Estate Tax in Australia: A Guide for Executors

Australia has no inheritance tax, no estate duty and no gift duty. What it has instead is an income tax and capital gains tax system that continues to operate after a death: the deceased's own tax affairs have to be brought to a close, the estate is treated as a trust for income tax purposes while it is being administered, and capital gains tax consequences arise as assets are sold, appropriated or transferred. That is what most people mean when they refer to 'estate tax', and it is the part of an administration that is easiest to leave until it is too late to manage.

This is the central reference for deceased estate taxation in the Parke Lawyers Information Centre. It maps the tax lifecycle of an estate and links to the specialist guides that deal with each issue in depth. It is written for executors and administrators first, and for the beneficiaries, accountants and advisers who work alongside them. It is general information only and is not personal tax advice. The operative sources are the Income Tax Assessment Act 1936 (Cth), the Income Tax Assessment Act 1997 (Cth), Schedule 1 to the Taxation Administration Act 1953 (Cth), the ATO's published rulings and guidelines and the case law; this guide is the navigator.

For the procedural and fiduciary side of estate administration — probate, executor duties, beneficiary rights, distribution and finalisation — see our companion Executor's Guide to Estate Administration in Victoria. For our practice pages, see Probate & Estate Administration, Wills & Estate Planning and Commercial & Business Law.

Three Executor Tax Workstreams

It is more useful to think of three workstreams than of a single event at the moment of death. They overlap, and a decision in one of them routinely affects the other two.

1. The deceased's own affairs. Earlier income years that were never finalised, unpaid tax, and — where the deceased's circumstances for the period from 1 July to the date of death require it — a return for that final period, lodged using the deceased's own tax file number.
2. The estate's income after death.Income derived on estate assets during administration is dealt with at the trust level under Division 6 of the ITAA 1936, with a tax file number and trust returns where they are actually required.
3. Capital gains tax and other consequences as assets move. As assets devolve to the executor, are appropriated, sold or transferred, CGT and other provisions apply. Division 128 disregards many of the gains and losses that would otherwise arise on death, but it is a general rule with exceptions, not an automatic freeze on every asset in every transaction.

None of this depends on the estate being large. A modest estate holding one long-held parcel of shares and a former home can present harder tax questions than a larger estate of cash and term deposits.

Pre-death Affairs and the Final Return

The first task is to establish what the deceased's tax position actually was. That means identifying whether returns for earlier income years are outstanding, whether there is an existing tax debt or an active payment arrangement, whether PAYG instalments were in place, and whether the deceased held interests in trusts, partnerships or private companies that generate their own reporting. Where the deceased used a tax agent, that agent is usually the fastest source of the history. The ATO will ordinarily require evidence of the executor's authority before it will discuss the deceased's affairs — see our guide on why the ATO may ask for probate before discussing a deceased estate.

A return for the year of death is required where the deceased's circumstances for that part-year call for one — for example because assessable income for the period exceeded the relevant threshold, because amounts were withheld, or because a capital gain was realised before death. It is not automatic, and the ATO's deceased estates material sets out how to work out whether a return, or a non-lodgment advice, is the correct step.

Two features of that final period are commonly missed. First, study and training support loans: the ATO's position is that a compulsory repayment worked out on the deceased's income for the period to the date of death is dealt with in the final return, while the remaining loan balance is not payable by the estate. Second, losses: carry-forward tax losses and net capital losses belong to the deceased and are not transferred to the estate or to the beneficiaries, so any capacity to use them is confined to the deceased's own return. Where the deceased had substantial unapplied losses and the estate expects to realise gains, that asymmetry needs to be understood before assets are sold.

The Estate as a Separate Tax Entity

A deceased estate is treated as a trust for income tax purposes while it is being administered. The reason is practical: immediately after death the residue is being assembled, debts and testamentary expenses are being paid and beneficiary entitlements are being quantified, so there is usually no individual to whom the income can properly be attributed. Division 6 of the ITAA 1936 supplies the attribution rules for that period.

The consequences follow from that classification. Estate income is returned on a trust return rather than an individual return. Tax on estate income is payable out of estate assets. Where no beneficiary is presently entitled the trustee is assessed. And the executor, as the person answerable in that representative capacity, carries obligations and potential exposure of their own, dealt with below.

TFNs and When Returns Are Required

A tax file number for the estate is needed where the estate is required, or is likely to be required, to lodge a trust return — most commonly because it derives assessable income or makes a capital gain during administration. It is issued in the form 'The Estate of the Late [Full Name]'. A short administration with little or no income may never require one, and applying for a TFN that the estate does not need creates obligations rather than protection. The deceased's own TFN is not transferred to the estate.

