As Benjamin Franklin once said ‘in this world nothing can be said to be certain, except death and taxes’.
As time goes by it is more and more likely that, as a result of our relationships with family and close friends, we will be asked to be the executor of a persons deceased estate. Depending on the size of the estate and the complexity of the will and assets involved acting as an executor can be a time consuming and difficult task. Throw in a business and the various trading structures used and things can get quite complicated.
An executor’s role is extremely important and there are many key duties required to be performed. These include making the necessary funeral arrangements, applying for grant of probate or a letter of administration, determining the estates assets, paying the estates debts and distributing what’s left to the beneficiaries. It is, however, the tax responsibilities of executors that are often underestimated and not fully understood.
While there are no death duties in Australia tax may be payable on certain income and capital transactions upon a person’s death. As an executor, your tax responsibilities include:
• Preparing and lodging income tax returns for the deceased person
• You will need to determine if the deceased person has any prior year tax returns outstanding and whether it is necessary to get them prepared and up to date.
• You may need to prepare and lodge the deceased person’s final income tax return or date of death return. This will be necessary if the deceased person had income for the financial year to date above the tax free threshold, there was tax withheld from their income or there are other refundable credits available.
• Preparing and lodging the deceased estate’s income tax return
• If the estate has earned any income you will need to apply for a trust tax file number effective from the date of death.
• A trust tax return may then need to be prepared and lodged to account for any income received or capital gains/losses crystalised. A trust tax return is also required if the estate has received dividends or income where franking credits or tax withheld can be claimed or where a business has been carried on.
• The deceased estate may need to prepare and lodge a return each financial year until the estate is no longer deriving income and is fully administered. It is important to note that depending on the requirements of the will this may take many years.
• Paying income tax
• Any outstanding tax payable prior to and as a result of the deceased person’s final return is the responsibility of the executor and is payable by the estate.
• You will also need to determine who pays the tax on the estates income. A number of factors including present entitlement, legal disability and whether the estate is fully administered need to be considered when determining if it is the estate or the beneficiaries who pay the appropriate tax.
• There are a number of complexities that may arise when considering the above factors as such it is important that you seek the advice of your accountant or legal advisor to assist in determining the taxing point of the estates net income.
• As executor, among other requirements, you cannot distribute any income or assets of the estate until all tax liabilities have been determined and accounted for.
• Provision of necessary information to beneficiaries
• Beneficiaries who are to receive a share of the estate, known as residuary beneficiaries, as opposed to specific gifts or money are entitled to full disclosure of the estates accounting and tax situation.
• You will be required to provide the details of any trust/estate distributions to be included in the beneficiaries own income tax returns in a timely manner.
The information provided above is general in nature, therefore it is important that should you find yourself appointed as an executor you seek the advice of an accountant who has a good understanding of the tax implications of deceased estates. After all if you get it wrong it could be you the executor who is personally liable.
Jonathan Grant Accountants