What is a deceased estate?
The property and assets belonging to a person who has died is called their deceased estate. The deceased estate is held in trust from the death of the person until the transfer of the property and assets to the beneficiaries. The deceased estate is considered to be a trust during this period. Unlike a natural person or a company, a trust is not a legal entity in its own right, but a relationship involving a trustee and the beneficiaries.The executor of the estate is the person who holds the deceased estate in trust. That person is the trustee for the deceased estate trust. The executor is responsible for administering the deceased estate in the best interest of the beneficiaries.
Beneficiaries are those people who share in the deceased estate. They are usually named in the will, where one exists. If no will exists, they are usually the deceased person’s next of kin.
The law that applies to the assets and income of a deceased person depends on which state or territory of Australia the deceased person lived in when they died.
If you have been appointed as an executor or administrator of the estate of a deceased person, you will be responsible for managing the deceased estate's tax affairs, as well as:
- carrying out (executing) the terms of the deceased person's will, or
- complying with the relevant inheritance laws where there is no will.
There are four main ways in which the income of a deceased estate is assessed. The rate of tax depends on whether:
- the beneficiary is presently entitled to the income of the estate or the trust (s97 of ITAA36)
- the beneficiary is under a legal disability (s98 and s102AG)
- some part of the net income is subject to tax in the trustee's hands, because no beneficiary is presently entitled to that portion of the income. This situation occurs where an estate is not yet fully administered (s99 or s99A) - where s99 applies, normal tax rates apply to the estate for the first three years after death, thereafter higher tax rates apply, and
- the trustee is assessed on the net income which is fully administered but the income is accumulating in the estate, rather than being allocated to beneficiaries (s99A); the top marginal tax rate (plus Medicare) applies.
Deceased estates sometimes need to become family trusts.
Capital Gains Tax
There are special rules in relation to capital gains tax that apply to deceased estates. These rules determine the cost base of specific assets. In general if the deceased acquired a CGT asset pre 20 September 1985 (pre-CGT) the beneficiary will inherit the market value of the asset at the date of death. If the asset was acquired by the deceased post 20 September 1985, the beneficiary will inherit the indexed cost base of the asset based on the original cost to the deceased.
In addition to these rules, there are special rules that relate to the former home of the deceased. In certain situations the former home of the deceased can be sold within 2 years of date of death and be exempt from income tax.
Where assets pass to non-resident beneficiaries of the estate, the deceased may be required to include a capital gain/(loss) in their date of death return. These special rules apply where assets pass to non-resident beneficiaries and tax-advantaged entities.
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All representations and information on this site is general in nature and should not be relied upon as advice. If you require specific advice please contact us.