An Executor who has obtained a grant of Probate for a deceased person's Will or an Administrator who has obtained a grant of Letters of Administration where there is no applicable Will (both called the Legal Personal Representative) is required to deal with the tax affairs of the deceased person.
In some instances a Legal Personal Representative can become personally liable to pay the tax liabilities of the deceased person from their own personal funds. Therefore caution must be exercised before distributions are made to the beneficiary(ies) to ensure that the Legal Personal Representative doesn't become personally liable.
By law a Legal Personal Representative is required to lodge all outstanding tax returns for the deceased person or notify the Australian Tax Office (ATO) that a tax return was not required to be lodged (for example because the deceased's taxable income for a particular year was below the tax free threshold).
The Legal Personal Representative is also required to pay any outstanding tax liabilities of the deceased person, capped at the value of the deceased's assets. However, a Legal Personal Representative can become personally liable for the tax liabilities of the deceased person if they make distributions to the beneficiary(ies) when they are on notice of a claim from the ATO.
Under tax law, in effect, the Legal Personal Representative stands in the shoes of the deceased person and as such is deemed by the ATO to have notice of any outstanding tax liability of the deceased (even though in reality they may have no knowledge of the deceased's tax affairs).
A liability to the ATO can include an assessment for a required tax return or an amended assessment for a tax return lodged before the deceased person's death.
It is important that a Legal Personal Representative makes appropriate enquiries with the ATO as part of their administration of the estate. This includes:
- Completing the relevant form (Notification of a deceased person - Form NAT 74279) to notify the ATO of the deceased person's death and add the Legal Personal Representative's contact details to the deceased person's records so they receive any notifications issued by the ATO. A certified copy of the Death Certificate and certified copy of the grant of Probate or grant of Letters of Administration are required to be provided with the completed form.
- Making a request to the ATO for a Deceased Estate Data Package to be provided. The ATO will extract the relevant data from their records and provide this to the Legal Personal Representative. This data package will provide valuable information to the Legal Personal Representative including the individual tax returns of the deceased for the last three years and notice of any outstanding debts. This will help the Legal Personal Representative identify the assets and income streams of the deceased and bring to their attention any outstanding debts.
This information will enable the Legal Personal Representative to determine what further action is required including payment of any outstanding tax liabilities, submitting tax returns required and/or notifying the ATO that a tax return was not required to be lodged by submitting a Return Not Necessary Advice where applicable.
The ATO have issued a guideline Practical Compliance Guideline (PCG 2018/4) – Liability of a legal personal representative of a deceased person. This guideline confirms that a Legal Personal Representative who has obtained a grant of representation for a deceased person will have some protection from personal liability if the following applies:
In the four years before the person's death:
- The deceased did not carry on a business
- The deceased was not assessable on a share of the net income of a discretionary trust
- The deceased was not a member of a self managed superannuation fund
The estate assets comprise only of:
- Public company shares or other interests in widely held entities
- Death benefit superannuation
- Australian real property
- Cash and personal assets such as cars and jewellery; and
- the total market value of the estate assets at the date of death was less than $5 million and none of the estate assets are intended to pass to a foreign resident, a tax exempt entity or a complying superannuation fund.
Where the above applies and a Legal Personal Representative has complied with their requirements (including paying any outstanding tax liabilities of the deceased up to the value of the estate assets, submitting tax returns required and/or notifying the ATO that a tax return was not required to be lodged as detailed above) the Legal Personal Representative will in effect obtain a protection from personal liability in certain circumstances. The conditions for protection from personal liability of the Legal Personal Representative are:
- that the Legal Personal Representative has acted reasonably (including bringing to the ATO's attention in writing any irregularities or omissions in a deceased person's previous tax returns);
- six months has elapsed since the last outstanding tax return of the deceased (or a return not necessary advice where applicable) was lodged with the ATO; and
- the ATO has not given the Legal Personal Representative notice that it intends to examine the deceased person's tax affairs.
To have absolute protection from any personal liability a Legal Personal Representative should wait the full six month period before making distributions to the beneficiary(ies) of the estate. This is particularly important for independent Legal Personal Representatives who have no knowledge of the tax affairs of the deceased person.
However, in practice where a Legal Personal Representative does have some knowledge of the tax affairs of the deceased (i.e. it is their spouse, parent or child) a Legal Personal Representative may assess the risk as minimal and decide to pay the distribution to the beneficiary(ies) of the estate before the six month waiting period has elapsed.
Alternatively, practical solutions can include retaining some of the estate assets and only paying an interim distribution to the beneficiary(ies) of the estate until the six month waiting period has elapsed or obtaining a Deed of Indemnity from the beneficiary(ies) of the estate. A Deed of Indemnity provides some recourse for the Legal Personal Representative if it is drafted to provide that if the ATO raises further taxation liabilities the beneficiary(ies) will be required to pay back some or potentially all of their inheritance to meet those liabilities. The downside to this option however, is that it involves greater legal fees for the additional legal work required in preparing the Deed of Indemnity and enforcing it (if required) and is dependent upon the beneficiary(ies) having those funds available when called upon.
If a grant of Probate or grant of Letters of Administration has not been obtained then the Legal Personal Representative cannot be made personally liable for the deceased's outstanding tax liabilities. The ATO will apply a different method to collect such debt.
Other tax considerations
In addition to dealing with the income tax returns of a deceased person, there will be further requirements for a Legal Personal Representative if the deceased was operating a business. If a deceased held an Australian Business Number (ABN) or was registered for Goods and Services Tax (GST) a final Business Activity Statement will be required to be lodged and the ABN and GST registrations cancelled. In addition PAYG on any staff wages are required to be paid.
It is important to note that the above information relates to the tax requirements of the deceased person. There may also be separate tax liabilities for the deceased person's estate, being the period after they have died, including for income tax, land tax, capital gains tax and GST.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.