EXECUTORS AND TAX – KEY OBLIGATIONS AND DUTIES

Presented by:

Warwick Gilbertson Trusts & Estates Practitioners (STEP)

Accredited Specialist (Family) LLB ATI

TURNBULL HILL LAWYERS

29 Smith Street, Charlestown NSW 2290

Tel: 02 4904 8000 Fax: 02 4943 3657

Email: enquries@turnbullhill.com.au www.turnbullhill.com.au

LEGAL DISCLAIMER

This presentation is offered for education/information purposes only. It does

not constitute specific legal advice. You should not act or rely upon the

information contained within this seminar without seeking the advice of a

qualified solicitor who specializes in the particular area of expertise and

jurisdiction you require.

P a g e | 1

EXECUTORS AND TAX – KEY OBLIGATIONS AND DUTIES (2019)

1. Introduction Solicitors acting in Estate Administration matters have a significant obligation to advise Executors of their duties. It is the common experience of all solicitors that most Executors are ignorant of the extent of their duties and obligations. In general terms, the basic duties of an Executor in a deceased estate are as follows:

a) To arrange for the burial or cremation of the body; b) To locate the Will; c) To collect information about the deceased’s assets and liabilities; d) To apply for a Grant of Probate/Letters of Administration (if

required); e) To pay the deceased’s debts from the assets in the estate (including

taxation obligations); f) To make sure the assets of the estate are not wasted; and g) To distribute the nett estate in accordance with the Will or in

accordance with the relevant law on an intestacy. This paper confines itself to the obligations of the solicitor acting for an Executor to discharge the taxation obligations of the deceased and the estate. Most people are not aware of the complexities and issues that can arise when administering an estate. A lawyer who is retained to advise the Executor on the administration of the estate will almost in every case deal with an estate where there are either major or incidental taxation issues. A lawyer in those circumstances who either ignores those issues or gives incorrect or incomplete tax advice, may find themselves liable. Going forward, should the Executor be later found to have not met the taxation obligations of the deceased or the estate, the Commissioner can impose a tax penalty together with interest in addition to the tax payable.

P a g e | 2 If there is any doubt in the taxation position of an estate, the prudent solicitor will obtain advice from it is recommended that advice be obtained from an advisor prior to the distribution of the estate. The complications from a tax law position will alter according to the nature of the estate of the deceased person. It is to be remembered that the estate of a deceased individual is all the real and personal property of an individual that they owned at the time of their death. The Executor, in their position as the Legal Personal Representative of the deceased, appointed under the deceased’s Will, stands in a trust position to hold the assets that form the deceased’s estate’s corpus for the benefit of the person/s who are named as beneficiaries under the Will, or in the case of Intestacy, those who are named as beneficiaries by virtue of the Laws of Intestacy. Individuals who take on that responsibility as the Executor/Administrator of the estate often do so at the time when they are grieving the loss of their relative or friend. This creates an added responsibility on advisors to be clear in setting out the Executors’ duties and ensuring they are attended to. The terms of the Will create a form of trust at law under which the Legal Personal Representative holds the legal interest in the estate for the beneficiaries. This is to be distinguished from a Testamentary Trust Will in which the will maker specifies a part of their estate which is to be placed in a Trust, the terms of which are within the Will. There are complicated and specific taxation requirements with Testamentary Trust which this paper does not address as time does not permit. Testamentary Trusts can come into being where a part of the estate is held to pass to a minor upon their come of age. 2. Executor’s Level of Accountability When an Executor/Administrator acts in regard to an estate, he or she does so accepting various levels of responsibility which can be summarised as follows:

a) Firstly, as the Executor ‘de son torte’ – this is where the Legal Personal Representative (“LPR”) completes actions for the estate prior to the Grant of Probate/Letters of Administration. Whilst so acting an LPR creates a liability upon himself/herself for their actions from creditors or beneficiaries of the deceased. In essence, they hold

P a g e | 3

all the responsibilities without any of the protections whilst in this position. It is for this reason why a person should obtain a Grant of Probate as soon as possible, thus availing them of whatever protections the law provides;

b) Once appointed, they are required to act responsibly if they are an individual who is not engaged in a profession, business or employment dealing with investment, and to exercise the care, diligence and skill that a prudent person would exercise.

c) If they are a person who is involved in a profession, business or employment dealing with investments or acting as a Trustee, they are required to exercise the care, diligence and skill that a prudent person engaged in that profession, business or employment would exercise in managing the estate.

