Tax Returns and Deceased Estates

Tax Returns and Deceased Estates

Tax Obligations and Final Tax Returns

Dealing with the tax affairs of a loved one who has passed away is rarely straightforward, and getting it wrong can delay the finalisation of their estate.

An executor or legal personal representative (LPR) is often left managing a range of financial responsibilities, including tax. Understanding what the ATO requires, and when, makes a difficult time easier to navigate.

There are two separate returns to consider: a date of death tax return for the deceased's own income up to the day they died, and potentially a trust tax return for income the estate earns afterwards. Australia has no inheritance tax, but the LPR must confirm all tax obligations are settled before distributing assets, or they can be held personally liable.

Step-by-Step: What an Executor Needs to Do

  1. Notify the ATO of the death by phone, this pauses correspondence to the deceased and records you as the person managing the estate.
  2. Confirm who's managing the estate. Usually, the named executor, or next of kin if there's no will. Full administration typically takes 6 to 12 months.
  3. Get a grant of probate or letters of administration if required; this makes you the ATO's recognised LPR with full authority over the deceased's tax affairs.
  4. Formally notify the ATO you're the LPR, a separate step from the initial call.
  5. Sort out any business tax obligations, including a final BAS if the deceased was a sole trader or in a partnership.
  6. Lodge the date of death tax return (and any outstanding prior-year returns).
  7. Lodge trust tax returns for the estate if it earned income after death.
  8. Confirm everything is finalised before distributing assets; this carries personal liability risk if skipped.

The "Date of Death" Tax Return

This covers the deceased's income from 1 July of the income year they died up to the date of death. It must be lodged on paper, not myTax or myGov, unless a registered tax agent lodges it online for you. It is required if tax was withheld, taxable income was above the tax-free threshold, or the prior-year returns were outstanding, otherwise lodge a non-lodgement advice instead. If the person died intestate and no one administers the estate within 6 months, the ATO may raise its own assessment.

The Deceased Estate Trust Tax Return

Income the estate earns after death eg: rent, interest or dividends may require a separate trust tax return, from the day after death to the next 30 June. This needs checking every income year, not just once. If continuing the deceased's business, apply for a new ABN and trust TFN. You cannot use the deceased's original ABN.

Confirming Tax Obligations Before Distribution

Before distributing assets, confirm all returns and lodgements are complete, credits owed are claimed, and business registrations are cancelled. The LPR is liable for the deceased's outstanding tax debts up to the value of the estate and can become personally liable if assets are distributed while aware of an ATO claim.

The Benefits of Not Settling Too Quickly

Rushing to distribute an estate is not always in the beneficiaries' best interests. Two concessions reward a properly paced administration:

  • A lower tax rate. For its first three income years, a deceased estate is taxed at individual rates with the full tax-free threshold and no Medicare levy, instead of the top marginal trust rate. This concession can't be extended past year three.
  • Favourable Centrelink treatment. For beneficiaries on income support, an inheritance generally isn't assessed under Centrelink's income and assets tests until it is distributed to them, giving executors genuine breathing room during administration.

But a delay must be reasonable. If Centrelink considers a delay is caused by the beneficiary's own actions rather than genuine administration needs, it can assess the inheritance as available or raise deprivation provisions. The tax concession is capped at three years regardless. Take the time the administration genuinely needs, but be ready to show the delay is justified, not manufactured.

Common Pitfalls

  • Confusing the date of death return with the estate's trust return
  • Missing income the estate earned after death
  • Not applying for a new ABN/TFN when continuing a business
  • Distributing assets before tax obligations are confirmed
  • Settling too quickly and forfeiting available tax or Centrelink concessions

Frequently Asked Questions on Deceased Estates and Tax

Do I have to pay tax on money inherited from a deceased estate in Australia? No. Australia has no inheritance tax. Tax obligations sit with the deceased's date of death return and, if applicable, the estate's own trust return.

Does a deceased estate get taxed at a lower rate? Yes, for the first three income years, at individual tax rates with the full tax-free threshold. After that, standard trust rates apply.

Does an inheritance affect my Centrelink payments? Not until it is distributed to you. It's generally not counted under Centrelink's tests while it remains in the estate, provided the estate is being administered within a reasonable timeframe.

Can I settle an estate too slowly to keep getting these benefits? Yes. Centrelink can still assess an inheritance if it believes a delay is deliberate, and the ATO's tax concession is capped at three years no matter the reason for delay.

Get Expert Support Managing a Deceased Estate

Administering a deceased estate's tax affairs is a significant responsibility that should not be tackled without the right guidance.

The team at Cashflow Financial helps executors and legal personal representatives across Sutherland, Wollongong, and Sydney manage deceased estate tax obligations with confidence. Contact Cashflow Financial today for guidance on your responsibilities as an executor or for more insights on tax and estate planning.