Losing a loved one is a stressful and highly emotional experience. Many practical and legal responsibilities fall on the immediate family, which exacerbates emotions further. On top of selling property, closing accounts, and cancelling subscriptions, families must also deal with the Australian Tax Office (ATO).
Deceased Tax Requirements
Assets can pass directly to those named in a will without involving the ATO because there is no inheritance tax in Australia. However, many people don’t realise the deceased must still submit a final tax return. An appointed executor must submit a final tax return for the deceased and fulfill all outstanding tax obligations. This includes any outstanding taxes or tax returns, tax payable on superannuation, and capital gains.
If you are an executor and have a grant of probate or letters of administration, you must complete a notification form with the ATO. The ATO will then register you as the Legal Personal Representative (LPR) of the deceased. An executor is typically named in the will. If there is no will, then the family has the right to nominate an executor.
Date of Death Tax Return
When submitting a tax return for a deceased person in Australia, it is referred to as a “Date of Death Tax Return.” An executor must submit a tax return for any outstanding tax the deceased person may owe from the 1 July to the date of their death. For example, if a person died on 8 February 2020, their Date of Death Tax Return is from 1 July 2019 to 8 February 2020.
An executor must complete and file a Date of Death Tax Return under the following circumstances: the deceased had tax withheld from income, income was earned above the tax-free threshold, an investment body withheld tax because the deceased did not provide a TFN, tax returns were lodged by the deceased in previous years.
An Executor will complete a hard copy Tax Return for Individuals on behalf of the deceased. If a tax return from the previous year is still outstanding, then the executor is responsible for submitting it too.
In the event that the deceased doesn’t meet any of the circumstances requiring a Date of Death Tax Return, the executor will not lodge one. Instead, the executor must complete a Non-lodgement Advice. When completing the form, the executor must state DECEASED, and the actual date of death as the reason on the form, i.e., DECEASED 8/2/2020.
Completing a Date of Death Tax Return
Preparing a Date of Death Tax Return is a similar process to a standard tax return. Using a paper copy of the Tax Return For Individuals Form, you start by printing the words DECEASED ESTATE at the top of page one. The name of the taxpayer should be ‘THE LEGAL REPRESENTATIVE OF JOHN CITIZEN DECEASED.’ We do not use their name on its own as the executor is signing, not the deceased.
Tax Allows and Deductions
There is little difference between a standard tax return and a Date of Death Tax Return. All the regular tax bands apply, including the tax-free threshold. The Medicare levy and the Medicare Levy surcharge are also still applicable.
The usual income declarations and tax deductions apply. The taxpayer’s executor’s tax expenses for preparing the tax return and the tax agent’s fees are additional deductions. You can still include medical expenses if applicable. But funeral costs do not fall into the medical expenses category and are not tax-deductible.
When completing an individual tax return, it is not uncommon To carry forward certain losses to offset future tax. In a Date of Death Tax Return, this is not an option. The ATO requires you to finalise all tax matters. So, any losses that cannot be offset in the Date of Death Tax Return will lapse.
Tax matters are complex at the best of times, but handling a tax return while still grieving for a loved one can be challenging. Although not a pleasant task, it is best to tackle taxation sooner than later and close out the estate. Many professional accounting firms specialise in Deceased Tax. They will provide advice and support to help you meet all tax obligations for the deceased.