Various acts of different jurisdictions in Australia provide for that under their various Trustee Acts. In New South Wales, it is the Trustee Act 1925, Section 14A1. Most statute law provides for excusable breaches of trust, but only in circumstances where a person has acted honestly and reasonably and where a Court considers it ought to be fairly excused for the breach of trust due to the manner in which the Trustee committed the breach. With Tax law compliance, there is a specific obligation placed upon the Executor. The Commissioner of Taxation may not be as forgiving of errors by an Executor in regard to the taxation affairs of a deceased person and the estate.

1 Australian State and Territory legislative equivalents to the Trustee Act 1925 (NSW) s14A Duties of trustee in respect to power of investment • Trustee Act 1925 (ACT) s14A • Trustee Act 1958 (Vic) s6 • Trusts Act 1973 (Qld) s22 • Trustees Act 1962 (WA) s18 • Trustee Act 1936 (SA) s7 • Trustee Act 1893 (NT) s6 • Trustee Act 1898 (Tas) s7

P a g e | 4 3. Executor’s Duties An Executor is prudently advised in regard to the deceased’s estate to do the following:

a) Take control of the asset and the investments of the deceased; b) Identify the deceased’s liabilities; c) Determine how the costs of administering the estate are to be met; d) In identifying the assets, obtain full and complete details in a

reasonable time of the bank and building society and financial institution accounts, share portfolios, managed investments, details of the property of the deceased including their residence and investment properties, motor vehicles, superannuation funds, insurance policies and valuable personal property;

e) In regard to real and personal property, maintain insurance over assets to secure the gifts to the beneficiaries under the Will.

Once those assets are determined, consideration needs to be given as how those assets will meet the obligations of the Executor or payment of the debts of the deceased, including mortgage payments, hire purchase agreements, credit card, bank loans, funeral accounts and numerous other liabilities that can exist. There is a specific responsibility of an Executor under Tax law. What is that responsibility? To:

a) Ensure that the tax return of the deceased individual at the date of death have been completed and finalised;

b) If necessary, ensuring that the past tax obligations of the estate are attended to;

c) Should there be a Testamentary Trust, for which the Executor is also the Trustee, seeking advice and acting in accordance with the requirements of the Trustee of an ongoing Testamentary Trust.

P a g e | 5 The specific duties can be summarised as follows:

a) Advising the Australian Taxation Office of the deceased’s death; b) Lodging any outstanding taxation returns of the deceased person,

including a return up to the date of death; c) Lodging income tax returns for the deceased’s estate for the period

from the date of death until the administration of the estate is finalised;

d) Attending to outstanding tax obligations of a deceased person, this can include past year returns and/ or Business Activity Statements;

e) Payment of taxes as required by law and in accordance with the requirements of the Commissioner of Taxation;

f) Obtaining any credits or refunds of payments of the deceased and distributing these in accordance with the terms of the Will to the beneficiaries (franking credits);

g) Maintenance of records for the purpose of completing income tax returns and future audits;

h) Finally, as to Testamentary Trusts where the Executor is the Trustee, the lodgement of the ongoing tax returns for the Trust and the payment of tax as assessed by the Commissioner.

Where a person has been appointed as the Executor (the LPR) of a deceased by virtue of a Grant of Probate or Letters of Administration, then the Executor becomes the deceased individual for the purposes of Tax law (ie to the extent of the assets of the deceased person). The Executor is required to provide returns and other information that an individual is normally required to provide to discharge their obligations enables an appropriately correct assessment of an individual and the estates tax liability. This obligation exists even in circumstances where an individual may not have filed a tax return for a number of years. The Executor, as the LPR, needs to ensure the deceased’s compliance with the tax law is fulfilled. Where a tax liability exists or is created in respect of a period prior to death, then the Australian Taxation Office is not able to collect from the Executor any monies greater than the value of the deceased’s assets which form part of the estate. Where Probate or Letters of Administration are not obtained within six (6) months following death, it is open to the Taxation Commissioner to independently determine the total amount of tax owed by a deceased by virtue

