Information Centre · Probate & Deceased Estates
Who Pays Tax on Estate Income in Australia?
A concise Australian guide to how income derived after death is taxed — the deceased's final return, the estate as a trust for tax purposes, present entitlement, and how the section 97, 98, 99 and 99A assessments interact with Division 128 CGT rules and the Commissioner's current practice. General information only — not tax advice.
Key points
- Income derived up to the date of death is reported in the deceased's final individual return; income derived after death is generally income of the deceased estate as a trust for tax purposes, taxed under Division 6 of the Income Tax Assessment Act 1936 (Cth).
- Whether a beneficiary is 'presently entitled' to a share of trust income at year end drives assessment — a presently entitled beneficiary not under a legal disability is assessed under section 97; the trustee is assessed under sections 98, 99 or 99A depending on the facts.
- Under IT 2622 residuary beneficiaries generally are not presently entitled until residue is ascertained, but an interim payment of income during administration may create present entitlement to the amount paid where sufficient assets remain for outstanding liabilities.
- The ATO administratively applies concessional adult individual rates to the trustee of a deceased estate in specified early income years of administration and the Commissioner may exercise the section 99A discretion — the outcome is not automatic and depends on the facts.
- Whether the estate needs a separate TFN and lodges a trust return depends on current ATO requirements; deductions, franking credits, capital gains and capital losses are attributed under Division 6 and the specific-entitlement rules rather than automatically.
- Division 128 of the Income Tax Assessment Act 1997 (Cth), the two-year main residence rule and Division 152 concessions each have statutory conditions and exceptions — specialist advice is warranted where the estate holds a business, private entity, foreign, CGT-heavy or trust interest.
The taxation of estate income involves three distinct taxpayers — the deceased for the period up to death, the deceased estate as a trust for tax purposes for the administration period, and any beneficiary who becomes assessable on estate income during that period. This article sets out the framework as it stands under the current text of Division 6 of the Income Tax Assessment Act 1936 (Cth), Division 128 of the Income Tax Assessment Act 1997 (Cth), Taxation Ruling IT 2622 and the current ATO published guidance on deceased estates.
It is written for executors and their advisers. It is general information only and does not replace specialist taxation and legal advice on the estate's specific facts.
The three taxpayers
The deceased's final individual return reports assessable income derived by the deceased up to the date of death and any relevant deductions. Whether income is derived before or after death is determined by the applicable derivation rule for that class of income — for example, when interest is derived, when dividends are derived and when trust income is derived. There is no single universal test based on the date an amount is credited to a bank account, a dividend record date or the date of registration of a transfer.
The deceased estate is treated as a trust estate for tax purposes during administration. The executor is the trustee. Income derived by the estate after the date of death is assessed under Division 6 either to a beneficiary who is presently entitled to a share of the trust's net income, or to the trustee.
A beneficiary is assessed on estate income only where the requirements of section 97 (or section 98 for beneficiaries under a legal disability) are met. Whether that occurs during administration is a question of fact and law that must be considered each income year.
The administration period and IT 2622
IT 2622 sets out the Commissioner's longstanding view on present entitlement during administration. The ruling distinguishes three broad stages:
- early administration, when it is not clear whether the estate is solvent or what the residue will be;
- a middle stage, when it is apparent that funds will be available for distribution but administration is not complete; and
- the stage at which residue has been ascertained and the executor can be treated as holding the balance of the estate on trust for the residuary beneficiaries.
The ruling accepts that residuary beneficiaries generally are not presently entitled in the early stage. However, it also recognises that an interim payment of income to a residuary beneficiary during administration may create present entitlement to the amount paid where the executor has sufficient other assets to meet any outstanding debts, liabilities and specific gifts.
Sections 97, 98, 99 and 99A
Section 97 assesses a beneficiary who is presently entitled to a share of trust income and is not under a legal disability on that share of the trust's net income at the beneficiary's own marginal rates. Section 98 assesses the trustee, in respect of a presently entitled beneficiary who is under a legal disability or is a non-resident, at rates calculated by reference to the beneficiary.
Section 99 assesses the trustee on trust income to which no beneficiary is presently entitled, using rates that broadly reflect adult individual rates. Section 99A imposes tax at the top personal rate plus Medicare levy on trust income assessable to the trustee, unless the Commissioner is of the opinion that it would be unreasonable to apply section 99A. The matters the Commissioner must consider in forming that opinion are set out in section 99A(3) and include the circumstances in which the trust estate came into existence and the source of the income.
