Deceased Estate Tax in Australia: What Applies And When

When someone dies, their tax obligations do not die with them. While Australia does not have inheritance tax or death duties, a deceased estate can still have tax responsibilities depending on the circumstances.

For executors and beneficiaries, this can come as a surprise. Understanding how tax applies to a deceased estate helps avoid delays, unexpected liabilities, and unnecessary stress during what is already a difficult time.

What Is A Deceased Estate for Tax Purposes?

Assets do not pass immediately to beneficiaries following death. Instead, a deceased estate is created and, for tax purposes, treated as a separate entity while the administration process is underway.

The estate exists from the date of death until all assets have been collected, liabilities settled, and distributions made. During this period, the legal personal representative, usually the executor named in the Will, is responsible for managing the estate’s tax affairs.

Is There Inheritance Or Estate Tax In Australia?

Australia does not have inheritance tax or death duties. Beneficiaries are not taxed simply because they receive an inheritance.

However, this does not mean that no tax applies at all. Tax can still arise where: 

• the estate earns income,
• assets are sold, or
• certain benefits are paid.

This is where confusion often sets in.

Do Tax Returns Need To Be Lodged After Someone Dies?

If you are appointed as the executor or legal personal representative of an estate, it is important to understand that the deceased’s tax affairs still need to be managed and lodged.

There are usually two types of tax returns to consider.

The final individual tax return covers income earned from 1 July of the financial year in which the person died, up to the date of death. This is the same financial year you would normally think about when lodging a tax return, and it includes income such as wages, pensions, investment income, or business income received before death.

The deceased estate tax return covers income earned after death, while the estate is being administered. This can include rental income from property, interest on bank accounts, dividends from shares, or income generated by a business. If the estate earns income, it generally needs its own tax file number and must lodge a separate tax return.

It is important that any outstanding tax liabilities are identified and paid before assets are distributed to beneficiaries. Executors who distribute assets too early, without accounting for tax, can become personally liable for unpaid amounts.

Because each estate is different, the exact returns required will depend on the deceased’s circumstances and whether the estate earns income during administration.

How Is Income Earned By A Deceased Estate Taxed?

If a deceased estate earns income, it is taxed under special rules that depend on how long the estate has been under administration.

For the first three income years after death, a deceased estate is generally taxed at individual income tax rates and benefits from the full tax free threshold. No Medicare levy is payable during this period.

If the administration of the estate continues beyond three income years, higher trust tax rates may apply. These rules are intended to encourage estates to be administered and finalised within a reasonable timeframe.

Capital Gains Tax And Deceased Estates

Capital gains tax does not apply simply because a person has died. However, CGT may arise later depending on what happens to the assets.

CGT may be payable where:

• The executor sells an asset during the administration of the estate
•  A beneficiary later sells an inherited asset
• An inherited property that was not the deceased’s main residence is sold

In some circumstances, exemptions or concessions may apply, such as where the deceased’s main residence is sold within the required timeframe.

CGT rules for deceased estates depend on factors such as when the asset was acquired, how it was used, and when it is sold, which means outcomes can vary significantly.

Do Beneficiaries Pay Tax On Inherited Assets?

Receiving an inheritance itself is not taxable income.

However, beneficiaries may still have tax obligations in certain situations, including where they receive income from the estate before it is finalised, where they later sell inherited assets and a capital gain arises, or where superannuation death benefits are paid to non-dependant beneficiaries.

The tax outcome depends on the type of asset and what happens to it after death.

Other Taxes That May Apply To A Deceased Estate

Depending on the circumstances, additional taxes may apply, including:

• Land tax on property held by the estate, subject to state thresholds
• Tax on certain superannuation death benefits
• Transfer duty, depending on how assets are transferred and the relevant state rules

These obligations vary based on asset type and location.

Executor Responsibilities for Deceased Estate Tax

Executors have a legal obligation to ensure all outstanding tax liabilities of the deceased and the estate are properly dealt with before distributing assets to beneficiaries.

If tax debts are overlooked and assets are distributed too early, an executor may become personally liable for unpaid amounts. This makes careful administration and early advice particularly important.

Why Getting Advice Early Can Save Time And Stress

Deceased estate tax issues often sit at the intersection of tax law, estate law, and practical administration. Timing, asset type, and documentation all affect the outcome. Getting advice from our Estates or Accounting teams early can help executors understand their obligations, avoid costly mistakes, and ensure the estate is administered efficiently and in accordance with the law.

Disclaimer:

The information contained in this article is for general informational purposes only and is not intended to provide legal advice or substitute for the advice of a professional. This information does not consider your personal circumstances and may not reflect the most current legal developments. Should you need advice, please contact our firm for targeted information relating to personal your situation.