Can an Executor Distribute an Estate Before Tax Is Finalised?

Why Executors Want to Distribute Early

Most executors are family members or close friends of the deceased. They administer one or two estates in their lifetime, often during a period of grief, and they are usually keen to bring the administration to a close quickly. The pressure to distribute early comes from several directions: beneficiaries who are financially stretched and want their inheritance; beneficiaries who distrust the executor and assume delay equals misconduct; the executor's own desire to be finished with the administration; and a general misunderstanding that "probate granted" means "ready to distribute".

Early distribution is not inherently wrong. Interim distributions are common, sensible and often expected in estates that take more than a year to administer. What is wrong is distributing before the executor understands the tax position — or distributing without retaining enough to meet that position with comfort.

Probate Is Authority, Not Readiness

A grant of probate confirms that the will is valid and that the executor named in the will has authority to administer the estate. It does not confirm that the estate's debts and liabilities have been ascertained, that the tax position is settled, or that the residue is ready to be paid out. Many executors arrive at the same misconception: "Probate is granted; I can now distribute." That is incorrect. Probate is the executor's licence to act. It is the start of the real work, not the end.

See our companion article on probate in Victoria for the underlying process, and our article on letters of administration in Victoria where there is no executor or no valid will.

Authority to Administer vs Readiness to Distribute

It helps to draw a clean distinction between two concepts that beneficiaries (and many executors) treat as the same:

• Authority to administer is a legal concept. The executor has the legal power to deal with the estate's assets and liabilities. This is conferred by the will and confirmed by probate. It answers the question "is the executor allowed to act?".
• Readiness to distribute is a practical, financial and tax concept. The executor has identified the estate's liabilities (including tax), provided for them, ascertained the residue and is confident that the proposed distribution will not leave the estate short. It answers the question "is it safe to distribute?".

Probate confers authority on day one. Readiness to distribute the residue often takes another twelve to twenty-four months — sometimes longer for complex, litigated or international estates.

Executor Duties Before Distribution

Before making any meaningful distribution, the executor's core duties include:

• collecting in the estate's assets;
• identifying and paying funeral and administration expenses;
• identifying and paying creditors;
• lodging the deceased's final personal income tax return and any outstanding prior-year returns;
• applying for the estate's separate TFN and lodging estate trust returns each year of administration;
• quantifying CGT on any sale of estate assets;
• quantifying superannuation death benefit tax payable by non-dependant beneficiaries;
• reserving for foreshadowed litigation (TFM claims, caveats, will challenges);
• obtaining accounting and legal advice on the proposed distribution; and
• documenting the distribution decision and obtaining beneficiary indemnities where appropriate.

For a fuller treatment of the underlying duties, see our article on the duties of an executor in Victoria and on fiduciary duties of an executor in Victoria.

Estate Liabilities and Tax Liabilities

The estate is liable for everything the deceased owed at death (subject to the rules on which creditors take priority), everything the estate incurs during administration, and the tax assessed on the deceased's final return and the estate's trust returns. From the executor's personal-risk perspective, tax liabilities sit in a category of their own because the ATO has specific statutory powers to pursue the legal personal representative to the extent of estate assets that have passed through the executor's hands.

Common tax liabilities that arise after the executor has begun distributing include: amended assessments on the deceased's final return; late assessments on prior-year personal returns; CGT assessed on sales the executor has reported but the ATO recalculates; tax on superannuation death benefits paid to non-dependants; and unexpected income from a late distribution from a managed fund or share registry that arrives after the executor thought the income stream had ended.

The Deceased's Final Personal Tax Return

Where required under the ATO's ordinary lodgment tests applied to the deceased's part-year position, the deceased's final return covers the period from 1 July of the year of death to the date of death. Any required return is lodged under the deceased's TFN, marked "final", and is the executor's responsibility. Salary, interest, dividends, business income and capital gains are all apportioned to the part-year. PAYG withholding for the part-year often produces a refund, but not always — an investor who realised significant gains earlier in the year can leave a final-return liability for the executor to fund. Where lodged, the final return must be reconciled and assessed before the executor can confidently calculate the residue.