P a g e | 6 of the Taxation Administration Act 1953. Once the assets of an estate have been distributed to beneficiaries, the Tax Commissioner is unable to seek to recover those estate assets from the beneficiaries in the absence of fraud or evasion in the circumstances. This distribution may exist where an Executor has taken reasonable care to determine and complete the tax obligations of an estate of a deceased person, prior to the final administration of the estate and subsequent unexpected liabilities arose. 4. ATO Tax Guidelines The Australian Taxation Office has given guidance on the responsibility of Executors finalising the tax affairs of a deceased individual. In a compliance guideline, PCG2018/4 entitled “Income Tax – Liability of a Legal Personal Representative of a Deceased Person”. This guideline is meant to provide guidance to Executors in dealing with the normal standard estate: attached as appendix to paper. With the estates of high wealth individuals, the obligation of the LPR/Executor is more complex and onerous. The guideline is just what is says, a “guideline” for Executors to enable them, as the LPR to complete the administration of the estate without ongoing concern. It applies where an Executor or an Administrator has obtained a Grant of Probate or Letters of Administration in the following circumstances of the estate:

1. In the four (4) years prior to death the deceased did not carry on a business and was not assessible on a share of nett income of a Discretionary Trust;

2. The estate assets consist of – an interest held in and or shares in a publicly listed company and commonly held entities.

3. superannuation received pursuant to a death benefit nomination; 4. Australian real property. 5. Cash, personal assets including car and jewellery tools etc. 6. Where the estate value is less than $5,000,000.00.

P a g e | 7 What happens if PCG2018/4 applies as to deceased’s tax liabilities?

1. The Executor/Administrator has notice of liabilities of the deceased owing at the time of death. This includes the accrual of charges in respect of those amounts, such as interest;

2. The Executor has notice of liabilities from outstanding assessments, being assessments that occur after death with the returns lodged prior to death;

3. The Executor has notice of tax liability in respect to returns that have not been lodged prior to death – where a taxpayer may not have lodged returns for two, three or more years there is notice of that liability;

4. Notice of liabilities following on from amendments or changes from the lodgement of the tax returns.

Under the guidelines, where an Executor has acted reasonably in lodging all of the deceased’s outstanding returns or advising the ATO that they were not necessary (and the ATO has not given notice to the Executor that it intends to examine the deceased’s personal taxation affairs within six months form the lodgement or six months of the advice of non-lodgement) then the ATO will not treat an Executor has having notice of any further potential claims. The six-month period is crucial and needs to be understood. This period provides Executors with qualifying estates, increased certainty in regard to their obligations under the tax regime. The guidelines provide information in regard to the obligation of an Executor in notifying the ATO that no further lodgement of tax returns are necessary by the deceased. In particular, the guideline sets out the following:

“The ATO will treat an LPR as having notice of a further potential ATO claim relating to returns the deceased lodged (or advised were not necessary) before their death where within six months from the lodgement (or advice on non-lodgement) of the last of the deceased’s outstanding returns, the ATO gives the LPR notice that it intends to examine the deceased’s person’s taxation affairs”.

P a g e | 8

The guideline continues:

“The ATO will also treat an LPR as having notice of a further potential ATO claim where, in the course of administering the deceased’s estate (including the preparation and lodgement of outstanding tax returns) an LPR becomes aware (or should reasonably have become aware) of a material irregularity (or irregularities) in a prior year return. In such a case, the ATO will treat the LPR as having notice of a further ATO claim in relation to that irregularity or irregularities”. “However the ATO will not treat the LPR as having notice of a potential ATO claim if the LPR brings any irregularity promptly to the attention of the ATO in writing (for example by requesting an amendment) and the ATO does not, within six months, issue an amended assessment or indicate that it intends to review the issue”.

It can be seen that the six-month period is crucial. The obligations on Executors are serious and need to be properly understood. Where further assets are discovered that were not previously known to the Executor at the time of the lodgement of the tax returns or the notification of no further return, the obligation on the Executor is to reconsider the deceased’s tax position. The ATO will regard the LPR as having notice of the claim by the ATO. Care needs to be taken in completing the tax returns of deceased estates and finalising the tax affairs of individuals. 5. What should an Executor do to protect themselves?

1. In assessing the taxation risks in an estate, obtain copies of the taxation returns filed by the deceased person;

2. Instruct an appropriately qualified tax agent/accountant with expertise in regard to returns for an individual and an estate holding the assets comprising the deceased’s estate – in other words the more complex, the greater the need for expertise. This is particularly important where the Executor does not have business acumen or professional experience. Also, it assists the legal advisor in not exposing themselves to possible claims for negligence for failing to advise correctly or to warn;

P a g e | 9

3. Until there has been a clear advice given in writing as to the tax liability outstanding or the likely future assessment, there should be no distribution of the proceeds to the beneficiaries. To do so prior to being satisfied, places at risk the Executor to be able to recover those funds from a beneficiary who, upon receipt of them, may have used them for their own purposes. It is to be remembered that an Executor can only recover monies paid to a beneficiary if the beneficiary still has them. Even then, there is difficulty and risk clawing them back.