Where a TFN is obtained, quoting it matters. Whether an amount must be withheld, and whether a TFN or an ABN is the relevant identifier, depends on the payment and the payer: interest and dividends paid to the estate, managed fund distributions, rent collected by an agent and business payments each sit under their own rules. The practical step is to work through the estate's actual income sources with the accountant and give each payer or account provider the identifier that applies to it, rather than circulating the estate TFN indiscriminately. Where withholding has already occurred because no identifier was quoted, the credit is claimed in the relevant return.

Whether a trust return is required in a given year turns on the estate's income and CGT events for that year, amounts withheld, PAYG instalment notices, present entitlement and any ATO request. The tests are set out in our guide on when an estate income tax return is required, and the complementary question of who bears the tax is covered in who pays tax on estate income in Australia.

Estate Income During Administration

Estate income is income derived after the date of death on assets that remain in the estate: interest on estate accounts, dividends on estate shareholdings, managed fund and trust distributions, rent, and business income where trading continues. Income referable to the period up to death belongs to the deceased's own position, and the cut-off can require care — for dividends, for example, the relevant dates on the distribution rather than the date the cash arrives.

Interest. Accounts continue to earn interest after death. Consolidating estate cash into a dedicated estate account once authority is established simplifies both the income record and the later reconciliation.

Dividends and franking credits. Franked distributions paid to the estate carry franking credits in the ordinary way. Where the income is retained at the trust level, the franked distribution and the credit are included in the estate's assessable income and the credit is applied against the estate's liability. Where a beneficiary is presently entitled to the income, the credit ordinarily flows through to that beneficiary. Streaming a franked distribution to a particular beneficiary depends on the will or trust instrument and on statutory conditions being met and recorded within time.

Rent. Rent derived after death on an estate property is estate income, with the deductions that are actually available claimed against it. Whether the property was tenanted immediately before death also matters to the main residence analysis below.

Business income. Where trading continues, the post-death result is estate income and the operating obligations continue as well — see the business section below.

Deductions, Expenses and Commission

Executors frequently ask which estate costs are deductible. The honest answer is that nothing is deductible merely because the estate paid it. Deductibility depends on the character of the expense, its connection with assessable income, the taxpayer who incurred it and the year in which it was incurred. Four distinctions do most of the work.

• Income-related versus administration expenses. Costs incurred in deriving the estate's assessable income — for example rates, insurance, agent's commission and interest referable to a tenanted property — are considered against that income. Funeral expenses, the costs of obtaining a grant, and the general costs of administering, accounting for and distributing the estate are ordinarily not deductible against estate income, however necessary they are.
• Repairs versus improvements. Restoring something to its former condition is treated differently from replacing or upgrading it. Work done to make a property saleable shortly after death, and work done to remedy defects that existed when the property was acquired, each have their own treatment. Capital works and improvements are dealt with under the capital works and cost-base rules rather than as immediate deductions.
• Legal and accounting costs. These follow their character. Advice about deriving assessable income, or about a dispute over income, is treated differently from advice about the administration or distribution of the estate, or about a family provision claim.
• Decline in value and capital allowances.Depreciating assets in an estate property raise their own questions, including the effect of death on the asset and the limits that apply to second-hand assets in residential rental premises.

Executor's commission, where it is allowed by the will or approved, is assessable to the executor who receives it, and its treatment in the estate accounts and returns should be settled with the accountant before it is paid. None of the above should be read as a promise that a category of expense will be deductible; each item is tested on its own facts against the current law.

Present Entitlement and the Stages of Administration

Present entitlement is the concept that decides whether trust income is assessed to a beneficiary or to the trustee. It is often reduced to a formula about a vested and indefeasible right to demand immediate payment, but that formulation needs context: what matters is whether, on the terms of the will and the general law, the beneficiary has an interest in the income of the year which they can presently demand, or which has been applied for their benefit.

Taxation Ruling IT 2622 deals with present entitlement through the stages of administration, and the sequence it describes is the practical guide. In the early stages — while assets are being collected and debts, testamentary expenses and tax are being paid or provided for — residuary beneficiaries generally are not presently entitled, because there is no ascertained residue to which an entitlement can attach. As administration progresses and the residue becomes ascertainable, that position can change. Specific gifts, income entitlements conferred expressly by the will, life and income interests, and interim distributions each require their own analysis rather than a categorical answer.

Two cautions follow. First, present entitlement is not a lever. An executor cannot create it by resolution, or by labelling a payment a distribution of income, in order to place income with a beneficiary on a lower marginal rate; the will, the legal rights of the beneficiaries, the estate accounts and the actual state of administration control the position. Second, the same discipline applies at the other end: the point at which administration is complete is a question of fact, not a date chosen for its tax effect.

Sections 97, 98, 99 and 99A ITAA 1936

Every dollar of the net income of a trust estate is dealt with under one of these provisions.

