Appendix 9: Instructions to trustees of deceased estates

These instructions will help you complete the trust tax return for a deceased estate, if you are:

• the legal personal representative
• a trustee or executor
• an administrator of a deceased estate
• collecting information on behalf of an administrator.

Deceased estates

A 'deceased estate' is a trust. Unlike a natural person or a company, a trust is not a legal entity in its own right, but a relationship between a trustee and beneficiaries. The trustee administers the trust property in the best interests of the beneficiaries.

A trust is made up of:

• assets of a deceased person, the trust property
• beneficiaries, who, in a typical deceased estate, are those normally named in the will of a deceased person, although in some circumstances the courts may vary the terms of a will. Beneficiaries may include the surviving partner, children and grandchildren, and charitable or scientific institutions and religious bodies
• the trustee, who is usually appointed by the deceased person's will. For income tax purposes, the legal personal representative of a deceased estate is the trustee of the deceased estate.

 

What you need to do as a legal personal representative

• Notify the ATO of the death, so that we can stop the issue of any notices that may cause distress to partners or other relatives. If you know the TFN for the deceased person, quote this in any phone calls or letters to us.
• Lodge a 'date of death' return.

Date of death returns may not need to be lodged for people who obviously have no taxation liability and may not have lodged tax returns for many years, such as taxpayers who were receiving only:

• the age pension
• the disability support pension, or
• a Department of Veterans' Affairs (DVA) pension.

In these cases the legal personal representative of the deceased person simply needs to write and tell us the facts.

A date of death return covers the period from the beginning of the income year to the date of the taxpayer's death. Show the name of the taxpayer as THE LEGAL REPRESENTATIVE OF JOHN CITIZEN DECEASED, or similar. The return must include:

• all assessable income and deductible losses or outgoings of the deceased person from the start of the income year up to the date of death
• a full and true statement of the assets and liabilities of the deceased person at the date of death, for salary and wage earners this is only necessary if the ATO asks for it.

The return may also include:

• tax agent's fees and similar expenses incurred by the taxpayer's legal personal representative; these are deductible expenses
• medical expenses incurred by the deceased taxpayer and paid by the legal personal representative; a medical expenses tax offset may be allowable for this expenditure.

The legal personal representative can sign the return.

The period from the date of death to the end of the income year is covered by the first return of the deceased estate. Trustees of a deceased estate must use the Trust tax return 2011. The trustee needs to apply for a trust TFN by completing an ABN registration for companies, partnerships, trust and other organisations (NAT 2939) if an ABN is required or a Tax file number application or enquiry for a deceased estate (NAT 3236) if an ABN is not required. Show the name of the trust as THE ESTATE OF JOHN CITIZEN DECEASED or similar.

Amounts of assessable income received after death

If assessable income, including interest, rent, and business or employment income, is received after a taxpayer's death, it is part of the deceased estate. The trustee is then liable for any tax due on those amounts.

Recreation leave and long service leave

Amounts of recreation leave and long service leave, ordinarily assessable under sections 83-10 and 83-80 of the ITAA 1997, are exempt from tax when paid directly to the trustee of a deceased estate.

Dividends

Dividends are usually assessable when they are credited to a taxpayer.

Payments from friendly society funeral policies

A funeral policy is a type of life insurance policy issued by a friendly society for the sole purpose of providing benefits to pay for the funeral of an insured person. In some instances the policy holder pays a funeral director upfront for a set funeral service and this payment is managed by a friendly society in a funeral policy.

Benefits received by the deceased estate under a friendly society funeral policy that was taken out before 1 January 2003 are exempt from tax.

If the deceased person was insured under a friendly society funeral policy taken out after 31 December 2002, the investment income from the funeral policy is included in the assessable income of the estate, if the estate's trustee:

• instructs the friendly society to pay a funeral director or other party for the insured person's funeral expenses, or
• is reimbursed for the funeral expenses.