4. Where you are on notice of circumstances that the returns previously lodged may have errors or where there has not been full disclosure, a diligent Executor should ensure there is a review (unofficial audit) of the taxation affairs of the deceased person prior to administration of the estate. You could ask the ATO for a voluntary audit, but it is not recommended and there is no guarantee that this will occur expeditiously. I am not aware of circumstances where an Executor has voluntarily done that. What does occur is that the Executor gives notice that there has not been full disclosure and that errors have been made, thereby triggering an ATO review.

Obtaining a release or an indemnity from a beneficiary would not be a protection to an Executor in regard to the taxation obligations of the deceased and the estate. The LPR stands in the place of the deceased and the ATO seeks to recover funds from the Executor as the deceased. There is no release that can be provided for this from the ATO. There are times when, with the complexities of a tax issue arising from an estate, a private ruling is sought from the ATO and then a return lodged on the basis of that private ruling. It is to be remembered that private rulings take time and can delay the distribution. Even then, the ruling is made on the basis of information provided and should that information later be found to be incomplete or inaccurate, it is of no assistance. Also, for an Executor, the taxation liability in regard to an estate are ones which cannot be protected from the Executor’s personal estate by the obtaining of a Grant of Probate, giving notice of the intention to distribute the estate and then waiting that six-month period before distribution. That notice will not protect an Executor from the claims of the ATO. It will be effective for other creditors, but not the Deputy Commissioner of Taxation.

P a g e | 10 The obligations of an Executor in regard to the tax affairs of the deceased are quite onerous, particularly as the affairs of many people are complicated. We have entered the period of handing over significant wealth of Australians where there are numerous tax consequences and tax events that arise on the administration of an estate. 6. Practical Things To Do In practical terms an Executor needs to:

a) Cancel GST and ABN registrations in regard to businesses; b) Obtain tax file numbers for the estate or for the estate with a

business, if it is to continue to be operated by the estate; c) Notify the ATO of death, if there has not been a previous notification

of ceasing of lodgement of tax return; d) Lodge outstanding tax returns; e) Lodge a date of death return; f) Lodge an estate tax return for the years of the estate operating if

same is required; g) Pay tax liabilities, as and when they fall due; h) Notify the ATO of any events coming to an Executor’s knowledge that

would trigger a review of the deceased’s tax affairs by the ATO. Failure to any of the above is to leave an Executor exposed to actions by the ATO going forward. On occasion legal estate advisors see notices made to the Executor by the ATO enquiry as to the non-lodgement of a tax return. This may occur in circumstances where no one has notified the ATO of the death of the individual and there is no ongoing obligation of the individual to file tax returns. Their parent, aunt, uncle, grandparent or friend has passed away and no consideration has been given to that obligation. Many people are completely unaware of the risks that they expose themselves and their assets to in these circumstances. Commonly, it is the author’s experience that many people do not even know whether tax returns need to be filed or have any information in regard to the tax file number of the deceased or even indeed, the name of the tax adviser, if any, who they dealt with.

P a g e | 11 When a Will is completed the will maker should be advised to retain the last copy of their tax return with their private papers and their tax file number along with details of their bank accounts and assets, etc, for their LPR to access upon their death. This simplifies the administration of the estate and significantly reduces the risk that an Executor accepts upon appointment. 7. Year of Death Tax Return This is the individual’s income tax return for the year of their death from the preceding 1 July to the date of death. This obligation exists when a deceased:

a) Has tax withheld from income they earnt (e.g. interest tax withheld or franking credits);

b) The deceased had a taxable income greater than the tax-free threshold;

c) There had been PAYG withholding tax met during the year; d) There had been a failure to lodge tax returns in the years prior to the

income year of their death.

