Taxes and Death

Death Duties

State and Federal death duties, were abolished Australia in 1970s. 

By and large taxing death is mostly accepted as part of life throughout the world (where a lot of planning is put in to trying to minimise or avoid the taxes altogether primarily through the establishment of trusts and divesting wealth offshore). 

For example, the amount of duty or tax payable as a result of death in the United Kingdom can be enormous - the current tax rate is 36% of the estate value (subject to adjustments) - so you can well imagine there is whole planning industry dealing with the topic. 

Whilst the prospect of a labor government reintroducing death duties was bandied about at the during federal election campaign (almost certainly falsely) I think it safe to say that no government of any persuasion would attempt to reintroduce them at any time in the near future.  Just look what happened with Labor’s policy of abolishing franking credits was promptly rebranded “Retiree Tax” the Coalition.  And the taxation of discretionary trusts is a real hot potato that seems to have been mashed for now.

There are still taxation consequences for estates and their beneficiaries that should be planned for.  Yes, with a little planning you can make your estate a whole lot larger for your loved ones.

Here are some things to keep in mind:-

Administration Issues

• when someone dies they still have to pay income, capital gains tax and other taxes and perhaps penalties and interest ("taxes") owing for previous financial years and in the year they die from 1 July to the date they die;
• from the date of death their estate is liable to pay taxes for each accounting period until the estate is distributed and wound up.  For example if an investment property or shares are sold and a capital gain is realised, tax on that gain will have to be paid before the estate is distributed;
• executors and administrators are personally liable to pay the deceased’s and the estate's tax (in terms of section 260-140 (2) of the Taxation Administration Act 1953 Cth).  Executors and administrators effectively stand in the shoes of the deceased for the purposes of discharging the deceased’s outstanding tax liabilities.  Most people accepting appointments are not aware of this law and that if they muck things up they could be personally liable.  They are similarly not aware that the ATO may amend an assessment (and require more tax, interest and penalties to be paid) well after the estate has been distributed.
• generally, if the executor or administrator has lodged returns (or a non-lodgement advice) they will not be personally liable for the deceased’s taxes;
• generally it is desirable that interim or final distributions of the estate not be made until the ATO has issued a Notice of Assessment;
• if real property is gifted directly to a beneficiary the beneficiary will inherit the cost base (for CGT purposes) of that property.  This means that when the beneficiary ultimately sells the property the CGT will be calculated using the inherited cost base;
• if you inherit a property that was a main residence for CGT purposes there will be no CGT consequence if you sell the residence within two years of the date of death;
• carried forward losses are lost on death (i.e. they only help  you minimise your tax when you are alive so try and use them up)

Taxation of Superannuation Death Benefits

• superannuation death benefits are tax free when paid to the deceased’s spouse/s, the deceased’s children under 18, any person in an interdependency relationship with the deceased or any person financially dependent on the deceased.  
• Tax up to 17% (including 2% Medicare levy) of the death benefit is payable if paid to an adult child (unless the adult child can show they were in an interdependency relationship with or financially dependent on the deceased).  If the death benefit is paid directly to an estate with no non-tax dependants there is no 2% Medicare levy;
• generally, it is hard to show that an interdependency relationship subsists at the date of death.  All of these elements must be shown:-
  • the parties have a close personal relationship (the ATO has a high standard to prove this);
  • the parties live together;
  • one or each of them provides the other with financial support; and
  • one or each of them provides the other with domestic support and personal care.
• generally, proving financial dependence is also very difficult.  The test is “if the financial support received by a person were withdrawn would the person be able to survive on a day-to-day basis. If the financial support provided merely supplements the person’s income and represents ‘quality of life’ payments, then it would not be considered a substantial support. What needs to be determined is whether or not the person would be able to meet the person’s daily needs and basic necessities without the additional financial support.”
• For a non-tax dependant who receives a super death benefit, the payment is largely comprised of two components: tax free component and taxable-component. The tax free component is the non-concessional contributions made by the deceased . The recipient takes this tax free component ‘tax free’ without paying any income tax. On the other hand, the taxable component is broadly money in the fund that was put there by contributions such as employer contributions plus earnings. The recipient of the taxable component will usually pay at most 15% (in some cases this can be 30%) tax plus levies on that component. If the recipient has low to nil taxable income in that financial year, their tax free threshold may apply.
• when a legal personal representative (estate) receives a super lump sum, the tax law applies as if the recipients under the will received the death benefits directly, except that the legal personal representative pays the tax on behalf of the recipients.
• if there is a life insurance component this component in the death benefit it is also taxed.
• if you only have adult children who might receive your death benefit the only way of avoiding tax is to withdraw your superannuation benefits from the superannuation system after the age of 60 and before death.  There are often very good (tax) reasons to keep the funds in the superannuation system.

If you have any questions regarding this article, please don't hesitate to contact Paul Radford on 4771 5664 or email law@connollysuthers.com.au.