Common Misconceptions Reported With Deceased Estate Taxes

Speaking in a recent podcast, Colonial First State Technical Services Manager Craig Day said that when a client dies, it’s a common misconception that as long as the estate is held open, no beneficiary will ‘needs to pay tax and the assets don’t count for Centrelink purposes.

“However, that is not the case,” Mr. Day said.

Once someone becomes the legal personal representative (LPR) of the deceased, one of the first obligations they will have is to file a final tax return for the deceased, he explained.

CFS Senior Technical Services Manager Linda Bruce said the LPR should also file any tax returns that have not been filed in previous years.

“After the date of death, the deceased estate may receive income or some income will be paid to the deceased estate. The LPR is required to report this income in a Declaration of Deceased Estate Trust,” Ms Bruce explained in the same podcast.

Ms Bruce said the LPR must use a Declaration of Deceased Estate Trust to report income, claim deductions where applicable or claim tax returns for franking credits for the deceased estate.

“While the estate of the deceased is open, the LPR is required to verify these details, to ensure that they declare this income and to verify all tax obligations before making any final distribution. If they fail to do so, they could be personally liable for any tax owed by the deceased estate,” she warned.

During the period following death and before any of the beneficiaries become currently eligible, the deceased estate trustee will only have to pay marginal adult tax rates as long as the estate is administered within three years, explained Mr. Day.

“If it lasts longer than that, different tax rates apply,” he said.

However, once beneficiaries are currently entitled, they will need to start including that income to which they are currently entitled on their individual tax returns, he said, unless they have a legal disability or are not are not tax residents.

“We can’t just leave it in the estate and say ‘you beauty, I don’t have to pay tax’, in fact, from current law, you do. If you are a minor or someone who is not a tax resident, the executor will actually have to pay tax on your behalf at the adult tax rate,” he said.

In determining whether someone is currently entitled to it, Ms Bruce said there are two key things to look at.

“The first is whether or not the deceased state beneficiary has an inalienable and absolutely vested interest in the income. This means that if the beneficiary has a claim or an interest in the income, it cannot be rejected by a other person. This may not be the case, if the trust or estate has a potential dispute, it is questionable whether the claim or the interest in the income can be defeated, “she explained. .

“The second part is whether or not the beneficiary has the right to demand immediate payment of the income. This means that the beneficiary may currently be entitled to it, even though he may not have actually received the income.

Ms Bruce said the ATO explained that whether a beneficiary is currently entitled to it may depend on what stage the administration of the deceased’s estate has reached.

There are three key steps in administering the estate, she noted.

“In the initial phase, which is the starting point of the deceased’s estate, the LPR could be very busy. They are collecting assets, they are collecting unpaid debts, they are trying to determine if the estate has enough assets or income to cover debts of the deceased and they must pay funeral expenses or other testamentary expenses,” she said.

“During this stage, it is not possible for a beneficiary to be currently entitled to any of the income of the estate, because even the LPR itself does not know whether the estate has sufficient assets or income to cover these expenses.”

At the interim stage, Ms Bruce said the LPR had determined whether there was enough net income to cover expenses and had the option of making an interim payment to eligible recipients.

“If they make the actual payment, that payment is a share of the net income of the estate and [the beneficiary] would be considered currently entitled to that particular payment,” she noted.

The LPR may decide not to make any payments at this stage, in which case the ATO will not consider the beneficiaries to be currently entitled to income from the trust until they receive any payments, she explained.

“Once the final stage has been reached, i.e. the remainder of the estate has been determined and all debts have been discharged, the beneficiaries are currently entitled to the income of the trustee. Whether or not the LPR makes an actual distribution of this income is irrelevant. Once the administration is complete, the beneficiaries are currently entitled to income from the estate,” she said.

“Once the beneficiaries are currently entitled to certain income from the trust, that net income from the deceased estate will no longer be taxed at the estate tax rate; it will be taxed at the beneficiary’s marginal tax rate. [However]the arrangements for collecting and paying tax can again be quite complicated depending on whether or not the beneficiary is legally incapacitated, or whether the beneficiary is a tax resident or not.

Ms Bruce noted that there are exceptions with certain types of income such as superannuation death benefits.

When the executor or administrator of the deceased estate passes the super death benefit to a non-tax dependent through the estate, this is a classic example where the taxable component is effectively taxed in the hands of the LPR. It has nothing to do with the beneficiary. The beneficiary will receive the payment after tax has been deducted. We are talking about up to 15% for the taxed element and up to 30% for the untaxed element, at the expense of the LPR,” she noted.

Regarding the Centrelink Rules, CFS Senior Technical Services Manager Kim Guest explained that they work similarly to the Tax Rules in that Centrelink recognizes that it will take some time to administer. the date after a person dies.

“So while these assets are in the estate and that person is unable to receive or has not received their benefits from the estate, they are not yet valuing it as the beneficiary’s asset,” Ms. Guest said.

“However, if 12 months have passed and you still have not told Centrelink that you have received or are able to receive your inheritance rights, then Centrelink will send a letter and ask you what is happening and why. you haven’t received your inheritance tax They will investigate to see if there is anything preventing this from happening.

For example, if the client is the executor and they have the discretion to decide when they can administer the estate, this could be one of the situations where Centrelink decides they can delay the administration of the estate. and that it could start valuing those assets.

Miranda Brownlee

Miranda Brownlee is the Deputy Editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF industry.

Since joining the team in 2014, Miranda has been responsible for breaking some of Australia’s biggest superannuation stories and has reported extensively on technical strategy and legislative updates.
Miranda also has extensive experience in business and financial services reporting, having written for titles such as Investor Daily, ifa and Accountants Daily.

Common Misconceptions Reported With Deceased Estate Taxes

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Last update: March 21, 2022

Posted: March 21, 2022

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