In these circumstances the statement of distribution issued by the friendly society will advise the amount of income to be included on the trust tax return.

If the policy proceeds are paid to a funeral director, either under a policy assignment or as the nominated beneficiary, they are included in the funeral director's assessable income and no amount needs to be included in the estate's assessable income.

Employment termination payments (ETPs)

An ETP paid to a trustee is taxed in the hands of the trustee in the same way that it would be taxed if paid directly to a beneficiary. That is, the portions of the payment are subject to tax to the extent the beneficiary is a dependant (see Definition of terms) or a non-dependant of the deceased.

Superannuation lump sums

A superannuation death benefit paid to a trustee is taxed in the hands of the trustee in the same way that it would be taxed if paid directly to a beneficiary. That is, the portions of the payment are subject to tax to the extent the beneficiary is a dependant or a non-dependant of the deceased. There is no tax payable to the extent that the payment is made to dependants or eligible non-dependants of the deceased.

Eligible non-dependants of Australian Defence Force and Australian police force (including Australian Protective Services) members who have died in the line of duty are treated as dependants for tax purposes.

Capital gains tax

From the 2006 income year, a trustee of a testamentary trust could choose to be assessed on part or all of an amount of a net capital gain that is included in the net income of a trust.

Legislative changes made in 2011 expand this choice to eligible trustees of all resident trust estates in respect of capital gains that meet certain criteria.

Paying tax on the income of deceased estates

A trustee cannot distribute the income or assets of a deceased estate until the debts of the deceased person, including any outstanding tax liabilities, are determined. For taxation purposes, this requires a notice of assessment. Once a notice of assessment is issued, the trustee can deal with the assets of the deceased person in accordance with the will.

A trustee can distribute some of the income or assets to beneficiaries if the trustee is certain that the remainder of the estate is sufficient to cover any outstanding liabilities. Beneficiaries who receive payments of income are considered to be presently entitled to them and they declare them and pay tax on those amounts in their own tax returns.

Any undistributed trust income, or income accumulated in the deceased estate and not paid to or applied to the credit of beneficiaries, is treated as income to which 'no beneficiary is presently entitled', for example, where the administration of an estate is not finalised.

For more information on the term 'presently entitled' and the taxation of trusts, see item 65 Statement of distribution.

TFN Withholding for Closely Held Trusts

Trusts of deceased estates are excluded from the TFN withholding rules up until the end of the year of income in which the fifth anniversary of the individual's death occurred. After this, the trustee will need to consider whether they will be subject to the TFN withholding rules. To find out more about these rules see TFN withholding for closely held trusts.

Example 9.1 Completing a simple deceased estate return

Page 1

Complete all appropriate items.

If the activities of the executor, in realising the deceased estate, amount to carrying on an enterprise and an ABN is required, complete an ABN registration companies, partnerships, trusts and other organisations (NAT 2939) to obtain an ABN. For more information on carrying on an enterprise, see Miscellaneous Taxation Ruling MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number ('ABN').

If an ABN is not required and an ABN registration is not lodged, before completing the trust tax return apply for a trust TFN by completing a Tax file number application or enquiry for a deceased estate (NAT 3236).

Executors of deceased estates can also apply online for a TFN by completing the relevant parts of the Tax file number application for companies and other organisations (NAT 3799), and available through the electronic lodgment service (ELS).

Show the name of the trust as THE ESTATE OF JOHN CITIZEN DECEASED or similar. Print code D in the CODE box at Type of trust and complete the date of death box.

Pages 3 to 5

Complete the appropriate items listed below.

Income

8 Partnerships and trusts

Show at A or B any amount of primary production or non-primary production partnership income.

Show at Z or R the trust's share of primary production or non-primary production income which has been included in the net income (for tax purposes) of other trusts after the date of death.

Show at S any deductions for the deceased estate's own expenses in relation to distributions of primary production income.

Show at T any deductions for the deceased estate's own expenses in relation to distributions of non-primary production income.

