Tax Issues for Deceased Estates
Although death is generally not a taxing event, whenever assets move from one person to another, there may be potential income tax, capital gains tax (CGT) and stamp duty implications.
An individual tax return is generally required to be lodged by the deceased’s Legal Personal Representative (LPR) from the beginning of the financial year up to their date of death. A deceased estate is treated as a trust for tax purposes with the LPR taken to be its trustee. The trustee may be required to lodge a trust tax return for the income received by the deceased estate. In some cases, a trust tax return will have to be lodged every financial year until the deceased estate is fully administered. A testamentary trust may also be established under the terms of a will. It functions similarly to a discretionary trust, with certain provisions of the will operating like a trust deed. It is not the same trust as the deceased estate and may last for many years after the deceased estate is fully administered.
Depreciating assets held by the deceased will cause a balancing adjustment event to occur at time of the deceased’s date of death. The transfer of depreciating assets to the LPR will not trigger a taxing event, as the termination value will be equal to its written down value as at date of death. However, when depreciating assets are distributed to a beneficiary, they are deemed to be disposed of at market value, and therefore potentially trigger a taxing event.
A deceased person’s assets are taken to have been acquired by their LPR on their date of death. Any capital gain or loss is disregarded. Similarly, when an asset owned by the deceased is transferred from the LPR to a beneficiary any capital gain or loss is also disregarded. However, if an LPR acquires an asset during the estate administration period, such as through shares acquired through a DRP, and transfers it to a beneficiary, it can trigger a capital gain or loss. Also, if a beneficiary buys an asset from the estate, CGT will apply. The cost base of any property passed through an estate will need to be obtained to determine the CGT payable by the LPR if the property is sold.
A property which is used as a person’s main residence is generally exempt from CGT. However, for deceased estates, there are special rules that apply. If a property is pre-CGT, it does not need to have been the main residence of the deceased to obtain the exemption. It could have been a rental property of the deceased and would still be entitled to the exemption. If a property is post-CGT, it is necessary for the property to be the deceased’s main residence immediately before death and not been used for income-producing purposes at the date of death. To access the exemption, the property must generally be sold within two years. However, there is an automatic exemption if the spouse of the deceased, a person granted right to occupy, or beneficiary occupies the property until the property is ultimately sold.
The LPR and beneficiary gets the benefit of the asset holding period of the deceased and can access the 50% general CGT discount on any capital gain they generate on assets held for at least 12 months. The LPR or beneficiary can also access the small business CGT concession, if they dispose of the property within two years of the deceased’s date of death and the property would have qualified for the CGT small business concessions if the deceased had disposed of it immediately before their death.
Stamp duty is generally not payable on the transfer of property from the deceased to the LPR. Similarly, stamp duty is not payable on the transfer of property to a beneficiary. However, if a property is sold by the LPR to a beneficiary instead of being distributed under the terms of the will, stamp duty will likely apply.
If you have questions on any of the above, or other matters relating to your tax or financial affairs, please do not hesitate to contact our office on (07) 5504 5700 to speak to one of our trusted advisors.