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Is the Executor Liable for a Deceased’s Tax Liability?

wills & estates

When someone dies the person responsible for the multiple duties involved in administering and distributing his or her estate is known as a legal personal representative (LPR).

This person is generally appointed to this important role by being named as Executor in the deceased’s will. In situations where the Executor named in the will is unable or unwilling to perform their role, or where the deceased died intestate (without making a will), then the LPR is appointed as administrator under a grant of letters of administration issued by the Supreme Court.

In addition to tasks such as collecting the deceased person’s assets, paying any of his or her outstanding debts and liabilities, and finally distributing the estate to the beneficiaries, an LPR also has the responsibility of dealing with the deceased’s outstanding tax liabilities.

This is a particularly important task because it is possible for the LPR acting as Executor to become personally liable for the payment of the tax liabilities of the estate if certain actions are not taken. It can also be an onerous task where the deceased’s tax affairs were complicated, or they had a number of outstanding tax returns, managed their own tax affairs or failed to keep proper records on tax matters. The advice and guidance of an experienced legal professional can be invaluable during this process.

What are an LPR’s duties regarding the deceased’s tax affairs?

When the testator dies, the LPR has a number of tasks to perform related to the deceased individual’s tax affairs. These include:

  • Notifying the Australian Taxation Office (ATO) of the deceased’s death;
  • preparing and lodging any outstanding tax returns of the deceased with the ATO;
  • arranging for a final tax return (also known as a ‘date of death return’, which covers the period from 1 July to the date of death) for the deceased to be prepared and lodged with the ATO including, if appropriate, a Return Not Necessary Advice;
  • attending to the payment of any tax liabilities.

Where the deceased had more complicated financial arrangements, such as ownership or partnership in a business, involvement in a trust, or membership of a self-managed superannuation fund (SMSF), then the LPR’s tasks may be far more time-consuming and the expertise of legal and accounting professionals should be relied on.

It’s important to note that the deceased’s individual tax affairs are considered separately by the ATO from the tax liabilities of the estate. For taxation purposes, the estate is treated as a trust. This means the LPR may also be required to obtain a tax file number for the estate, arrange for estate-related tax returns to be prepared and lodged with the ATO, and pay any outstanding tax liabilities.

When does an LPR’s personal liability arise?

Finalising a deceased person’s tax matters requires the LPR to collect all the assets of the estate as well as provide and pay for its liabilities. Further tax liabilities can also arise during the estate administration process, such as when capital gains tax is payable on property or shares held by the deceased and sold by the LPR in the estate. Income tax may also be payable on any superannuation death benefit paid to the LPR.

Tax liabilities are notified to an LPR by a notice of assessment from the ATO, but the Tax Office can also review and issue an amended notice of assessment up to four years from the date of the initial assessment.

This can prove problematic for an LPR who distributes the estate within this four-year period.  If an LPR makes a distribution and subsequently receives an amended notice of assessment from the ATO within four years of the original assessment, the LPR can become personally liable to the ATO for the shortfall. An LPR’s personal liability for tax liabilities is capped at the value of the deceased’s assets collected into the estate. The LPR may also be entitled to recover amounts that they have personally paid to the ATO from the estate and/or beneficiaries who have received distributions.  Recovery of funds from beneficiaries may not be possible, however, where a beneficiary no longer holds the funds distributed to them by an estate.

ATO guidance

In August 2018 the ATO issued Practical Compliance Guideline PCG 2018/4 designed to guide LPRs in avoiding personal liability while settling an estate’s tax matters as well as lengthy delays caused by the four-year review period. The Guideline applies only to tax liabilities incurred up to the death of the deceased person and does not apply where probate or letters of administration have not been obtained.

The Guideline is designed to apply only to ‘smaller and less complex estates’, meaning where the estate’s assets comprise listed shares or units, death benefit superannuation, real property in Australia, cash and personal assets with a total market value at date of death below $5 million. Beneficiaries must also not be foreign residents, a tax exempt entity or a complying superannuation entity.

The Guideline sets out the situations where an LPR is deemed to have notice of a claim from the ATO, including where:

  • Amounts are owing at the time of death (including interest);
  • there are liabilities owing from outstanding income tax assessments and outstanding tax returns;
  • there are liabilities from amendments arising out of a review by the ATO; and
  • further assets are discovered after completion of the estate’s administration.

The LPR will be regarded as not having notice if they have acted reasonably in lodging all of the deceased person’s outstanding returns, and where the ATO did not give notice to the LPR of its intention to examine the deceased person’s taxation affairs within six months of lodgment of the last outstanding return(s) by the LPR.

The importance of expert advice

The role of an LPR can prove to be a difficult balancing act between the need to comply with the requirements of authorities such as the ATO, and the desires of beneficiaries to have the deceased’s estate distributed as soon as possible.

Sometimes this middle position can cause an LPR acting as Executor to abandon or forget the caution needed to fulfil the role. The wisest course of action is to consult legal professionals such as Delaney & Delaney who have a century’s worth of experience in advising on wills and estates.

We will provide timely, focused advice to help an Executor take the right steps all the way through the process of estate administration while avoiding any personal liability. Contact us today on (07) 3236 2604 if you have any questions after reading this article.