Estate Tax in Australia: A Guide for Executors

Introduction to Deceased Estate Taxation

At the moment of death three tax events occur. The deceased's tax year closes at the date of death. A new tax entity — the deceased estate — comes into existence and immediately begins to earn income on assets that previously belonged to the deceased. And the Division 128 capital gains tax rollover engages, freezing the CGT position of the deceased's assets until the executor or the beneficiary disposes of them. These three events create the framework in which every executor tax decision is made for the remainder of the administration.

The deceased's personal tax position is finalised in a single 'date of death return' covering the income year from the previous 1 July to the date of death. The return is lodged by the executor on behalf of the deceased, using the deceased's tax file number, and any refund or liability is settled with the estate. From the date of death onwards, income earned on estate assets is reported in the estate's own trust tax return — the deceased estate is a trust for income tax purposes, governed by Division 6 of the Income Tax Assessment Act 1936. The window in which the estate is taxed as a deceased estate (with concessional treatment under section 99) is finite; the longer administration takes, the greater the risk that section 99A penalty rates engage.

Capital gains tax is the most commonly mis-handled area. Death itself is not a CGT event — the Division 128 rollover defers tax until a later disposal — but the cost base, the date of acquisition, the two-year main residence window and the treatment of pre-CGT versus post-CGT assets are all critical and all routinely mishandled. The CGT consequences of decisions made in year one of an administration are often only discovered in year three or year four, by which time most of the options for managing them have closed.

Why Deceased Estates Are Separate Tax Entities

The reason a deceased estate is treated as a separate tax entity is largely practical. After death the deceased no longer has the legal capacity to be a taxpayer, and there is rarely an obvious individual beneficiary to whom income should immediately be attributed — the residue is being assembled, the debts are being paid and beneficiary entitlements are being quantified. Treating the estate as a trust for the administration period solves the attribution problem, preserves the integrity of the income tax system and produces a coherent ledger that the executor can settle with the ATO before distribution.

The classification has consequences. The estate must obtain its own tax file number. The estate lodges its own trust tax return on a separate form (the trust return, not an individual return). The estate is taxable on its income; that tax is paid out of estate assets; and the executor is personally exposed under section 254 of the Income Tax Assessment Act 1936 if distribution outpaces tax payment. The estate's existence as a separate taxpayer is the structural reason executor tax obligations exist at all.

TFN Requirements for Deceased Estates

One of the first administrative steps an executor takes is the application for a tax file number in the name of the estate. The TFN is sought through the ATO's online application process or through the executor's accountant. It is issued in the form 'The Estate of the Late [Full Name]' and is quoted in all dealings relating to the estate's income.

Quoting the estate TFN to banks, share registries, managed-fund administrators and tenants is essential. Where no TFN is quoted, the payer is required to withhold pay-as-you-go withholding at the top marginal rate plus Medicare — the most expensive form of cash- flow drag the estate will face. A late TFN application, in addition to creating compliance friction, often forces a series of refund applications to recover withheld amounts that should never have been withheld.

The deceased's personal TFN does not transfer to the estate. It remains the identifier for the date-of-death return only. Anyone working in the estate's records should be careful to keep the two TFNs separate — the deceased's personal TFN is for pre-death income, the estate TFN is for post-death income.

Estate Income During Administration

Estate income is income earned on estate assets after the date of death — interest on the estate's bank balances, dividends on the estate's shares, rent on the estate's properties, distributions from the estate's investments and business income where a business continues to trade. All of it is reported in the estate's trust tax return for the income year in which it is derived.

The four most common categories — interest, dividends (with franking credits), rental income and business income — each have a few particular features worth isolating.

Interest Income

Bank account balances continue to earn interest after death. Where the estate TFN has been quoted, interest is paid gross and reported in the trust return. Where the TFN has not been quoted, withholding will reduce the cash interest and produce a credit that the estate claims back. The deceased's bank accounts should be transferred into the name of the estate (one consolidated estate cash management or trust account is standard) as soon as practicable after the grant of probate.