Estate Income Tax Returns

From the day after death, the estate is treated as a trust for income tax purposes. Whether the estate must lodge a trust return (form TRT) for a given year depends on the ATO's filing tests for a deceased estate, which differ between the first three income years of administration and later years. Where required (or lodged voluntarily), the return is lodged under the estate's TFN and reports interest, dividends, rent, managed-fund distributions, business income and capital gains accrued by estate assets, less deductions properly attributable to estate income, and allocates net income between presently entitled beneficiaries and the trustee. Estate returns continue to be lodged, where required, until the estate is "fully administered" for tax purposes. See our articles on who pays tax on estate income in Australia, when an estate income tax return is required and when a deceased estate ends for tax purposes.

Present Entitlement and Why It Matters for Distribution Timing

"Present entitlement" is the central concept that decides whether estate income is taxed in the estate's (trustee's) hands or in a beneficiary's hands under Division 6 of the Income Tax Assessment Act 1936 (Cth). In broad terms, a beneficiary is presently entitled to estate income for a year of income where they have an immediate, indefeasible right to demand payment of that income from the executor. Where a beneficiary is presently entitled and not under a legal disability, the beneficiary is assessed on their share of net trust income under section 97. Where no beneficiary is presently entitled, the trustee is assessed under sections 99 or 99A.

During the early phase of administration the ATO generally accepts that no beneficiary is presently entitled to estate income because the executor is still ascertaining assets, paying debts and working out the residue. As the estate becomes "partly" and then "fully" administered, beneficiaries can become presently entitled to income — and the tax treatment shifts from the trustee's hands to the beneficiaries' hands. Interim and final distributions are not the only way present entitlement arises, but the timing of distributions, distribution resolutions and the executor's communications with beneficiaries are often what crystallises it in a particular year. That is why distribution timing is also a tax question, not just a residue question. See our companion articles on who pays tax on estate income in Australia and when a deceased estate ends for tax purposes.

Capital Gains Tax Issues

CGT is a recurring source of unexpected tax exposure in deceased estate administration. Division 128 rolls the deceased's cost base over to the executor (and on transfer, to the beneficiary). However, sales by the executor during administration are CGT events in the estate's hands. Post-death dividend reinvestment plan (DRP) shares are estate acquisitions, not inherited assets, and have their own cost base. The two-year main-residence window runs from the date of death and does not pause. See our cornerstone articles on capital gains tax in deceased estates and dividend reinvestment plans and deceased estates. The executor must have a clear CGT picture before calculating any retention.

Superannuation Death Benefit Tax (High Level)

Superannuation is not ordinarily an estate asset before payment to the LPR. Where a super death benefit is paid to the LPR it is then administered as estate property under the will (or intestacy), and the ATO's treatment of the LPR for death-benefit tax generally follows the ultimate beneficiary. Where a benefit paid to the LPR ultimately passes to a non-tax-dependant (typically an adult independent child), the taxable component is generally taxed in the trustee's hands — broadly at 15% on any 'taxed element' and 30% on any 'untaxed element' — with the Medicare levy generally not applying when the benefit is received by the LPR. Where a benefit is paid directly to a non-dependant individual, Medicare levy can apply. Rates and characterisation depend on the components of the benefit and the ATO's current guidance. Whether the tax attributable to the super proceeds is properly borne only by the non-dependant beneficiary's share, or is apportioned differently, depends on the will, the identity of the ultimate beneficiaries and applicable estate law and advice — do not assume a fixed rule. Where the executor intends to bear the tax against a particular share, that should be addressed in writing before any super-derived funds leave the estate's account. Take specialist advice.