• Section 97 assesses a beneficiary who is presently entitled to a share of the net income and is not under a legal disability, on that share, in their own return.
• Section 98 assesses the trustee in respect of a presently entitled beneficiary who is under a legal disability, and in respect of a non-resident beneficiary. Sections 98A and 98B then deal with the beneficiary's own assessment and with credit for the tax paid by the trustee.
• Section 99A is the default charge, at the higher rate, on the net income of a trust estate to which no beneficiary is presently entitled.
• Section 99 applies to that same income where section 99A has been displaced, and assesses the trustee as if the net income were the income of an individual.

The order of operation matters and is frequently stated backwards. Section 99A is the default. Section 99A(2) provides the carve-out for a trust that resulted from a will or codicil, from an order of a court varying or modifying a will or codicil, or from the operation of a law relating to the administration of an intestate estate: where the statutory description is met and the Commissioner is of the opinion that it would be unreasonable that section 99A should apply, section 99A does not apply and section 99 applies instead. It is not correct to say that section 99 continues unless the Commissioner forms that opinion. Section 99A(3) directs the Commissioner to matters such as the circumstances in which property was acquired by or conferred on the trust, the nature of that property, the circumstances in which income was derived, and whether a person who contributed property to the trust contributed property to other trusts — not to how long the administration has taken.

Within section 99, the ATO publishes the rates it applies to a deceased estate: the resident individual rates including the tax-free threshold for the income year of death and the following two income years, and a schedule without the tax-free threshold for later years while the estate remains under administration. Those are published rate schedules, not a blanket concession, and the later schedule does not, without more, tax every dollar at the top rate. The current figures should be taken from the ATO page rather than assumed, and the schedule applying to a continuing testamentary trust is a different question from the schedule applying to a deceased estate during administration. A deceased estate is the trust that exists while the estate is being administered; a testamentary trust created by the will is a separate trust that continues after the estate has been administered and the trust has been funded.

Capital Gains Tax as Assets Pass, Are Sold or Transferred

Capital gains tax is the largest area of executor tax exposure, and the one most often described too simply. Division 128 of the ITAA 1997 provides that a capital gain or loss from a CGT event that results from the deceased's assets devolving to the legal personal representative, or passing to a beneficiary, is generally disregarded (section 128-10). That is a general rule subject to exceptions, not a proposition that death is never a CGT event and never has CGT consequences.

The governing distinctions are these.

• What the recipient's cost base is.Section 128-15 sets out what the legal personal representative or beneficiary is taken to have acquired the asset for: broadly, the deceased's cost base and reduced cost base for an asset the deceased acquired on or after 20 September 1985, and market value at the date of death for a pre-CGT asset and for a dwelling that satisfies the relevant main residence conditions. The section also fixes the acquisition date at the date of death for the recipient.
• Whether the asset 'passes'. Section 128-20 defines when an asset passes to a beneficiary — broadly, where the beneficiary becomes the owner under the will, under an order varying the will, by intestacy, or in certain arrangements. This is the provision that a deed of family arrangement, a settlement of a claim, a redirection of an entitlement or a sale of an asset to one beneficiary must be tested against. It must not be assumed that any transaction that moves an asset out of an estate obtains Division 128 treatment.
• Sale by the estate. Where the executor sells, the estate makes a capital gain or loss on the Division 128 cost base, with the CGT discount available where the conditions are met and the deceased's ownership period relevant to the twelve-month requirement. Any net capital gain forms part of the estate's net income for the year and is attributed under Division 6.
• Transfer in specie. Where an asset passes to a beneficiary in satisfaction of their entitlement, the gain or loss is generally disregarded and the CGT consequence is deferred to the beneficiary's later disposal. Whether to sell within the estate or transfer in specie is one of the executor's more consequential decisions, because the two routes can put the tax in different hands at different rates.
• CGT event K3. Where an asset passes to a tax-advantaged entity — broadly an exempt entity, a complying superannuation entity, or a foreign resident in respect of an asset that is not taxable Australian property — CGT event K3 in section 104-215 can apply, with the gain arising in the deceased's own return for the year of death. A gift of appreciated shares to a charity, or a non-resident beneficiary of a share portfolio, can therefore create a liability that has to be met out of the estate.
• Assets outside the ordinary rollover.Trading stock and depreciating assets are dealt with under their own provisions rather than the general Division 128 result, and their treatment depends on whether the asset is sold or passes to a beneficiary and on how it is then used.

The detail, with worked examples, is in our companion guide on capital gains tax in deceased estates and the mistakes executors make. The rule of thumb for this guide is that the CGT consequences of a decision taken in the first year of an administration are frequently only quantified in the third or fourth, by which time the alternatives have closed.

The Deceased's Dwelling

The former home is the most common significant asset in an estate and the most common source of CGT error. There is no universal rule that market value at the date of death applies to it, and no single answer for a dwelling that was rented at death.

Section 118-195 of the ITAA 1997 can allow a capital gain or loss to be disregarded in full, but only where the conditions on both sides of the death are satisfied.