The ATO applies section 99 rather than section 99A to trust income of a deceased estate for the income years specified in its current published guidance on trustee assessment of deceased estates. Nothing in the Act treats section 99 as available automatically for every year of every deceased estate; the analysis must be undertaken each year on the estate's facts.
Concessional individual rates
The ATO's current guidance on tax rates for deceased estates explains when the trustee of a deceased estate is entitled to be assessed at concessional individual adult rates. That treatment does not create a rolling three-year grace period and years beyond the specified early period do not automatically indicate improper delay. Executors should check the current ATO guidance in force for the income year concerned and take advice where administration is likely to extend.
Interim distributions and streaming
An interim distribution of income to a beneficiary during administration should be documented and considered against the tests for present entitlement in IT 2622 and the streaming rules for franked distributions and capital gains. The specific-entitlement rules can allow a franked distribution or a capital gain to be streamed to a particular beneficiary, subject to timing and record-keeping requirements. Streaming interacts with Division 6 and requires care.
Common income types
Interest. Interest is generally treated as derived when it is received or credited. Interest credited to an account before death is included in the deceased's final return; interest referable to a period after death is income of the estate. The bank's ability to withhold amounts pending receipt of a TFN or ABN is a compliance matter rather than a change in the underlying assessment.
Dividends. Whether a dividend is derived by the deceased or the estate depends on the derivation rule for the taxpayer holding the shares and the terms of the dividend. Franking credits follow the assessment and the streaming rules.
Trust and partnership distributions. Present entitlement to distributions from other trusts, and the timing of derivation from a partnership, follow the ordinary trust and partnership rules; whether the income falls in the deceased's final return or the estate return depends on when the entitlement or derivation arises.
Rent. Rent derived after death is estate income. Deductions for property expenses that have the necessary connection with the rental income are available on ordinary principles.
Business income. Where the executor continues a business, the tax treatment depends on the structure through which the business is carried on, the terms of the Will and the length of the administration period. Specific advice is warranted.
Capital gains and Division 128
Division 128 sets out the CGT consequences of death. Broadly, CGT assets that pass to the LPR are taken to be acquired at the deceased's cost base; a dwelling that was the deceased's main residence and was not being used to produce income can pass at market value for CGT purposes; and pre-CGT assets are taken to be acquired at market value at death.
When the executor sells a CGT asset during administration, a capital gain or loss is calculated using the estate's cost base and forms part of the estate's net income under Division 6. Transfers in specie to a beneficiary generally involve a CGT rollover and the beneficiary inherits the estate's cost base and acquisition date. The CGT discount, the main residence exemption and PCG 2019/5 apply on their statutory terms.
Deductions and losses
The estate may claim deductions with the necessary connection to its assessable income under the general provisions. Estate administration costs — such as legal fees for obtaining probate, funeral expenses and the cost of collecting and transferring estate assets — are generally capital in character and are not deductions against income. Estate capital losses can be applied against estate capital gains but do not transfer to beneficiaries.
Testamentary trusts and section 102AG
Where the Will establishes a testamentary trust, section 102AG allows income of the trust that qualifies as "excepted trust income" to be assessed to a minor beneficiary at ordinary marginal rates rather than the punitive Division 6AA rates. The 2019 amendments limit the concession to income derived from property that devolved from the deceased or from property representing accumulations of that income. Care is required to preserve the concession — particularly where funds are borrowed, contributed or comingled after death.
Executor TFN, ABN and return obligations
Whether the estate needs its own TFN, ABN and trust return depends on the ATO's current requirements, the estate's income and the entitlement position at year end. There is no rule that every executor must obtain a TFN on day one, lodge a return every year, or personally pay estate tax from their own money. Section 254 of the ITAA 1936 imposes a specific personal liability on the trustee for tax on trust income, but only in a representative capacity and only to the extent of money coming to the trustee's hands.
When the estate ends for tax purposes
The estate is generally treated as ending, for tax purposes, when the executor has completed administration and holds any remaining assets in a different capacity — as trustee of a testamentary trust, as bare trustee for a specific beneficiary, or otherwise. The ATO's current guidance on the trust's end date and IT 2622 should both be considered, and the point of transition should be documented in the estate accounts.
Records and professional advice
Executors should keep contemporaneous records of income receipts, expenses, valuations, communications with the ATO and any interim distributions. Specialist tax and legal advice is prudent where the estate holds a business, a private company or trust interest, a self-managed superannuation fund, foreign assets, significant CGT assets or where administration is likely to cross more than one income year. The cost of proper advice is generally modest compared with the tax exposure of an incorrect Division 6 analysis.