Deceased Estate TFNs

Where the estate is required (or the executor elects) to lodge a trust return, the estate needs its own TFN, which is also used for TFN certifications to banks, share registries and managed funds so that no-TFN withholding is not deducted from interest and unfranked dividend income. An ABN is additionally required if the estate is carrying on a business. Not every estate needs a TFN immediately — the requirement follows the need to lodge.

ATO Correspondence and Assessments

ATO assessments do not issue automatically the day a return is lodged. The Commissioner usually takes weeks to months to issue a notice of assessment, and may issue an amendment within the standard amendment period (two or four years depending on the taxpayer's circumstances, longer for fraud or evasion). A careful executor will wait for assessments before making final distributions and will retain enough to comfortably absorb amendment risk. See our article on the ATO's approach to deceased estates and probate.

Retaining Funds for Tax and Expenses

How much should the executor retain? Enough to cover, with comfort:

• the best estimate of the remaining tax liabilities (final personal return, estate returns, CGT, super tax);
• a margin for ATO amendment risk on lodged returns;
• remaining administration expenses (legal, accounting, valuation, registry, conveyancing);
• any foreshadowed litigation, including the cost of defending it; and
• a contingency for late-emerging creditors and unexpected liabilities.

There is no rule of thumb. A simple, solvent estate with no business interests and no CGT exposure may justify a small retention; an estate with significant shareholdings, post-death DRP allocations, an unsold investment property and a foreshadowed TFM claim should retain materially everything until those issues are resolved. When in doubt, retain more, not less — beneficiaries can always be paid the retention when assessments issue.

Interim Distributions

An interim distribution is a partial payment to a residuary beneficiary on account of their final entitlement. It can be a sensible response to beneficiary pressure where the estate is clearly solvent and the remaining retention is sufficient. Interim distributions should be:

• recorded in writing, with a clear statement that the payment is on account of the beneficiary's eventual entitlement;
• accompanied, where appropriate on the facts, by an indemnity from the beneficiary to repay any over-distribution;
• accompanied by a retention statement explaining what is held back and why; and
• signed off by the executor's accountant and (for material distributions) by the executor's lawyer.

Equal residuary beneficiaries should usually receive equal interim distributions on the same date. Unequal interim distributions to selected beneficiaries are possible but create their own risks (preferment, breach of trust, beneficiary disputes) and should be documented carefully.

Final Distributions

The final distribution is the payment that closes a beneficiary's entitlement (or, in the case of the last one, that closes the estate). It should follow:

• lodgement and assessment of every required tax return;
• receipt of every refund or payment of every liability;
• finalisation of administration expenses;
• recalculation of the residue;
• accounting sign-off on the final distribution figures;
• a written distribution statement; and
• a beneficiary release (or, if a beneficiary refuses, a court application to pass accounts).

Final distributions are by definition not reversible without litigation. The standard for "ready" is much higher than for an interim distribution.

Testamentary Trusts and Distribution Timing

Where the will establishes a testamentary trust (for example, for minor children, a vulnerable beneficiary, asset protection or tax-planning purposes), the executor's distribution timetable can look quite different from a will that gifts the residue outright. Once the estate is administered, assets or income may move into the continuing testamentary trust rather than being paid out to a beneficiary, and the trustee of the testamentary trust then assumes responsibility for managing those assets and any future distributions under the terms of the trust. Distribution decisions in that setting are made by reference to the testamentary trust deed (as set out in the will), not just by reference to the residuary clauses. See our articles on taxation of testamentary trusts explained and testamentary trusts explained for further background on how testamentary trusts operate and the tax issues they raise.

Beneficiary Indemnities

A beneficiary indemnity is a written undertaking by the beneficiary to repay any over-distribution if the estate's liabilities turn out to exceed the retention. Well-drafted indemnities identify the payment, confirm the beneficiary's understanding that it is on account of their entitlement, oblige the beneficiary to repay on demand, and are signed before the funds are transferred. Indemnities are not a substitute for adequate retention — a beneficiary who has spent the money or moved overseas may not be in a position to repay — but they do strengthen the executor's hand and limit the executor's exposure.

