Any death in the family is a very difficult time for all involved. Apart from the emotional burden, there are also a range of administrative tasks that need to take place after a bereavement. This death and taxes article covers the main steps family members should take to ensure tax obligations are met.
Death and Taxes: Inheritance
Unlike some countries, in Australia there are no taxes on inheritances or deceased estates. A person’s assets can pass directly to those they name in their legal will without the involvement of taxation authorities.
Outstanding Taxation Obligations
While there are no death taxes in Australia, there is still an active obligation to pay tax for ordinary earnings and investments if a person passes away. A tax return is required if a deceased individual has tax withheld on their income in the year they pass. The same applies if their taxable income was greater than the tax-free threshold of $18,200. There may be other obligations if a person was a sole trader or operating a business. This includes pay as you go withholding (PAYG) amounts, or business activity statements (BAS). Similarly, any outstanding debts to the ATO likely need to be paid from the assets of the deceased estate.
Contacting the ATO
The person responsible for administering a deceased estate is the ‘executor’ (or administrator) of the will. The ATO recognises an executor or administrator as a legal representative of the deceased person’s estate. It is a common assumption that a spouse or immediate family member can contact the ATO for all tax-related matters for a deceased relative. However, unless the person is named as an authorised contact, they may not be able to deal with the account. Often, the executor is the best person to contact the ATO as they have automatic legal standing.
While there are no direct taxes on death, family members must understand certain tax rules to avoid a significant tax bill.
When a person dies and their superannuation is passed onto a non-dependant (such as their children) the ATO will levy a 15% tax to the taxable portion of the balance. For example, Richard passed away with a superannuation balance of $300,000 of which $250,000 is taxable. That means before his adult children Susan and John receive it, the ATO will tax that $250,000 at 15% or $45,000. That’s $45,000 Susan and John won’t receive.
There are some ways to avoid paying that 15% tax, but they’re dependent on individual circumstances. It’s important to discuss your full financial situation with your tax agent as you move into later life. This helps ensure your wealth passes to your beneficiaries when you die.
Capital Gains Tax (CGT) is another tax to be aware of. CGT is a tax levied when a person sells an asset like shares or an investment property. In many wills, the family home that the deceased lived in passes on to the beneficiary of the will. This is often a spouse or other family member. If that family member sells that home, they may be liable to pay CGT on the sale proceeds.
Capital Gains Tax Exemptions
There are exemptions to the CGT housing rules for beneficiaries of a will. The exemption covers dwellings inherited after 20 August 1996 and bought on or after 20 September 1985.
If the inheritor either lives in the dwelling as their main residence, or they sell it within two years, then any capital gain or loss made is disregarded for tax purposes. For homes of this kind inherited before 20 August 1996, CGT is only disregarded if the home was used as the main residence by the person who inherited it.
If the dwelling was bought before 20 September 1985, which is the case for many homes that have been in the family for many years, then CGT does not apply if the home is sold within two years of it being inherited or if the person who inherits it uses it as their main residence while it is owned.
Death and taxes can be tricky, but help is at hand
The advice in this article is a good place to start. But, this information is general in nature. Please get in touch with Etax or your accountant for detailed advice. Our team will guide you through your taxation obligations after a death.