What Happens to Someone's Tax Affairs When They Die
When someone passes away, there is understandably a lot for their family to deal with.
Arranging a funeral or celebration of life, notifying family and friends, locating important documents and beginning to understand the person’s estate can all happen within a relatively short period of time. Tax is unlikely to be at the top of the list, nor does it need to be immediately.
At some point however, the deceased person’s tax affairs will generally need to be reviewed and finalised. Depending on their circumstances, there may also be ongoing tax obligations for their estate.
For an executor or family member dealing with this for the first time, it can be difficult to know where to begin.
The good news is that you do not need to work it all out at once.
What happens to a person’s tax affairs when they die?
A person’s tax obligations do not automatically disappear when they pass away.
Usually, the person responsible for administering the estate will need to establish whether the deceased had any outstanding tax obligations and whether a final income tax return needs to be prepared.
The Australian Taxation Office (ATO) refers to the final individual tax return as a “date of death tax return.” Where a return is required, it generally covers the period from 1 July up to the person’s date of death.
There may also be tax returns from earlier years that were never lodged. Part of the process can therefore involve establishing the deceased person’s tax history and making sure any outstanding obligations are dealt with.
Who deals with the ATO?
The person legally authorised to manage the deceased person's affairs is generally referred to as the legal personal representative. This is commonly the executor named in the will, or an administrator where applicable.
The ATO has processes for notifying it of a death and establishing who will manage the deceased person's tax affairs. Once the appropriate authority has been established, a registered tax agent can also be appointed to assist with the tax requirements of the deceased person and estate.
Exactly who can access information or act on behalf of the deceased will depend on the circumstances, so this can be an important first step before trying to resolve outstanding tax matters.
Does the estate have separate tax obligations?
This is an area that can sometimes cause confusion.
There is an important distinction between, the deceased person's tax affairs up to their date of death and income earned by their estate after they have passed away.
For example, after a person dies, their estate might continue to receive:
· Interest from bank accounts;
· Dividends from investments;
· Rental income from property; or
· Other investment or business income.
For tax purposes, this income may need to be reported by the deceased estate rather than included in the deceased person's final individual tax return. A deceased estate may therefore require its own tax file number and, depending on its circumstances, one or more tax returns while the estate is being administered.
Not every estate will have the same requirements. A relatively straightforward estate may involve very little tax work, while an estate containing investment properties, shares, businesses or other significant assets can involve considerably more.
What information might be useful to gather?
There is no need for a grieving family to immediately arrive at an accountant's office with a perfectly organised folder.
However, as documents become available, it can be helpful to retain information such as:
· Previous income tax returns and tax correspondence;
· Bank and investment statements;
· Details of shares and other investments;
· Records relating to properties owned by the deceased;
· Information about any business interests;
· Details of income received after the date of death;
· Records showing when significant assets were originally acquired; and
· Invoices and documents relating to the administration of the estate.
Some of these records may become important later, particularly where an asset is sold or transferred.
When should tax be dealt with?
Tax does not generally need to be the family's first priority in the days immediately following someone's passing.
Estate administration can take many months, and the ATO notes that completing the administration of a deceased estate commonly takes between six and twelve months and can take longer.
It is, however, worth considering the tax position before the estate is completely finalised.
The ATO recommends ensuring the deceased person's and estate's tax obligations have been completed, or appropriately provided for, before the estate's remaining assets are finally distributed to beneficiaries.
Getting accounting advice earlier in the process can help identify what needs to be done and reduce the risk of discovering an unexpected tax issue towards the end of the administration.
How can an accountant help?
An accountant can work alongside the executor, family and their solicitor to help deal with the financial and taxation side of the estate.
Depending on the circumstances, this might include:
· Reviewing the deceased person's tax position;
· Identifying outstanding income tax returns;
· Preparing a final date of death tax return;
· Assisting with the tax registrations required for a deceased estate;
· Preparing deceased estate tax returns where required;
· Reviewing income received by the estate;
· Helping gather and interpret financial records;
· Considering the tax treatment of investments and property; and
· Assisting the executor in understanding what tax matters remain outstanding before the estate is finalised.
An accountant's role is different from that of a solicitor. Questions about the will, probate, the executor's legal responsibilities or how assets should legally be distributed should be discussed with an appropriately qualified legal adviser.
Often the best outcome comes from the family's accountant, solicitor and other advisers working together where required.
You don't have to navigate it alone
Losing someone is difficult enough without feeling that you suddenly need to become an expert in tax and estate administration.
For most families, the important thing is simply to recognise that there may be some tax matters to attend to and to seek assistance when the time is right.
A conversation with an accountant can help establish what has already been taken care of, what still needs to happen and which matters may require assistance from another professional.
From there, the process can be broken down into manageable steps, giving families and executors one less thing to navigate on their own.
This article contains general information only and does not constitute taxation, financial or legal advice. Professional advice should be obtained where required.
Written by Brandon Lawrence
Chartered Accountant & Director