Dividend Income

Shares held by the estate continue to pay dividends. Each dividend is reported in the trust return with the franking credit (if any) attached. Where the shareholder enrolled in a dividend reinvestment plan, the DRP allocations create new CGT parcels and must be tracked carefully. The post-death dividend income is estate income; the pre-death dividend income (declared before death and unpaid, or with a record date before death) belongs to the deceased's final personal return. The cut-off date — record date for franking purposes — is a frequent source of error.

Franking Credits

Franking credits attach to fully or partially franked dividends paid by Australian companies. Where the estate holds the shares, the credit attaches to the estate. Where the estate distributes the dividend income to a presently entitled beneficiary in the year it is received, the franking credit can flow through and be claimed by the beneficiary; where the estate retains the income, the credit is claimed against the estate's tax. Excess franking credits may be refunded to the estate. The rules require streaming and documentation; informal allocations after year end are unlikely to satisfy them.

Rental Income

Where the estate holds an investment property, rental income earned after the date of death is estate income. The executor reports the gross rent, claims allowable deductions (council and water rates, insurance, agent's fees, repairs, depreciation, and interest where a mortgage continues), and includes the net rental outcome in the trust return. Pre-death rent (up to the date of death) belongs to the date-of-death return. Capital works expenditure that creates an enduring asset is not deductible; it adjusts the cost base for CGT purposes on eventual sale.

Business Income

Where the deceased was carrying on a business at death, two tax periods apply. Business income earned to the date of death goes in the date-of-death return. Business income earned after the date of death, while the executor continues the business pending sale or transmission, goes in the trust return. PAYG instalments continue, GST registration continues, employee entitlements (wages, leave, superannuation guarantee) must be paid on time, and fringe benefits and any ABN-specific obligations continue. Continuing a business is among the highest-risk executor activities and should never be undertaken without an accountant's involvement.

Capital Gains Tax in Deceased Estates

Capital gains tax is the largest single area of executor tax exposure. Australia does not tax death itself — the Division 128 rollover defers the CGT outcome of the deceased's assets to the executor and ultimately to the beneficiary. The deferred outcome is shaped by three variables: whether the asset was a pre-CGT asset (acquired before 20 September 1985) or a post-CGT asset; the deceased's cost base for post-CGT assets; and the time and manner of the eventual disposal.

The detail is set out in our companion guide on capital gains tax in deceased estates: common executor mistakes. The guide below summarises the key concepts and links out where the detail belongs.

CGT Assets Inherited from a Deceased Person

When the executor takes possession of a deceased CGT asset, three categories arise. First, post-CGT assets (acquired by the deceased on or after 20 September 1985) — the executor inherits the deceased's cost base and ownership date for CGT purposes. The eventual sale triggers a CGT event with that inherited cost base. Second, pre-CGT assets (acquired by the deceased before 20 September 1985) — the executor takes the asset at market value at the date of death; the pre-CGT character is generally lost on death. Third, the deceased's main residence — special rules apply, with the most important being the two-year disposal window described below.

The same three categories apply when the asset is transferred to a beneficiary in specie rather than sold. The beneficiary inherits the cost base in turn (with adjustments for the two-year main residence window) and the CGT event is deferred to the beneficiary's eventual disposal. Knowing whether to sell within the estate or transfer in specie is one of the executor's most important tax planning decisions.

Disposal of Inherited Assets

Where the executor sells a CGT asset of the estate, a CGT event occurs and the estate calculates a capital gain or loss. For post-CGT assets, the calculation is proceeds less cost base (the deceased's cost base, with adjustments). The CGT discount of fifty per cent is available where the combined ownership period of the deceased and the estate exceeds twelve months. The resulting net capital gain forms part of the estate's assessable income and is taxed under section 99 (or section 99A if applicable). Where the executor transfers an asset to a beneficiary in specie, no CGT event occurs (the Division 128 rollover continues) and the beneficiary takes the asset with the estate's cost base.

Main Residence Considerations

The deceased's principal place of residence is the most common CGT asset in an estate and the most common source of CGT error. The general rule is that a capital gain on disposal of the deceased's main residence is disregarded if the disposal settles within two years of the date of death — regardless of whether the property was rented out or sat vacant during that period. The Commissioner has a discretion to extend the two-year window where settlement is delayed by probate complications, will challenges or unforeseeable property issues; ATO Practical Compliance Guideline PCG 2019/5 sets out the safe-harbour conditions.