Where a tax return is not required, (i.e. where the taxable income may not exceed the threshold) the executor should notify the Australian Taxation Office of death. Where the deceased was required to lodge prior year returns but has not lodged prior to the death, those returns need to be completed and lodged. The individual tax rates for a deceased person in their year of death return include the full tax-free threshold if they are an Australian resident. There would need to be an adjustment and a calculation pro rata of the Medicare levy surcharge for the period of the income year return to the date of death. 8. Estate Tax Returns

An Executor needs to decide whether they are required to lodge a return for the deceased estate. Where the Executor has applied for and obtained a tax file number for the deceased estate the return should be lodged. The decision can only be made once the Executor has identified the assets, liabilities, income and expenditure of the estate during the period that they are administering the estate up until the final distribution. Where the estate is administered over a period of one, two or three years, estate tax returns will need to be lodged for each year.

P a g e | 12 The return to be lodged by the Executor is a Trust Income Tax Return for the estate. Where the estate is administered completely in the same income year as the death of the deceased it may be that an income tax return is not required. This can apply where no person has received any of the estate’s income and the taxable income of the estate is below the tax-free threshold. That exemption only applies in those limited circumstances with all the events occurring within the income tax year. On the administration of the estate, completed in a year outside the year of death an income tax return would be required for each year the estate is administered and where the following may occur:

a) The estate has a net income greater than the individual tax-free threshold;

b) The estate received income from franked dividends and from capital gain;

c) Income was received from sources where tax was withheld; d) The estate carried on a business; e) A beneficiary (such as a minor) was presently entitled to a share of

the income of the estate. Normally the Commissioner assesses the income for an estate in those circumstances under Section 99 of the ‘Income Tax Assessment Act’ 1936.

This will continue to be the position for an estate for a period of three years from the deceased’s date of death. Should an estate remain unfinalised and earning income for a period greater than three years after the date of death, then the estate will lose the tax-free threshold and will pay tax on all income. It is to be remembered the deceased estate return does not include the Medicare levy and surcharge. In general terms, the Commissioner of Taxation deals with the taxation of estate income as set out in Taxation Ruling IT2622. A reading of that Ruling shows that the Commissioner acts in three ways in regard to the administration of an estate. 1. Firstly, during the early administration stage of the estate where

income is used to meet debts of the deceased person and no beneficiary is entitled to the income, the Executor is assessed on the net income of the estate;

P a g e | 13

2. Secondly, where the Executor has been in a position to determine which part of the estate does not need to pay debts and pays out an interim distribution, the beneficiaries may be presently entitled to some income and may be assessed on some of the net income and the Executor on the remainder of the income;

3. Finally, upon all debts been paid out, the estate assets being available and distributed to all beneficiaries, the beneficiaries are presently entitled to the income and will be assessed on that income in their returns.

It is important to understand at what stage of administration you are at when advising an Executor in regard to their tax obligations. 9. Is an estate a Tax Residency for Australian Tax Purposes?

By virtue of Section 95 sub-section 2 of the ITAA 1936 where a trustee/ Executor of an estate is a resident or if the central management control of the estate was in Australia anytime during the year of income, the estate would be an Australian Resident Estate. Nearly every estates advisors deal with, will be considered an Australian Resident Estate. Where the Executor of an estate is a foreign resident (for example a child of the deceased who is living overseas and is a non- tax paying Australian) the estate will not be an Australian Resident Trust Estate for tax purposes. This occurs even where the Legal Personal Representative provides a Power of Attorney to an Australian resident solicitor or other third party to assist with the administration of the estate. This is because such an arraignment is that of agency. The Commissioner of Taxation treats the managing control of the estate to be vested with the Executor who resides overseas. This has consequences for the estate as follows:

a) Only net income from Australian sources will be assessed; b) The Executor will be subject to the foreign residence tax rates and/ or

withholding tax regime- the Executor in these circumstances will lose the tax-free threshold of $18,200.00;

c) The Executor will be unable to access the 50% discount on sale of Taxable Australian Property (“TAP”).

P a g e | 14 If the estate is an Australian Tax Resident estate, the Executor is assessed for income purposes on all income not just income sourced from Australia at the normal Australian tax rates. 10. Non-resident Australian foreign beneficiaries Where a foreign resident is entitled to the estate income, the Executor bears the responsibility of the payment of income tax on that income. With a foreign resident, there are two situations in which the Executors may incur an income tax liability.