• The deceased's side. Either the deceased acquired the dwelling before 20 September 1985, or the deceased acquired it on or after that date and the dwelling was the deceased's main residence just before death and was not then being used to produce assessable income. The deceased's status and the actual use of the dwelling immediately before death therefore have to be established on evidence, not assumed.
• The recipient's side. The requirement is satisfied either by disposal with settlement occurring within two years of the death, or by qualifying occupation after death — for example by the deceased's spouse, by an individual who had a right to occupy the dwelling under the will, or by a beneficiary to whom the dwelling passed.
• Extension of the two-year period. The Commissioner may extend it. Practical Compliance Guideline PCG 2019/5 sets out a safe harbour, with conditions about the reasons for the delay, the steps taken once the impediment was resolved and the length of the extension. It is a guideline with conditions, not an assurance that a delay will be excused.

Where section 118-195 does not apply in full, the analysis moves to the partial exemption in section 118-200, which apportions the gain by reference to the relevant periods, and to the cost-base provisions, including section 118-192 where a dwelling first started to be used to produce assessable income in the circumstances that section addresses. Section 118-210 deals with a dwelling that a trustee of a deceased estate acquires under the will for a beneficiary to occupy. The practical consequences are that a dwelling rented out at death does not fall into one uniform result, that holding a dwelling for more than two years does not automatically extinguish every exemption, and that a partial exemption is often the correct outcome rather than either extreme.

Because the answer turns on the acquisition date, the use just before death, the occupation after death and the timing of the disposal, the position should be worked out before the property is listed, tenanted or transferred — not afterwards. Our deceased estate CGT guide works through the combinations.

Particular Assets and Complications

Several categories of asset raise issues that a pillar guide should flag even though each has its own specialist treatment.

• Dividend reinvestment plans. Each allocation is a separate acquisition with its own date and cost base, so a long-held holding can comprise dozens of parcels straddling 20 September 1985. Reconstructing them is a records exercise that must be done before a sale — see dividend reinvestment plans and deceased estates.
• Joint ownership and survivorship. An asset held as joint tenants passes to the surviving joint tenant by survivorship and is not an asset of the estate, though Division 128 has its own rules about the CGT consequences for the survivor. An interest held as tenants in common does form part of the estate. Getting the tenure right at the outset determines both what the executor administers and where the tax sits.
• Private company and trust interests.Shares in a private company raise valuation, transfer and constitution questions, and can raise Division 7A issues where the deceased or an associated entity had a loan account or an unpaid present entitlement. Distributions, dividends and loan repayments in the year of death and during administration should not be dealt with before that position is understood — see private company shares in deceased estates.
• Cryptocurrency and digital assets. These are CGT assets with their own record-keeping and access problems — see deceased estates and cryptocurrency holdings.
• Foreign assets and foreign income.Foreign income of the estate is generally assessable in the ordinary way, with a foreign income tax offset potentially available for foreign tax paid. Foreign real estate and investments can require a separate grant or resealing, may attract foreign tax on the death itself, and can engage treaty questions. Where the deceased was a foreign resident, Division 855 and the taxable Australian property rules and the modified main residence rules for foreign residents apply.
• Non-resident beneficiaries. Where a beneficiary presently entitled to estate income is a non-resident, section 98 assesses the trustee on that share, with sections 98A and 98B dealing with the beneficiary's assessment and credit. Withholding can also apply to particular payments, and the source and character of the income matter. A non-resident beneficiary can also affect the CGT analysis, including CGT event K3.
• Trading stock and depreciating assets.Both sit outside the ordinary Division 128 result and are dealt with under their own provisions; the treatment depends on whether the asset is sold by the estate or passes to a beneficiary, and on the use the recipient makes of it.
• Lost or unlocatable holdings. Share registries, unclaimed money and missing certificates are a records problem before they are a tax problem — see lost share certificates in deceased estates.

If the Estate Continues a Business

Where the deceased carried on a business and it continues to trade pending sale or transmission, the executor is running an enterprise as well as administering an estate. The obligations that continue depend on the arrangements adopted, and they should be settled with an accountant before the first trading day: whether the existing ABN and GST registration can be used or whether the estate needs its own registrations; PAYG withholding and payment summaries for employees; PAYG instalments; wages, leave and superannuation guarantee for staff, which carry consequences of their own if paid late; fringe benefits where relevant; and the treatment of trading stock and depreciating assets on death and on any later sale. Where a business is being prepared for sale, the structure of the sale — assets or shares — affects the tax outcome materially and is worth planning early.

Superannuation Death Benefits

Superannuation is not an estate asset by default. Whether a death benefit is paid to a dependant, to another person nominated in accordance with the fund's rules or to the legal personal representative depends on the governing rules, any binding death benefit nomination and, where there is a discretion, the trustee's decision.