The two-year window is the single most valuable CGT concession available to an estate. Missing it without the Commissioner's discretion engaging is a costly failure. Beneficiaries who decide to keep and rent the former main residence beyond the two-year window must understand that the CGT exemption is largely lost from that point. See the companion guide for worked examples.

Dividend Reinvestment Plans

Dividend reinvestment plans create an under-appreciated problem in deceased estates. Each DRP allocation creates a separate CGT parcel with its own date of acquisition and its own cost base. A shareholding that has been on a DRP for fifteen years may comprise sixty or more parcels, each with a different cost base, some of which may be pre-CGT and some post-CGT. When the executor sells, the calculation of the gain or loss requires every parcel to be identified — a task that is impossible from the dividend statements alone if the records have been lost. The full detail is in our companion guide on dividend reinvestment plans and deceased estates: the hidden capital gains tax trap.

Estate Tax Returns

The executor lodges (a) a date-of-death return for the deceased's personal income up to the date of death, and (b) a trust tax return for the estate for each income year of administration. A separate trust return is required for every income year during which the estate earns income or has a tax obligation. The first trust return is usually for a part-year starting from the date of death and ending on the following 30 June; the last is for the year of final distribution.

Whether a trust return is required for a particular year depends on the income and the CGT events of the year. The tests are set out in detail in our companion guide on when an estate income tax return is required. The complementary question — who pays the tax once the return is lodged — is covered in our companion guide on who pays tax on estate income in Australia.

Present Entitlement

Present entitlement is the threshold concept of Division 6. A beneficiary is presently entitled to trust income if and to the extent that the beneficiary has a vested and indefeasible right to demand immediate payment of that income. Where a beneficiary is presently entitled, section 97 ITAA 1936 attributes the income to the beneficiary, who is taxed on it in their own return. Where no beneficiary is presently entitled, the trustee is taxed under section 99 (concessional) or section 99A (penalty).

During estate administration, residuary beneficiaries are generally not presently entitled because the residue has not yet been ascertained — the executor must first collect assets, pay debts and quantify entitlements. That position changes once administration is complete (when residue is ascertained) or earlier in respect of specific gifts (where a specific bequest has been satisfied or the will gives an immediate income entitlement). The point at which present entitlement crystallises is critical and is examined in detail in the companion guide on who pays tax on estate income.

Sections 97, 99 and 99A ITAA 1936

Section 97 ITAA 1936 taxes a presently entitled beneficiary on trust income to which they are presently entitled (provided the beneficiary is not under a legal disability). Section 99 ITAA 1936 taxes the trustee of a deceased estate at the resident individual rates — including the full tax-free threshold and no Medicare levy — on trust income to which no beneficiary is presently entitled, during the concessional period (the year of death and the two following years for an ordinary estate). Section 99A ITAA 1936 taxes the trustee at the top marginal rate on trust income outside section 97 and outside the concessional section 99 window.

Together these sections form a complete attribution framework. Every dollar of estate income falls under either 97, 99 or 99A. The executor's planning task is to ensure that the dollar lands in the lowest-cost available section — distributing to a presently entitled beneficiary where the marginal cost is lower than the estate's, retaining where the section 99 tax-free threshold delivers a better outcome, and taking active steps to bring administration to a close before section 99A engages.

When a Deceased Estate Ends for Tax Purposes

A deceased estate ends for tax purposes when it is 'fully administered' — when the assets have been collected, the debts and tax discharged and the residue is held for, and capable of being distributed to, the residuary beneficiaries. From that moment present entitlement attaches to the residue beneficiaries and Division 6 shifts the tax to them under section 97. If the will establishes ongoing testamentary trusts, those trusts begin as separate tax entities and the deceased estate ends. The full analysis (and the practical indicators of full administration) is set out in our companion guide on when a deceased estate ends for tax purposes.

