Quite honestly, I have no idea, but I’m guessing there are many different answers based on one’s belief system.
Having said that, this isn’t a philosophical question. We are Accountants after all and we’re approaching this from the Death & Taxes angle.
So the real question is … “What are the tax and legal obligations when a taxpayer passes away?”
Firstly, I acknowledge that this is a very sad and stressful time for those left behind. Apart from the sheer grief associated with losing a loved one, there are all the formalities that need to be attended to.
Apart from the Funeral Directors, most of whom do a fantastic job at helping the bereaved get through it all, there are Lawyers & Accountants that need to be engaged to wind up the deceased’s affairs.
Understanding Probate, Executors, and Legal Formalities
Without going into too much detail (we are not Lawyers after all), a Lawyer is needed for Probate (if a valid Will exists) or Letters of Administration (if no Will was in place).
A Will would normally name an Executor or Executors who are charged with distributing the deceased’s assets to the beneficiaries in accordance with the Will. If there’s no Will, the family would liaise with the Lawyer to assign an Executor(s).
A Lawyer would advise whether formal Probate is required. If a (say) husband passes and just leaves his half of the jointly owned home to his wife, and there are minimal assets held in a joint bank account, then Probate will probably not be required.
If, however, there are extensive assets, including shares, investment property and perhaps superannuation, then Probate will certainly be required. Again, your Lawyer will guide you through this process.
When and How to Lodge a Date of Death Tax Return
Where the Accountant comes in is in preparing and lodging the deceased’s required Tax Returns.
We need to do what’s called a “Date of Death” return which covers the period from 1 July to the date of death. If the deceased was a pensioner who no longer lodged returns, there’s nothing to be done (assuming minimal assets and no Probate required).
If the deceased however was (say) younger and was lodging normal tax returns, then a Date of Death tax return is required to be completed. This only covers the deceased’s normal activities until the date of death.
If however one of the named Beneficiaries is a non-resident, the Date of Death return may need to include certain information. The logic behind this is that a non-resident beneficiary is not subject to Capital Gains Tax so any such tax must be included in the deceased’s Date of Death return. This is a complex area as it doesn’t apply to all types of assets inherited.
Deceased Estate Trust Returns and Ongoing Obligations
Beyond the Date of Death return, if Probate is granted and there will be some time taken for the affairs of the Estate to be wound up, a Trust will need to be created for the deceased. This is simply an application to the ATO to enable the generation of a Trust Tax Return in coming years until the Estate is fully settled.
As an example, if the deceased owned Investment Property and the tenancies continued beyond the date of death, the income and expenses associated with this will need to be reported in the deceased’s Trust Tax Return.
Generally speaking, it is ideal that all the assets of the Estate are sold or distributed within a 2 year period from the date of death, as the tax treatment after this time may change subject to the discretion of the Commissioner of Taxation.
Difficulties can arise if there are a number of beneficiaries and disagreement as to how assets should be treated. Some may want the Investment Property ownership to be passed on jointly to the beneficiaries and for the property to continue as a rental property, while others may prefer that the property be sold and cash distributed to the beneficiaries.
Our job as Accountants is to explain the tax consequences of each choice so that the beneficiaries can arrive at a satisfactory decision. If disputes continue, this becomes a matter for the Lawyers.
Minimising Tax for Beneficiaries and the Estate
We will prepare the Date of Death return and Trust returns as required and ensure that tax payable is minimised.
If the deceased had a tax liability at the time of death, we can make a submission to the ATO to get that debt remitted, especially if there are insufficient funds in the Estate to pay it.
Finally, quite often the beneficiaries have inherited assets (eg shares or property) that now have adjusted cost bases for the purpose of calculating future Capital Gains Tax. As an example, sometimes the cost base is the deceased’s cost base and other times it’s the market value at the date of death (complex area). We will help the beneficiaries understand this irrespective of whether they wish to engage us as their Accountant or remain with their present one.
Why Pre-Planning Your Estate Saves Costs and Stress
If you need an Accountant for these purposes, or you think you may need one in the future, it’s best to come and see me, as some pre-planning can simplify things and reduce costs and can even minimise tax liabilities.
Need expert help with a deceased estate tax return? Contact Depoltz Accounting for a confidential consultation.
Newman Borg is the Director of Depoltz Accounting, specialising in accounting, taxation, and business advisory for individuals and small to medium businesses. With decades of experience, he helps clients navigate complex financial and tax matters. Newman values integrity, personalised service, and practical solutions that minimise tax and maximise business success.