Taxation of the benefit is governed by its own regime in Division 302 of the ITAA 1997 rather than by Division 6. The treatment turns on whether the recipient is a death benefits dependant, on the components of the benefit and on the form of the payment; where the benefit is paid to the legal personal representative the taxable treatment is worked out by reference to who is expected to benefit from the estate, which is why the executor needs to identify the intended recipients before the money is applied. Insurance proceeds within the fund and untaxed elements can change the result. The interaction with the will and with nominations is a frequent source of dispute. The detail — including the difference between a superannuation dependant and a death benefits dependant, the components, the age-based income stream rules and how section 302-10 works where the benefit is paid to the estate — is in our guide to tax on superannuation death benefits.

State Duty and Land Tax

The absence of inheritance or estate duty does not mean that every dealing with estate property is free of state taxes. Duty and land tax are imposed by each state and territory under its own legislation. The account below is a Victorian example; an executor administering land or dealings in another jurisdiction must check the rules of the relevant state or territory revenue office, because the concessions, periods and notification duties differ.

Victorian duty. Section 42 of the Duties Act 2000 (Vic) provides that no duty is chargeable on a transfer of dutiable property, not made for valuable consideration, by the legal personal representative of a deceased person to a beneficiary, where the transfer is made under and in conformity with the trusts in the will or arising on an intestacy. Both limbs matter: conformity with the will or the intestacy rules, and the absence of valuable consideration. It is therefore wrong to assume that every transmission from an estate is duty-free. A transfer that departs from the will, gives a beneficiary more than their entitlement, is made for consideration, gives effect to a deed of family arrangement or a redirection, or is a later dealing by a testamentary trustee rather than by the executor, requires separate assessment — and a different exemption may or may not be available. Transfers of life estates and rights to reside, and transfers under Part IV of the Administration and Probate Act 1958 (Vic), are also assessed on their own terms.

Victorian land tax during administration.Land held on trust is generally assessed at the land tax surcharge rates, but estate land held by a personal representative is not, while it is an administration trust. The estate is treated as an administration trust from the date of death until the end of the concessionary period. That period ends on the earlier of two things: first, the third anniversary of the death or any later date approved by the Commissioner of State Revenue; and second, the date administration of the estate is completed. During that period otherwise taxable estate land is assessed at the general rates rather than the trust surcharge rates. If administration is not completed within the concessionary period, the surcharge rate applies. An approval of a later date is available only in exceptional circumstances and where administration is not yet complete; it is discretionary, turns on the facts, is not automatic, and should never be assumed when planning a sale or transfer.

The deceased's home. A separate concession applies where the deceased owned and occupied land as their principal place of residence at the time of death. It ordinarily runs from the date of death until the earlier of the third anniversary of the death and the day the deceased's interest in the land vests in a beneficiary of the estate or in the trustee of a testamentary trust. The Commissioner may extend this concessionary period beyond the third anniversary in exceptional circumstances where administration of the estate has not been completed; any such extension is discretionary, depends on the particular facts, and is not automatic. The concession also has conditions: it does not apply where the deceased held only a right to reside or a life interest, and from 1 January 2026 it does not apply if any income is derived from the land, other than income from a part of the land used to carry on a substantial business activity or from a separate residence. Letting the house during administration is accordingly a decision with a land tax consequence.

When administration is treated as complete.Completion is a question of fact and can occur well before formal transfer or final distribution. The State Revenue Office identifies practical indicators, including that the representative has finished all duties except distribution, has made an interim distribution indicating that there are sufficient funds for the debts and expenses, has first assented to a transfer of estate land to the person entitled, has completed the final accounts, or has begun holding the land on trust for the beneficiaries — for example where beneficiaries allow the representative to continue holding it for their enjoyment under a right to reside — as well as the actual transfer of the land to the person entitled under the will or the intestacy rules.

After administration. Once administration is complete, the land tax position follows the new legal owner — the beneficiary, the trustee of a testamentary trust, or a purchaser. A personal representative who completes administration but retains legal title holds the land as trustee for the beneficiaries and is assessed at the surcharge rates, although in some cases general rates can be obtained by notifying the State Revenue Office of the beneficiaries of the trust or nominating a principal place of residence beneficiary, and a trustee who is also the sole beneficiary is assessed at general rates.

The notification duty. A personal representative must notify the State Revenue Office of the commencement of administration and of its completion where the estate continues to hold land. The Office presently requires each notification within one month — of the appointment of the legal personal representative, and of the completion of administration respectively — and states that penalties may apply for failing to notify within that time. Confirm the current form and period before lodging, and diarise the completion notification at the point administration is in fact finished rather than at final transfer. Take advice before signing a deed of family arrangement or restructuring a transfer for convenience.

When the Estate Ends for Tax Purposes

An estate ceases to be in administration when the assets have been collected, the debts, testamentary expenses and tax have been paid or properly provided for, and the residue is ascertained and held for the beneficiaries. From that point residuary beneficiaries can be presently entitled and Division 6 attributes the income to them. If the will establishes ongoing trusts, those trusts continue as separate tax entities once they are funded.