Getting help
Our wills and estate planning team advises executors on the tax obligations of a deceased estate, including present entitlement, streaming, Division 128 and testamentary trust structures. Where an income tax issue is contentious we work with the estate's accountant and, where appropriate, engage tax counsel.
Frequently Asked Questions
Whose income is taxed after a person dies?
Income derived up to the date of death is included in the deceased's final individual return. Income derived after the date of death is generally income of the deceased estate as a trust for tax purposes and is taxed under Division 6 of the Income Tax Assessment Act 1936 (Cth). Depending on the facts, the trustee (executor) is assessed under sections 98, 99 or 99A, or a presently entitled beneficiary is assessed under section 97.
What does 'presently entitled' mean during administration?
A beneficiary is presently entitled to trust income when they have a present, vested and indefeasible right to demand and receive payment of that income. Under IT 2622 residuary beneficiaries generally are not presently entitled until residue is ascertained, but the ATO accepts that an interim payment of income during administration may create present entitlement to the amount paid where sufficient assets remain for outstanding liabilities.
Are the concessional individual rates automatic for the estate?
No. The ATO administratively applies concessional individual rates when assessing the trustee of a deceased estate in specified early income years of administration, subject to the Commissioner's section 99A discretion. Section 99A is not an automatic penalty; whether it applies depends on the character of the trust, the source of the income, contributions to the estate and the other matters the Commissioner must consider under section 99A(3).
Does the estate need its own TFN and trust tax return?
Whether a tax file number and trust tax return are required depends on current ATO requirements, the estate's income and beneficiary entitlements. Where a return is required the executor lodges a trust return in the estate's name; a separate individual return is lodged for the deceased for the period from 1 July to the date of death.
Are franking credits available to the estate or the beneficiaries?
Franking credits attached to dividends derived by the estate flow with the assessment. Where a beneficiary is presently entitled and specifically entitled to a franked distribution under the streaming rules, the credit is attributed to that beneficiary; otherwise it is available to the trustee. Anti-avoidance and holding-period rules must be considered.
What deductions can the estate claim?
The estate can claim deductions that have the necessary connection with its assessable income under the general rules. Interest on borrowings used to fund an income-producing asset, agent fees on rental property, accounting fees for the estate return and similar expenses are commonly deductible. Funeral expenses, probate costs and administration costs are generally capital in character and are not deductions against income.
How are capital gains during administration taxed?
Division 128 of the Income Tax Assessment Act 1997 (Cth) governs the CGT consequences of death. Assets pass to the LPR at the deceased's cost base or market value (for pre-CGT assets and dwellings satisfying the conditions). A sale by the executor is assessed under Division 6 and Division 6E; a transfer in specie to a beneficiary is generally a rollover with the beneficiary inheriting the cost base and acquisition date.
Does the family home get an exemption?
A dwelling that was the deceased's main residence and was not used to produce income at the date of death can qualify for a full main residence exemption if disposed of within two years, subject to the conditions in section 118-195 of the ITAA 1997. The Commissioner has a discretion to extend the two-year period, guided by Practical Compliance Guideline PCG 2019/5. The exemption is not automatic.
How is a testamentary trust taxed differently?
Where the Will establishes a testamentary trust, section 102AG of the ITAA 1936 allows income of that trust that is 'excepted trust income' to be assessed to minor beneficiaries at ordinary marginal rates. The 2019 amendments limit the concession to income derived from property that devolved from the deceased or property representing accumulations of that income. The interaction with Division 6 and streaming needs to be worked through case by case.
Is the executor personally liable for the estate's tax?
Section 254 of the ITAA 1936 imposes a personal liability on trustees for tax on trust income, but only in respect of income that comes to them in that representative capacity and only to the extent of the money that comes into their hands. Executors who distribute estate assets before addressing known tax liabilities can expose themselves to personal liability and should seek specialist advice.
How Parke Lawyers Can Help
Parke Lawyers' Probate & Estate Administration team advises executors and beneficiaries on the tax obligations of a deceased estate — present entitlement, streaming of income, Division 128 CGT rollover and testamentary trust structures — and works with the estate's accountant and, where appropriate, tax counsel on contentious issues. Engage us early so returns, distributions and any elections are aligned before positions are locked in.
Probate & Deceased Estates
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Parke Lawyers advises executors and beneficiaries on the tax aspects of estate administration, including present entitlement, streaming and testamentary trust structures.
This article is general information only and does not constitute legal or tax advice. Please obtain advice tailored to your circumstances.