Executor Personal Liability

The single most important tax fact for any executor to absorb is that the executor is personally liable. The estate pays the tax, but if the estate does not, the executor does. Section 254 of the Income Tax Assessment Act 1936 is the source of the rule and section 260-140 of Schedule 1 to the Taxation Administration Act 1953 adds further mechanisms by which the Commissioner can recover from a representative. Failure to retain; distribution before clearance; payment of beneficiaries in priority to the ATO — each of these is a route to personal liability.

Section 254 ITAA 1936

Section 254 ITAA 1936 makes the executor (as an 'agent or trustee') personally answerable for tax payable on income, profits or gains of the deceased or the estate 'to the extent of any money that comes to him or her in his or her representative capacity'. In practice the section requires the executor to retain, out of any money received in the executor's hands, an amount sufficient to pay any tax that is or will become payable. Distribution of estate assets without that retention is the most common path to personal exposure.

The protection is process. Identify every reasonably foreseeable tax liability. Lodge returns promptly. Engage with the ATO. Obtain a final notice of assessment (or, where appropriate, a clearance letter) before the final distribution cheque is written. Where a partial distribution is required earlier, retain a calculated buffer and document the basis for the retention. The companion guide on whether an executor can distribute an estate before tax is finalised sets out the practice in detail, including worked examples and the role of refunding bonds.

Testamentary Trusts

Many estates do not end at distribution; they continue as testamentary trusts established by the will. A testamentary trust is a trust born of the will and funded with all or part of the residue. Once funded, it is a separate tax entity in its own right. Its income is taxed under Division 6 in the ordinary way — to the presently entitled beneficiaries under section 97, or to the trustee under section 99 or 99A as applicable.

The headline advantage is the concessional treatment of minor beneficiaries. Income distributed to a minor from an ordinary family trust is taxed at the punitive Division 6AA rates (the top marginal rate over a very low threshold). Income distributed to a minor from a testamentary trust may qualify as 'excepted trust income' under section 102AG ITAA 1936 — taxed at adult marginal rates with the full tax-free threshold. For families with several minor beneficiaries, the saving is substantial. The full detail, the integrity limitations and the trustee's compliance obligations are set out in our companion guide on the taxation of testamentary trusts explained.

Distributions to Beneficiaries

Distributions are the point at which estate tax, executor liability and beneficiary planning collide. The executor's task is to ensure that each distribution (whether interim or final) leaves enough in the estate to meet identifiable and reasonably foreseeable tax liabilities. The beneficiary's task is to understand that a distribution is not a tax-free windfall — it may carry income tax consequences (where present entitlement is engaged) or future CGT consequences (where an asset is transferred in specie). Coordinated advice between the executor's accountant and the beneficiary's accountant is the only reliable way to avoid surprises.

Distributing Before Tax Is Finalised

The executor's most dangerous question is the one that arrives at month nine of administration: 'Can I distribute now?' The technical answer is yes — the executor has authority — but the prudent answer is usually 'not until tax is clear, or not without a calculated retention'. The companion guide on distributing an estate before tax is finalised sets out the analysis, including: how to identify reasonably foreseeable tax exposure; how to size a retention; when refunding bonds are useful and when they are not; and when interim distributions are justified by liquidity considerations notwithstanding an open tax position.

Tax Records and Documentation

Estate tax records must be complete, contemporaneous and reproducible. The minimum set is: a full asset and liability schedule as at date of death, with valuations and source documents; an income register (interest, dividends with franking detail, rent, distributions, business takings) from date of death; a payments register (debts, expenses, professional fees, tax); the estate bank account statements; registry statements showing each transmission and DRP allocation; settlement statements for any property sale; correspondence with the ATO; and copies of every return lodged. The ATO's statutory minimum is five years after the relevant return; the practical minimum is the life of any continuing testamentary trust plus seven years.

Practical Executor Tax Checklist

For first-time executors, the following checklist captures the order in which the tax issues arise.