That date is a conclusion about the state of the administration, evidenced by the estate accounts and the executor's dealings — not a date the executor picks. The full analysis, including the practical indicators, is in our companion guide on when a deceased estate ends for tax purposes.

Executor Exposure and the Retention Decision

An executor is not personally liable for estate tax simply because the estate has a liability. The exposure comes from specific provisions and from the executor's own duties, and the distinctions matter because the responses are different.

Section 254 ITAA 1936. An agent or trustee, which includes an executor or administrator, is answerable as taxpayer for doing the things the Act requires in respect of income derived in that representative capacity. Paragraph 254(1)(d) authorises and requires the retention, out of money that comes to them in that capacity, of an amount sufficient to pay tax that is or will become due. In Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2015] HCA 48 the High Court held that the retention obligation is engaged by an ascertained amount of tax — ordinarily once an assessment has issued — rather than by a liability that is merely reasonably foreseeable. Paragraph 254(1)(e) then limits personal liability to the amount retained or that should have been retained. That is a narrower provision than it is often described to be.

Subdivision 260-E of Schedule 1 to the Taxation Administration Act 1953. This Subdivision is the Commissioner's collection machinery for a deceased person's outstanding tax-related liabilities, and it contains three provisions that do different work. Section 260-140 (administered estate) applies where probate or letters of administration have been granted: the Commissioner may deal with the trustee of the estate as if the deceased were still alive and the trustee were the deceased, and the trustee must discharge the liability and any penalty in that representative capacity, with an objection right under Part IVC. Section 260-145 (unadministered estate) applies where no grant has been made within six months of the death: the Commissioner may determine the total of the outstanding tax-related liabilities and must publish notice of the determination, and that published notice is conclusive evidence of those liabilities unless the determination is amended, subject to the objection rights the section gives a person claiming an interest in the estate or a person later granted representation. Section 260-150 then allows the Commissioner to authorise a person in writing to recover the determined amount, and reasonable costs of recovery, by seizing and disposing of property of the deceased. So Subdivision 260-E should not be cited as though section 260-140 exhausted it, and none of the three sections turns on the representative's own state of knowledge.

Notice of a claim, and where the exposure actually comes from. The practical exposure a legal personal representative faces for the deceased's pre-death tax is that they are liable to pay the deceased's outstanding tax-related liabilities up to the market value of the deceased's assets that come into their hands, and that they may have to meet those liabilities from their own assets if they distribute or otherwise part with estate assets while they are treated as having notice of a claim by the ATO. That is the framework the Commissioner sets out in PCG 2018/4 at paragraphs 3 and 5. It is a different question from the retention obligation in section 254: section 254 is engaged by an ascertained amount of tax and caps personal liability at the amount retained or that should have been retained, whereas the notice analysis asks what the representative knew or is taken to have known when assets left the estate. The two should not be run together, and the fact that the ATO has not made contact does not by itself make a distribution safe.

PCG 2018/4 — an administrative approach, not a clearance. Practical Compliance Guideline PCG 2018/4 (Income tax: liability of a legal personal representative of a deceased person) states when the Commissioner will treat a representative as not having notice of a claim, so that a less complex estate can be finalised without the representative funding a later liability of the deceased personally. It is a statement of how the Commissioner will administer the law where it is followed in good faith. It is not a statutory clearance certificate and it is not a blanket immunity. Its limits matter:

• It applies only where probate or letters of administration have been obtained. Where no grant has been made, the separate collection mechanism in sections 260-145 and 260-150 applies instead.
• It applies only to a less complex estate, which includes the requirement that the total market value of the assets of the estate was less than $10 million at the date of death.
• The other less-complex conditions are substantive: in the four years before death the deceased did not carry on a business, was not assessable on a share of the net income of a discretionary trust and was not a member of a self-managed superannuation fund; the estate assets fall within the listed categories (public company shares and widely held interests, superannuation death benefits, Australian real property, cash and cash investments and personal assets); and no assets pass to a foreign resident, to the trustee of a complying superannuation fund or to a tax-exempt entity.
• It deals only with the deceased person's own income tax liabilities arising before death. It expressly does not deal with tax-related liabilities arising in relation to the estate for the period after the death — the estate's own post-death income tax is outside it entirely.
• A representative is still treated as having notice of amounts owed at the date of death, of liabilities from assessments already made or from returns the representative must still lodge, and of liabilities arising once the ATO has told the representative it intends to examine the deceased's tax affairs. The favourable treatment depends on the representative having acted reasonably in lodging the deceased's outstanding returns and on the ATO not having given that notice within the period the guideline specifies.

Read the guideline itself against the facts of the estate before relying on it, and confirm the current version.

The executor's own duty. Independently of the tax provisions, an executor owes fiduciary duties to creditors and beneficiaries, which include not distributing in a way that leaves the estate unable to meet liabilities the executor knew or should have identified. That duty can be engaged before any assessment issues, which is why the practical answer to 'may I distribute?' is usually 'yes, with a properly considered reserve, documented'.