They are as follows:

a) Foreign Resident Withholding Tax – (i.e. tax withheld by way of interest, dividends and royalties) - the withholding of this income is a final tax payment. There is no requirement to report the income again. It is the organisation making the payment to the foreign resident who has the obligation to withhold and submit the tax to the Australian Taxation Office. Care needs to be taken, particularly with entitlement of the beneficiaries who are overseas, as there may be obligations upon the Executor. There is also, depending on where the resident lives, the withholding rate of tax variation from 15% to 30%. It is recommended advice be sought.

b) The second circumstance is where a beneficiary who is presently entitled to income is a foreign resident, the Executor will be assessed on behalf of the beneficiary on their share of the net income (this is not taxed under the withholding regime). This is commonly income from a share of rental or if an Executor continues a business for a period of time within the estate. Section 98 of ITAA 1936. The Commissioner issues a separate Notice of Assessment against the Executor on behalf of each individual foreign resident beneficiary under Section 99 of the ITAA 1936.

Accordingly care needs to be taken in regard to estates where income is earnt and is to be distributed to foreign residents.

P a g e | 15 11. The Obligation of Executors in Regard to Gifts to Foreign

Resident What happens where foreign residents receive what is described as Taxable Australian Property. Taxable Australian Property (“TAP”) includes real estate in Australia or an interest in real estate that is in Australia. Non- taxable Australian property is commonly personal property including interests in share portfolios or managed investments. Where non-taxable Australian property owned by the deceased, passes to a foreign resident under the terms of the Will, the Commissioner will capture any income tax due on the growth in the value of the asset since it acquisitions. There is no rollover relief in these circumstances. These events are referred to as CGT event K3 of the Act. This statutory provision sets out that there is a deeming of a CGT event as at the date of death of the deceased tax payer. Thus, the gain or loss in regard to the non-TAP asset is to be included in the deceased’s tax return for the year lodged up to the deceased’s date of death. There is not a CGT event K3 where a Taxable Australian property that is a CGT assessible (i.e. real property) passes to a foreign resident as a beneficiary. In these circumstances the asset will be taxed in the hands of the foreign resident at the time of the disposal of that asset by the foreign resident. Should you have an estate where an Australian resident who receives an inheritance from the United States and the beneficiary is a non-US citizen, they should seek advice in complying with the United States of America’s internal revenue service requirements. This is particularly so with United States assets in excess of $60,000.00. 12. Capital Gains Tax 1. Where there is a disposal of a CGT asset resulting in change of ownership

from one person (“the deceased”) to another person CGT event A1 occurs. This event can give rise to a capital gain or a capital loss.

In estates there is a special rule with CGT. When a deceased tax payer dies, which results with a capital gain or loss, the CGT event for the CGT asset the deceased owned just before dying is disregarded: Section 128-10 ITAA 1997

P a g e | 16 This provision is confined to the assets the deceased owned at time of death. Death itself does not trigger a CGT event except in circumstances when a CGT asset is passing to a beneficiary that is:

a) A tax-exempt body; b) A compliant superannuation fund; c) A non- resident where the asset is a non-taxable Australian property.

When the estate asset is classified as Taxable Australian Property it is relevant whether that property was owned or acquired prior to the 20 September 1985 (i.e. pre- CGT asset) Assets acquired after that date may be assessible for Capital Gains Tax. This means that transfer of estate asset to one of these three above groups of beneficiaries triggers a Capital Gains Tax event K3. The capital gain or loss is accounted for in the deceased’s tax return completed for the year of death: Section 104-215 of ITA 1997

In regard to tax exempt bodies, the gain or loss could be disregarded on some testamentary gifts by virtue of Section 118-60 of the ITA 1997. 2. Where an executor is dealing with post CGT assets (i.e. after 20 September

1985) which have been left to a charity, the taxation effects for the estate need to be considered by the Executor prior to distribution. If sufficient powers are granted in the Will for the Executor to sell the assets and distribute the cash or distribute the assets ‘in specie’ those alternatives should be considered. If the charity has a deductible gift status, sale of the assets by the executor would trigger Capital Gain Tax assessment. The transfer and distribution in specie would have the capital gain or loss disregarded. If the charity is not a deductible gift recipient, the gain or loss is included in the deceased’s personal tax return.

What happens when the CGT asset passes to a beneficiary from the Executor?

a) The beneficiary receiving the asset (e.g. a block of land, or house) is

taken to have acquired that property on the date of the deceased’s death: Section 128-15 ITA 1997

b) The beneficiary becomes the owner as it is given to them and/ or

transferred to them by the deceased’s Legal Personal Representative (Executor) in satisfaction of their entitlement in the deceased estate. The Act sets out when the CGT discount period commences. This

P a g e | 17

depends on whether the asset in the hands of the deceased was a pre or post CGT asset: Refer to 128-15 & 115-30 of ITAA 1997.

