Tax on administering an estate: a guide for executors

The deceased's final tax return

A tax return covering 1 July to the date of death needs to be lodged for the deceased, using their own TFN, reporting their income and deductions for that period. If they had earlier years not yet lodged, those need to be brought up to date too.

Notify the ATO of the death early — you'll generally need the death certificate and documents showing you're the executor or administrator (grant of probate or letters of administration) before the ATO will deal with you, or with us on your behalf once we're appointed as tax agent for the estate.

Income earned after death — the estate's own tax return

• From the date of death, a deceased estate is treated as its own trust for tax purposes. It needs its own TFN, and a trust tax return for any income the estate's assets earn (bank interest, rent, dividends) while it's being administered.
• The estate gets individual tax rates, including the full tax-free threshold, for its first three income years — with no Medicare levy and no tax offsets. This generally applies to income no beneficiary is yet entitled to.
• After the third income year, the concessional treatment stops, and the estate is taxed at less favourable rates — one of several reasons it's worth finalising administration within three years where you reasonably can.
• Once a beneficiary becomes presently entitled to estate income (rather than it staying with the trustee), it may instead be taxed in their own return. We can work through which applies as the estate progresses.

ATO: Tax rates — deceased estate ↗

Get these sorted early

• A date-of-death valuation for any asset that will pass to a beneficiary rather than be sold by the estate — shares, an investment property, anything that could trigger capital gains tax for whoever inherits it later. It's far easier to get now than to reconstruct years down the track; see our article on tax for beneficiaries for why it matters to them.
• Pay the deceased's outstanding tax debts, and the estate's own tax, before distributing what's left. An executor who distributes the estate without properly providing for a known or reasonably expected tax debt can become personally liable for it.
• If the estate includes the deceased's home and you intend to sell it, remember the two-year CGT-free window generally runs from the date of death, not from when probate is granted — and probate alone can take months. Talk to us (and your solicitor) early if a sale is likely to run past two years.

Superannuation death benefits paid through the estate

If a death benefit is paid to the estate rather than straight to a beneficiary, it falls to you as executor to work out whether each beneficiary receiving a share of it is a tax dependant, and to withhold the right amount of tax on the taxable component before paying out a non-dependant's share (commonly a financially independent adult child). That's a step that's easy to miss when you're focused on simply getting the estate distributed.

Keep good records

• The death certificate and the grant of probate or letters of administration.
• Date-of-death valuations for every asset that passed to a beneficiary.
• A record of all income the estate earned and expenses it paid during administration.
• Copies of every return lodged for the deceased and the estate.

Keep all of it for at least five years in case the ATO has questions later — the same as any other tax record.

How we can help

We can prepare the deceased's final tax return and the estate's trust tax returns, help you get date-of-death valuations sorted, and work through the three-year concessional window with you. We're not solicitors, so probate and the legal side of distributing the estate need your own lawyer — but the two usually need to work together, and we're happy to liaise with them directly.