Tax Rates for Deceased Estates

When dealing with a loved one’s estate, understanding the deceased estate tax rate is crucial.

The typical deceased estate can take anywhere up to 12 months to finalise, and even then, some have been known to take years.

Fortunately, there are no inheritance taxes in Australia, however that does not mean that there are no tax implications if a deceased estate continues to earn an income after the person passes away.

Tax Treatment of Deceased Estates

The administration of a deceased estate can be a complex affair if the estate earns a taxable income and a return needs to be lodged.

In these situations, the estate is treated as a trust for tax purposes, and trust tax returns may need to be lodged each year until the estate is finalised.

As with a person’s individual income tax returns, the trust tax returns are used to report the income of the estate after the person’s death, and to claim any tax refund or franking credit owed to the estate.

Usually, it is the legal personal representative who lodges a tax return for the deceased estate – this person may be the executor or administrator of the estate. For now, we’ll refer to them as the “trustee”.

When is a Tax Return Required?

For the first three income years of a deceased estate, the trustee must lodge a trust tax return if any of the following apply in that income year:

the net income of the deceased estate is greater than the tax-free threshold (presently $18,200);
a beneficiary of the deceased estate is presently entitled to any of the income at the end of the income year; or
a beneficiary of the deceased estate is not an Australian tax resident.

For clarity, if the trustee pays income to a beneficiary before the estate is fully administered, or the beneficiary has a claim or interest in the income which cannot be defeated by another person, they are considered to be presently entitled to it.

If a deceased estate continues to be administered into a fourth income year (and for any later income year), the trustee must lodge a tax return if the deceased estate earns any income at all (including capital gains).

Defining ‘An Income Year’

To determine the taxable income for a deceased estate, you must understand what income was collected in what income year, noting any income received before the deceased person passed away should be included in a date of death individual tax return.

The Australian Taxation Office (ATO) defines the first income year for a deceased estate as the time between the day following the date of death and the end of the financial year (30 June).

For example, if John passed away on 8 March 2023, the first income year for his deceased estate is from 9 March 2023 to 30 June 2023.

For each income year thereafter, an income year is the same as the financial year, which is the 12 months between 1 July and 30 June.

Which Tax Rate Applies?

Typically, a trustee of a deceased estate is assessed on the total net income (that is, the total income after expenses or deductions), and pays tax at the top marginal tax rate.

That said, when the trustee lodges the first trust tax return at the end of the first income year, they can apply for a concessional rate of tax.

The concessional rates are the same as the individual income tax rates (subject to change from 1 July) and the concession includes the benefit of the tax-free threshold, but not any tax offsets, and only applies for the first three income years. The concessional period cannot be extended.

Deceased estates are not subject to the Medicare levy.

If during the first three years the deceased estate earned taxable income of $18,200 or less, there is no tax payable. However, for deceased estates that continue to be administered beyond the third income year, the tax-free threshold is currently reduced to $416 and for every dollar thereafter the tax brackets progressively increase.

Deceased Estate Tax Returns

In Australia, deceased estate tax return rules are explained in:

the Income Tax Assessment Act 1936
the Income Tax Assessment Act 1997.

The key actions that need careful attention to comply with Australian tax laws and effectively handle estate administration include:

Notifying the ATO
Obtaining a Tax File Number (TFN)
Assessment of income and liabilities
Completing and lodging the deceased estate tax return
Payment of outstanding taxes

Contact Us

For more information about tax rates for deceased estates, contact us at Bambrick Legal today. We offer a free, no-obligation 15-min consultation for all enquiries.