Refunding Bonds and Indemnity-Style Arrangements

In some overseas jurisdictions, and historically in some Australian contexts, executors take a formal "refunding bond" from a beneficiary before paying a distribution — essentially a written promise (often with a surety) to refund any over-distribution if estate liabilities later exceed the amount retained. In Australia today, executors more commonly use beneficiary acknowledgements, written indemnities or retention arrangements rather than formal refunding bonds, with the specific form depending on the size and complexity of the estate and on the executor's legal and accounting advice. The practical strength of any of these arrangements depends on the beneficiary's ability to repay if called upon, the clarity of the document, and the executor's ability to enforce it — none of which should be overstated. They are a useful complement to an adequate retention; they are not a substitute for one.

Executor Personal Liability

Section 254 of the Income Tax Assessment Act 1936 (Cth) makes the legal personal representative personally answerable for tax payable in respect of income, profits or gains derived in that capacity, to the extent of assets that have come, or should have come, into the executor's hands in that capacity. If the executor distributes without retaining enough for tax and the ATO later issues a debit assessment, the ATO can look to the executor personally within those statutory limits. The same broad risk applies in relation to unpaid estate creditors where proper advertising for claims was not undertaken. Executor personal liability is a central reason careful executors retain generously and understand the tax position, rather than assuming a general 'ATO clearance' can be obtained for the whole estate — there is no such general clearance. Note that PCG 2018/4 concerns the ATO's approach to LPR liability for the deceased's pre-death income tax affairs; it does not deal with the estate's post-death trust liabilities. This article is general information only and is not taxation advice.

Over-Distribution Risks

Over-distribution risks include: personal liability of the executor to the ATO and to unpaid creditors; the practical impossibility of clawing back funds from beneficiaries who have spent them; inequity between beneficiaries; litigation between the executor and beneficiaries (with its costs consequences); and reputational exposure for executors who are professionals. The professional indemnity policy of a solicitor-executor may not respond to liabilities incurred while acting as executor (rather than as solicitor) — which is one reason solicitors who act as executor should review their policy wording and seriously consider retaining a third-party executor instead.

Estate Litigation and Disputed Distributions

Where TFM family-provision litigation, a probate caveat, a will-validity challenge or a creditor's claim is foreshadowed or filed, the executor should not distribute without legal advice. Under section 49 of the Administration and Probate Act 1958 (Vic), a personal representative is not compellable to distribute before one year from death. Under section 99, the standard filing period for a TFM claim is six months after the grant of probate or administration, subject to extension. Section 99A provides a protective regime after that six-month period: broadly, a personal representative who has received no written notice of an intended TFM claim, or who received such a notice more than three months earlier without notice of an application being subsequently received, may distribute without personal liability for a later claim in respect of the property distributed. A notice of intention lapses after three months if no notice of an application is received, and cannot be renewed. Whether to distribute or retain in a particular case remains fact-specific and depends on the claim exposure, appropriate reserves, consent, protective statutory provisions and any court order. See our article on time limits for TFM claims in Victoria and our service page on estate litigation and TFM claims.

Managing Pressure from Beneficiaries

Beneficiary pressure is normal. Beneficiaries do not see the tax calendar, the ATO correspondence and the retention calculations the executor sees. The executor's best response is communication: a written update at the start of administration, written updates each quarter, and a written explanation of any decision to defer or limit distributions. A structured interim distribution accompanied by an indemnity and a retention statement is almost always a better answer to pressure than refusing to distribute anything at all. Beneficiaries who feel heard rarely sue; beneficiaries who feel ignored often do. See our article on beneficiary rights during estate administration and on can an executor be paid in Victoria.