Show at C any share of credit for tax withheld where an ABN was not quoted.

Show at D any share of franking credit from franked dividends.

Show at E any share of credit for TFN amounts withheld from interest, dividends and unit trust distributions.

Show at O any credit for TFN amounts withheld from payments from closely held trusts.

9 Rent

Show at F the gross amount of rent including any booking or letting fees.

Show at G the total interest expenses incurred in earning rental income.

Show at X the total capital works deduction for rental buildings.

Show at H the expenses that relate to this rental income.

Show at Net rent the net amount of any rent.

11 Gross interest

Show at J the interest from banks and credit unions, building societies, debentures, notes and deposits, discounted or deferred interest securities, government securities, Australian Government loans issued before 1 November 1968, and interest paid by the ATO.

The total (that is, the gross amount of interest received or credited) must be included in assessable income.

Copy details from all statements to worksheet 3. Keep the worksheet with the trust's tax records.

Discounted, deferred interest or capital-indexed securities

Show at J the appropriate amount of discount, interest or other gain which accrued this income year on a discounted, deferred interest or capital-indexed security:

• that was issued after 16 December 1984
• that had a maturity date of over 12 months from the issue date, and
• where the sum of all payments under the security (except periodic interest, for example, a coupon rate) exceeds its issue price by greater than 1.5%.

TFN amounts withheld from gross interest

Show at I the TFN amounts withheld from gross interest.

12 Dividends

Show at K the total amount of unfranked dividends, and the unfranked amount of partially franked dividends, received.

Show at L the franked amount of franked dividends received.

Show at M the amount of franking credits received directly from a paying company.

Show at N the total of TFN amounts withheld from dividends received.

13 Superannuation lump sums and employment termination payments

Show at V the taxed element of the death benefit superannuation lump sum where the beneficiary is a non-dependant.

Show at W the untaxed element of the death benefit superannuation lump sum where the beneficiary is a non-dependant.

Show at X the taxable component of the death benefit employment termination payment where the beneficiary is a dependant.

Show at Y the taxable component of the death benefit employment termination payment where the beneficiary is a non-dependant.

14 Other Australian income

Show at O any other income received by the estate after the date of death. Include at O salary and wages received after the date of death and the assessable amount of benefits under friendly society funeral policies taken out after 31 December 2002.

15 Total of items 5 to 14

Show the total income amounts.

Deductions

16 Deductions relating to Australian investment income

Show at P the expenses incurred in earning interest and dividends.

18 Other deductions

Show at Q any other tax-related expenses. Do not include capital expenses incurred in administering the estate.

19 Total of items 16 to 18

Show the total deduction amounts.

20 Net Australian income or loss

Show at $ the total amount shown at item 15 Total of items 5 to 14 less the total amount shown at item 19 Total of items 16 to 18.

21 Capital gains

Show at A the net capital gain made by the trustee of the estate. The trustee may need to complete a CGT schedule if the trust has:

• a CGT event occurring in relation to an FMIS interest that is held other than as an initial participant
• total current year capital gains greater than $10,000
• total current year capital losses greater than $10,000.

Show the total amount of net income or loss plus any net capital gain amount.

The amount at item 26 equals the amount at item 24 if no amount is disclosed at item 25 Tax losses deducted.

Page 7

Complete Key financial information items

65 Statement of distribution

If the deceased estate has distributed amounts to trustee beneficiaries, the trustee will need to consider whether they are required to lodge a TB statement. See appendix 12 for more information on these reporting requirements.

If there has been no distribution of income from the deceased estate, the net income amount shown at item 26 Total net income or loss is separated into primary production and non-primary production income. Print the totals at the end of item 65, on page 15 of the tax return, under Income to which no beneficiary is presently entitled, at A and B for primary and non-primary production.

Print an assessment calculation code at V Assessment calculation code. For a list of trust assessment calculation codes, see appendix 13.

For lodgment addresses, see Lodgment.

For payment options, see Payment.