With a pre-CGT asset (i.e. acquired before 20 September 1985) the Executor is deemed to have acquired the asset on the date of death and accordingly its market value is on that day. If the Executor (LPR) sells the asset within 12 months of the date of death, there is no CGT discount available. If the asset is a post CGT asset (i.e. acquired after 20 September 1985) the Executory (LPR) is deemed to have acquired the asset at the same time and cost base as the deceased. The 50% discount is available if sold within 12 months of the date of death. The principle with post-CGT assets, is that the cost base of the asset is inherited, and the CGT discount applies from the time and date of the acquisition by the deceased. 3. What happens with jointly owned assets? Jointly owned assets are held either as joint tenants or tenants in common. Assets that are held as joint tenants are not part of the estate assets as they do not pass by virtue of the Will but pass by survivorship. Assets that are held as tenants in common, the deceased’s interest passes in accordance with their Will as part of their estate. Where a CGT asset is owned in joint tenancy, the deceased’s interest under the legislation is deemed to have been acquired by the surviving joint tenant or tenants. The date of the acquisition is the date of the death: Section 128-50(1)(2) ITAA 1997 With real property Title details inform the nature of the joint ownership. Other assets, such as monies held on deposit in bank accounts, shares and managed investments are usually treated as joint tenant ownership. It is possible for documentation within the estate to indicate a contrary intention. The joint tenancy is presumed on a prima facie basis. Should an Executor acquire assets during the administration phase of the estate, the Executor as under the estate structure, takes the asset with a Capital Gains Tax liability and on the transfer of those assets to a beneficiary there will be a Capital Gains Tax event within the estate. The exception is where an asset was acquired to satisfy a legacy. Again, power needs to have been given within the Will for the Executor and Trustee to do so.

P a g e | 18 4. The Deceased’s Main Residence There is a CGT exemption where the Executor disposes of a dwelling within 2 years of the deceased’s death. Remember the 2-year period applies to the settlement date of the Sale. Not the date of the Contract for Sale. The statement is simplistic. There are a number of factors that are considered when the Executor sells the deceased’s dwelling or where the dwelling is sold by a beneficiary of the estate. These factors determine whether there will be a full or partial CGT exemption available. These factors include:

a) The timing of events in relation to the dwelling; b) Whether the dwelling was used to produce income and for what

period; c) Who has been living in the dwelling after death.

This exemption is available for 2 years or any longer period allowed by the Commissioner: Section 118-195 ‘Income Tax Assessment Act’ 1997 The Main Residence exemption can be summarised as follows:

a) Where the residence was acquired before 20 September 1985 (a pre- CGT asset) the full exemption applies if the disposal occurs within the 2 years. This is even in circumstances where the deceased did not use the dwelling as the main residence or even where there are one or more properties owned which may qualify for a full or partial resident exemption;

b) With a post 20 September 1985 acquired dwelling (this is normally the case) the full exemption applies where the property was the main residence of the deceased immediately before the death and where it is not being used to produce income;

c) Again, with a post CGT asset, where the property was not the deceased’s main residence or was used for income producing purposes a partial exemption may apply: Sections 118-195 & 118-200 ITAA 1997;

P a g e | 19

d) The Commissioner may exercise a discretion to allow an extension of time for the 2-year period. Where the delay in the sale of property is caused by circumstances beyond the control of the Executor. Such circumstances can include a challenge to a will under the Succession Act or for a claim by way of proprietary estoppel or unjust enrichment against the asset, the complexity of the estate, the Executor’s unforeseen personal circumstances that give rise to delay or the delay in the actual completion of the sale through no fault of the vendor. It is obviously preferable not to have to request the Commissioner to exercise the discretion. The ATO have issued a guideline in PCG 2019/5 as to the factors the Commissioner will consider. It is worthwhile being familiar with the terms of this Practice guideline.

There may be a full exemption under the main residence exemption if:

a) It is a pre- CGT asset; b) The dwelling was the main residence of the deceased spouse or a

natural person had the right to occupy the dwelling under the Will; or c) With a property acquired post CGT and for the period after the

deceased’s death to the date of sale the dwelling was used as the main residence of the deceased’s spouse where the dwelling was the deceased’s main residence just before death and the dwelling was not being used for the purpose of producing income (ie rented out).