Practical Risk-Management Checklist

1. Obtain accounting advice at the start of administration.
2. Where the estate will need to lodge a trust return (or the executor elects to lodge voluntarily), obtain the estate's TFN in time to lodge and, where a TFN has been obtained, provide TFN details to relevant institutions to reduce unnecessary no-TFN withholding.
3. Lodge the deceased's final personal return where the ATO's filing tests require it (or where lodging is otherwise appropriate, for example to claim a refund).
4. Lodge estate trust returns for each year the ATO's filing tests require, or where the executor elects to lodge voluntarily, and take assessments into account before relying on retention figures.
5. Document every distribution decision in writing, including the retention calculation.
6. Obtain a beneficiary indemnity for an interim distribution where appropriate on the facts.
7. Defer the executor's commission until final distribution.
8. Obtain accounting and legal sign-off on the final distribution plan.
9. Keep all records for the longer of seven years and the period of beneficiaries' minority plus a buffer.
10. Communicate with beneficiaries in writing each quarter and at every decision point.

When to Obtain Legal and Accounting Advice

Legal advice should be obtained at the start of administration, again before any material interim distribution and again before the final distribution. Accounting advice should be obtained at the start of administration (to set up TFNs and reporting), at each tax return cycle, and at the point the executor is considering closing the estate. Estates with business interests, significant CGT assets, post-death DRP allocations, overseas beneficiaries, contested wills or super death benefits should treat both disciplines as compulsory. The cost of the advice is dwarfed by the cost of an over-distribution that triggers ATO recovery against the executor personally.

For related guidance, see our service pages on probate and estate administration, wills and estate planning, commercial and business law and estate litigation and TFM claims.

Worked Examples: Why a Retention Can Be Prudent

The following short examples illustrate why a careful executor often holds a retention before paying a final distribution. The numbers are illustrative only and are not taxation advice.

Example 1 — dividend income and an uncertain tax assessment. An estate holds an ASX share portfolio that produces approximately $42,000 of franked dividends in the first full year of administration. The executor has paid administration expenses, the deceased's final return has been lodged, and the estate's trust return has been lodged but not yet assessed. Two residuary beneficiaries are pressing for distribution of the entire residue. Because the trust return is not yet assessed, and because the franking credit refund and the precise allocation of net income between the trustee and any presently entitled beneficiary are not yet settled, the executor's accountant recommends retaining an amount sufficient to cover the estimated tax payable plus a margin for amendment risk and remaining administration costs. An interim distribution of the balance is made on indemnity, with a clear retention statement explaining what is held back and why. When the assessment issues and any refund is received, the retention is released.

Example 2 — capital gain on a sale before final distribution. The executor sells an investment property and a parcel of listed shares during administration to fund equal money distributions to four residuary beneficiaries. Both sales are CGT events in the estate's hands and produce a net capital gain that flows into the estate's trust return. The cost-base reconstruction for the shares is incomplete and one parcel was acquired post-death under a dividend reinvestment plan. Until the CGT calculation is finalised, signed off by the accountant and reflected in an assessed estate return, the executor cannot quantify the estate's residue with confidence. A retention is held back from the interim distribution to cover the anticipated CGT plus an amendment margin; the balance is released to beneficiaries on indemnity; and the final distribution is deferred until the ATO assessment issues.

In each example, the retention is a tool to protect both the executor and the beneficiaries — not a delay tactic. Without it, an unexpected increase in the assessed tax can leave the executor personally exposed and the over-distributed beneficiaries facing demands for repayment of funds they may already have spent.

General Information Only

This article is general information only and is not taxation advice. The right time to distribute a particular estate depends on its specific facts — the terms of the will, the composition of the estate, the beneficiaries' circumstances, the presence of litigation and the executor's appetite for personal risk. Executors and beneficiaries should obtain advice from a tax-qualified accountant and a specialist estates lawyer before any material interim distribution and before the final distribution.

Frequently Asked Questions