1. Week one: Locate the will and the deceased's tax records (returns for the last five years, account login details where lawfully accessible). Order at least five certified death certificates.
2. Weeks one to four: Engage an accountant and a solicitor. Identify likely date-of-death return issues (capital gains realised before death, business income, untaxed superannuation accumulation). Notify employers, banks, superannuation funds and share registries of the death. Apply for an estate TFN.
3. Months one to three: Apply for probate. Quote the estate TFN to every payer of income — banks, share registries, real estate agents, business customers. Open a dedicated estate bank account. Compile the date-of-death return and lodge it.
4. Months three to twelve: Lodge any required trust tax returns for the relevant income years. Track CGT events on every disposal. Maintain a running schedule of foreseeable tax liabilities. Begin discussions with beneficiaries about timing of distributions, the existence of any testamentary trusts and the consequences of in-specie versus cash transfers.
5. Before final distribution: Obtain a notice of assessment for the final year. Where appropriate, request an ATO clearance for the estate. Calculate the retention. Issue interim distributions against refunding bonds where justified. Reserve sufficient funds for any pending CGT, audit or superannuation death-benefit issues.
6. Finalisation: Make final distributions. File final accounts with beneficiaries. Close the estate bank account. Retain all records. Notify the ATO of finalisation and (if relevant) the transition of assets into ongoing testamentary trusts.

Common Executor Tax Mistakes

Across many estates, the same handful of tax mistakes recur. The most common are:

• No estate TFN: withholding at the top marginal rate eats into the estate until refunds are processed.
• Date-of-death return delayed:penalties and interest accrue and the deceased's record is left open while administration continues.
• Two-year main residence window missed: a recoverable CGT exemption is lost without the Commissioner's discretion engaging.
• DRP parcels not reconstructed: the cost base of a long-held shareholding is understated or overstated, sometimes by orders of magnitude.
• Distributing before assessment: the executor pays the ATO out of personal funds when estate funds have already been distributed (section 254 ITAA 1936).
• Treating superannuation as ordinary estate property: the trustee's discretion, the binding death-benefit nomination and the tax-dependant tests are missed, producing avoidable tax on non-dependant beneficiaries.
• Failing to consider testamentary trusts: minor beneficiaries are taxed at Division 6AA punitive rates where excepted-income treatment under section 102AG should have been available.
• Inadequate records: the executor cannot reproduce the basis for a deduction or a cost base on later ATO inquiry, exposing the estate (and the executor personally) to additional tax, penalties and interest.
• Continuing a business without advice: PAYG, GST, employee entitlements and superannuation guarantee obligations are missed, with both fiduciary and personal-liability consequences.
• Allowing administration to drag past three years: section 99A engages and the estate's income is taxed at the top marginal rate on the first dollar.

Related Estate Tax Guides

This pillar is the central reference. For specialist detail, follow the dedicated guides in the cluster: who pays tax on estate income in Australia, when an estate income tax return is required, when a deceased estate ends for tax purposes, capital gains tax in deceased estates: common executor mistakes, dividend reinvestment plans and deceased estates, taxation of testamentary trusts explained and can an executor distribute an estate before tax is finalised.

For the procedural and fiduciary side of administration (probate, executor duties, beneficiary rights, delay and personal liability), see the Executor's Guide to Estate Administration in Victoria, the duties of an executor in Victoria, the fiduciary duties of an executor in Victoria and the guide on estate administration delays and executor liability. For the probate process itself, see probate in Victoria, letters of administration in Victoria and why the ATO may ask for probate before discussing a deceased estate. For specialised estate assets, see lost share certificates in deceased estates, private company shares in deceased estates and deceased estates and cryptocurrency holdings.

How Parke Lawyers Can Help

Parke Lawyers acts for executors, administrators, beneficiaries and family members across the full taxation lifecycle of a deceased estate. We work with the estate's accountant and financial adviser to coordinate the date-of-death return, the trust returns, the CGT analysis, the present-entitlement strategy and the final ATO clearance. Where the estate funds an ongoing testamentary trust, we structure the establishment and the early-year compliance so that section 102AG benefits are actually delivered. We advise executors on retention sizing, refunding bond practice and the section 254 risk before final distribution — and we act in disputed estates where tax positions are challenged by beneficiaries, the ATO or other interested parties.

Our principal, Jim Parke, is both a lawyer and a Chartered Accountant. The combination is unusual and particularly useful in estate tax work, where the tax and legal questions cannot be sensibly separated.

Frequently Asked Questions