There is no universal statutory tax clearance certificate that every estate must obtain. What is available is process: identify the liabilities that actually apply, lodge the returns that are actually required, pay assessments once issued, and — where the position is uncertain or the estate is about to be closed out — seek confirmation from the ATO about the lodgment position where that is available and useful. Where an interim distribution is justified for liquidity or hardship reasons, size the retention, record the reasoning, and consider refunding bonds or indemnities as a supplement rather than a substitute. The practice, including worked examples, is set out in whether an executor can distribute an estate before tax is finalised.

Distributions, Cash and In Specie

Distributions are where estate tax, executor exposure and beneficiary planning meet. Two questions do most of the work. First, does the distribution leave enough in the estate to meet the liabilities that have been identified and those that remain reasonably foreseeable? Second, is the beneficiary receiving cash or an asset?

A cash distribution of income can carry an income tax consequence for the beneficiary where present entitlement is engaged, and the beneficiary needs to know before they lodge rather than afterwards. An asset transferred in specie generally carries a deferred CGT consequence: the beneficiary takes the Division 128 cost base and the acquisition date, and bears the gain on their own eventual disposal at their own rate. Two beneficiaries receiving equal value, one in cash and one in shares, are not in equivalent after-tax positions, and an executor dividing an estate should raise that rather than discover it later. A refunding bond is a useful supplement where a partial distribution is justified, but its worth depends on the beneficiary remaining solvent and cooperative. Coordinating the executor's accountant with the beneficiaries' own advisers before the distribution is the most effective way to avoid unwelcome surprises.

Testamentary Trusts

Many estates do not end at distribution: the will directs all or part of the residue into a trust which continues once funded, as a separate tax entity assessed under Division 6 in the ordinary way.

The distinguishing feature is section 102AG of the ITAA 1936. Income of a minor beneficiary from an ordinary family trust is generally subject to the Division 6AA rates, which apply the top rate above a low threshold. Income of a minor from a testamentary trust that qualifies as excepted trust income can instead be taxed at ordinary individual rates with the tax-free threshold. Qualification depends on the source of the trust property and of the income, and on the integrity rules, so the benefit is real but conditional on proper structuring, funding and documentation. The detail is in our guide on the taxation of testamentary trusts.

Record Keeping

Estate tax records need to be complete, contemporaneous and capable of reconstruction by someone other than the executor. The working minimum is an asset and liability schedule as at the date of death with supporting valuations; an income register from the date of death covering interest, dividends with franking detail, rent, distributions and business takings; a payments register for debts, expenses, professional fees and tax; the estate bank statements; registry statements evidencing each transmission and DRP allocation; settlement statements for any property dealing; ATO correspondence; and copies of every return lodged.

Retention periods are not governed by one rule. The general income tax record-keeping obligation is in section 262A of the ITAA 1936 and works on a five-year period. Records relating to CGT assets are governed by Division 121 of the ITAA 1997, which is directed at retaining the records needed to work out a capital gain or loss and can require records to be kept well beyond five years, because a cost base assembled today may not be used until a disposal decades from now. Payroll, withholding and superannuation records have their own requirements again. Because estates generate disputes years later and long-held assets generate CGT calculations later still, the prudent course is to keep the complete estate file — accounts, valuations, correspondence and returns — well beyond any statutory minimum, and to pass the CGT records on with any asset transferred in specie.

Staged Executor Tax Checklist

The order in which tax issues arise is more stable than the timing, which properly varies with the estate. Treat each step as conditional and take the detail from the current ATO deceased estates material and the estate's accountant.

1. Immediately. Secure the will and the deceased's financial and tax records, including returns and notices of assessment for recent years. Obtain certified copies of the death certificate in the number the estate's actual institutions require. Identify the deceased's tax agent.
2. Establishing the position. Engage the accountant and solicitor. Establish whether earlier returns are outstanding, whether there is a tax debt or payment arrangement, and whether a return for the year of death is required. Notify the relevant institutions of the death. Identify assets whose tax treatment needs early attention — a dwelling, a business, private company or trust interests, foreign assets, cryptocurrency, long-held share parcels.
3. Authority and accounts. Apply for a grant where one is needed. Open a dedicated estate account. Work out whether the estate needs its own tax file number, and where it does, provide the correct identifier to each payer or account provider according to what that payment or account requires. Lodge the return for the year of death, or record why none is required.
4. During administration. Lodge trust returns for the years in which the estate is required to lodge. Record every CGT event as it occurs, with the cost base workings. Maintain a running schedule of identified and foreseeable liabilities. Raise the timing of distributions, the existence of any testamentary trust and the difference between cash and in-specie transfers with the beneficiaries before decisions are taken, not afterwards.
5. Before final distribution. Confirm the lodgment position for each relevant year, pay any assessments that have issued, and size and document a retention for anything still outstanding or uncertain, including a pending CGT calculation or review. Where a final assessment or ATO confirmation is available and material to the decision, obtain it; where none is issued or required, record the basis on which the executor is satisfied. Use refunding bonds only as a supplement to an adequate reserve.
6. Finalisation. Make the final distributions, provide accounts to the beneficiaries, close the estate account, and transfer assets and their CGT records into any continuing testamentary trust. Deal with the estate's remaining ATO obligations — cancelling registrations that are no longer needed, and lodging a final return or non-lodgment advice as required — rather than assuming a general notification of finalisation exists. Retain the estate file.

