, rates, repairs, agent's commission and depreciation. Beneficiaries who inherit the property pick up the rent and expenses from the date they become presently entitled.
Tax Refunds
Many estates are entitled to a refund from the final return — particularly where the deceased received salary income with PAYG withholding throughout the year and died before claiming deductions. The refund is paid to the estate, not to any individual beneficiary. See our companion guide, Can an Executor Claim a Tax Refund Without Probate?
Outstanding Tax Debts
Tax debts of the deceased survive death and rank as ordinary estate liabilities. The executor must pay them from estate assets before distributing to beneficiaries. Where the estate is insolvent, the executor should obtain advice before paying any creditor and before distributing any asset.
Record Keeping Obligations
Executors must keep records of:
- all estate income and expenses;
- date-of-death valuations of estate assets, including real estate, shares and managed investments;
- proceeds and contract documents for every asset sale;
- tax returns lodged for the deceased and the estate; and
- distributions to beneficiaries, including the amount, date and underlying source.
Working With Accountants
Most executors should engage an accountant familiar with deceased estates, particularly where the estate includes real estate, shares, a business or a self-managed superannuation fund. The accountant prepares the final return and the estate's annual trust returns; the lawyer handles probate, administration and distribution. The two professionals work in tandem.
Practical Examples
Family home. An elderly woman dies leaving her Melbourne family home of forty years to her two children. The executor lists the property eight months later and settles fifteen months after death. Because the sale occurs within the two-year window, the main residence exemption usually applies and no CGT is payable.
Investment property. A father dies owning a Ringwood townhouse purchased in 2010 as an investment. The executor sells it eighteen months after death for $750,000. The gain is calculated using the original cost base of $420,000 plus capital improvements, with the 50% CGT discount available. The estate reports the gain in the year of contract.
Share portfolio. A retired engineer dies holding a portfolio of long-held listed shares. The executor obtains a date-of-death valuation, transfers the shares to her name as executor, and sells them progressively to fund distributions. Each sale is a CGT event for the estate; cost bases are inherited from the deceased.
Cash-only estate. A widower dies with $80,000 in a single bank account and a small share parcel. The executor lodges a final return with a small refund and an estate return for the modest post-death interest. Administration is straightforward and concludes within twelve months.
Common Executor Mistakes
- Treating the deceased's TFN as the estate's TFN.
- Distributing assets before the final return is lodged and the estate's tax position is known.
- Selling the family home shortly after the two-year window closes without seeking an ATO extension.
- Failing to obtain a date-of-death valuation of real estate and significant shareholdings.
- Paying refunds directly to beneficiaries without accounting for tax obligations of the estate.
- Letting administration drift past three years and triggering the higher trust tax rates on undistributed income.
Related Reading
- Probate & Estate Administration
- Wills & Estate Planning
- Why the ATO May Ask for Probate Before Discussing a Deceased Estate
Frequently Asked Questions
Does every estate need a tax return?
No. Where the deceased had no taxable income in the final year and the estate earns no income during administration, no return is required. In most estates of any size, however, at least a final return for the deceased and one estate return will be needed.
Who signs a deceased person's tax return?
The legal personal representative — usually the executor named in a grant of probate, or the administrator named in letters of administration — signs the final return on the deceased's behalf.
Can beneficiaries be personally liable for the estate's tax?
Beneficiaries are not personally liable for the deceased's pre-death tax debts, but distributions made to them can be clawed back if the executor pays them out before settling tax obligations. Executors who distribute before tax is finalised may be personally liable.
What if the deceased's records cannot be located?
Executors can request a deceased estate data package from the ATO, which contains historical tax information, payment summaries, and dividend data. Bank statements, broker reports and superannuation correspondence can usually be obtained on production of the death certificate and grant.
How long does the estate need to keep records?
Generally five years from the date the relevant return is lodged. For property and shares, records relevant to capital gains tax should be kept for five years after the CGT event is reported, which may be well after the estate is finalised.
Probate & Estate Administration
Tax Issues in a Deceased Estate?
Parke Lawyers works alongside your accountant to administer estates of all sizes, manage CGT on property and share sales, and protect executors from personal liability.
This article is general information only and does not constitute legal or tax advice. Please obtain advice tailored to your circumstances.