5. What is the situation in regard to non- resident beneficiaries for capital

gains tax purposes? Real property (i.e. classified as Taxable Australia Property (TAP)) received by a foreign beneficiary or comes under the control of a foreign resident Executor (LPR) does not of itself trigger a Capital Gains Tax event. On the future sale of the property the CGT event occurs, and the proceeds of sale become assessible for capital gain at that time. At that time, the owner, (being the beneficiary), will be required to obtain an Australian Non-Resident Tax File Number to enable to them to declare their gain in a tax return and pay the tax.

P a g e | 20 On the sale of real estate to foreign residents there are capital gain withholding tax rules which came into existence from 1 July 2016. Currently, in accordance with Australian Taxation Law, with a non-resident beneficiary, the Executor is liable to pay tax on the beneficiary’s share of any income distributed in accordance with following rates:

$0.00 to $90,000.00 - 32.5% $90,000.00 to $180,000.00- 37% Over $180,000.00 -- 45%

Again, these are subject to the withholding tax that is collected by the Executor and paid to the Australian Taxation Office. The beneficiary would then need to file a Non-Resident Tax Return with the ATO. CGT assets usually inherited by a non-resident are either real property or publicly listed shares. Publicly listed shares are non-taxable Australian property. Real property within Australia or with an interest that has a strong connection to Australia are Taxable Australia Property. Where the asset is a post CGT asset and is non taxable Australian Property (ie shares), CGT event K3 may apply where the asset is distributed in specie to the non-resident. A deemed capital gain or loss will need to be accounted for in the deceased’s personal tax return: Section 104-215 ITAA 1997 For Executors of estates, they need to be conscious of these provisions for non-resident beneficiaries in the following circumstances:

a) Where the deceased’s property to be dealt with has a value in excess of $750,000.00;

b) Where the Executor (LPR) or the beneficiaries are non-residents for tax purposes and the property is sold in accordance with the beneficiaries’ request;

c) When a non-resident Executor is acting for a deceased.

Under the Capital Gains Withholding Tax Rules, where an LPR sells the residence or other property of an estate, the LPR needs to be aware that the purchaser who is buying from somebody who is a non-resident LPR or a non-resident vendor has an obligation to withhold 12.5% of the purchase price and to pay this to the ATO. This would occur in every instance unless a clearance

P a g e | 21 certificate is provided, or it is a sale of real estate of less than $750,000.00 or where the Commissioner has provided a variation of the amount to be withheld. It is not my intention to embark on a discussion of this regime. Suffice to say practitioners advising non-resident LPR’s transferring or selling real estate or non-taxable Australian property for the benefit of non-resident beneficiaries should make their own enquiries and to obtain advice as to the taxation obligations. Generally, where there is an obligation on the Executor and the taxation obligation is not transferred to the beneficiary, that calculation and assessment for tax purposes is dealt with in the deceased person’s personal tax returns for the year of their death. 13. Miscellaneous considerations: 1. Where a deceased has accumulated tax or capital losses, those losses are

offset against income in the last personal tax return of the deceased. They are not carried forward for the benefit of the estate tax returns nor for the benefit of the beneficiaries;

2. GST - Where the deceased had an Australian Business Number (“ABN”),

that number cannot be used after death. The estate needs to obtain another ABN to finalise the affairs of the estate, if the business operation will exceed the registration turnover threshold. This also applies with a testamentary trustee.

Generally, where the deceased was a partner in a partnership at date of death, consideration needs to be given as to whether the current ABN and GST registration continues or whether a new ABN and registration is required. This usually depends on whether the partnership is regarded as a General Law partnership or a Tax Law partnership. This may impact in a small estate where the deceased is the husband and the couple carried on a tax partnership leasing commercial property.

Practitioners may wish to have regard to GST ruling GST 2003/13 and GST 2004/6.

P a g e | 22

14. Final comments – Get Advice

As can be seen with deceased estates, there is a significant tax mine field for Executors to transverse when fulfilling their duties and obligations to the estate. In summary an Executor should be advised to: a) Ensure that all tax obligations that rest upon them are properly assessed,

returns filed and tax paid; b) Documentation that supports the deceased’s cost base assessment on the

sale of their asset should be provided to the beneficiary receiving that asset;

c) Ensure that all these obligations are met prior to the distribution of the estate;

d) Interim distributions should be approached with great care adhering to the saying “less is more”.