Recurring Problem Areas

The same issues recur across estates of every size. None of them requires unusual assets; each of them is easier to manage early.

• Distributing before the tax position is identified. Not because early distribution is forbidden, but because the reserve has to be sized against liabilities that have actually been thought about.
• Assuming the dwelling is exempt. The section 118-195 conditions on both sides of the death have to be established, and a partial exemption under section 118-200 is often the correct answer.
• Assuming Division 128 covers the transaction. A deed of family arrangement, a redirection, a settlement or a sale to one beneficiary each need to be tested against section 128-20 before they are signed.
• Cost-base records not reconstructed. DRP parcels, capital improvements, corporate actions and pre-CGT acquisitions all sit in records that are easier to obtain in the first months than the third year.
• The deceased's own affairs left open.Outstanding earlier returns and unpaid tax do not resolve themselves, and interest and penalties can accrue while administration proceeds.
• Registrations and withholding. No identifier quoted where one was required, withholding at a higher rate, and refunds that then have to be recovered through returns.
• Trading without advice. Continuing a business engages registration, withholding, employee and superannuation obligations from the first day.
• Superannuation treated as an estate asset. The fund's rules, any nomination and the dependency tests decide both entitlement and tax.
• Testamentary trust benefits assumed rather than structured. Section 102AG treatment depends on the source of the property and income and on the integrity rules.
• State taxes overlooked. A convenient restructure of a transfer can attract duty that a straightforward transfer under the will would not.

Official Sources

Verify the current position against primary and official material rather than any summary, including this one.

• Income Tax Assessment Act 1936 (Cth) — Division 6 (including sections 97, 98, 98A, 98B, 99 and 99A), Division 6AA and section 102AG, sections 254 and 262A.
• Income Tax Assessment Act 1997 (Cth) — Division 128, section 104-215 (CGT event K3), sections 118-192, 118-195, 118-200 and 118-210, Division 121, Division 302 and Division 855.
• Taxation Administration Act 1953 (Cth) — Schedule 1, including Subdivision 260-E (sections 260-140, 260-145 and 260-150).
• ATO — Deceased estates — final returns for the deceased person, estate tax file numbers, trust tax returns, current rates for a deceased estate, inherited assets and inherited property.
• Taxation Ruling IT 2622 — present entitlement during the stages of administration of deceased estates.
• PCG 2018/4 — the Commissioner's administrative approach to the income tax liability of a legal personal representative of a deceased person.
• PCG 2019/5 — the Commissioner's discretion to extend the two-year period to dispose of a dwelling acquired from a deceased estate.
• Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2015] HCA 48 — the scope of the retention obligation in section 254.
• State Revenue Office Victoria — Deceased estates and land tax — the administration trust, the concessionary period, the principal place of residence concession and the post-administration position.
• State Revenue Office Victoria — Completion of administration of a deceased estate — the indicators of completion and the notification requirement.
• State Revenue Office Victoria — Deceased estates and duty — the section 42 exemption and the transfers that fall outside it.
• Duties Act 2000 (Vic) — section 42 (transfer to a beneficiary).
• Land Tax Act 2005 (Vic) — the trust provisions, including the assessment of administration trusts.

Related Estate Tax Guides

This pillar maps the lifecycle; the specialist guides carry the detail: 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 and the mistakes executors make, dividend reinvestment plans and deceased estates, the taxation of testamentary trusts and whether an executor can distribute an estate before tax is finalised.

For the procedural and fiduciary side of administration, 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 estate administration delays and executor liability. For the grant itself, see probate in Victoria and letters of administration in Victoria.

How Parke Lawyers Can Help

Parke Lawyers acts for executors, administrators, beneficiaries and family members across the taxation lifecycle of a deceased estate. We work with the estate's accountant and financial adviser on the deceased's final affairs, the estate's returns, the CGT analysis before assets are dealt with, the present-entitlement position and the lodgment and payment position before distribution. Where the estate funds an ongoing testamentary trust, we structure the establishment and early-year compliance so that the section 102AG position is actually available. We advise on retention sizing, refunding bond practice and the section 254 and Subdivision 260-E exposures before a final distribution — and we act in disputed estates where a tax position is challenged by beneficiaries, the ATO or other interested parties.

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

Frequently Asked Questions