Taxes and Death – Not so certain?

It is a cliché to be sure that the tax man and the undertaker will come for you with the persistence of a Terminator. As our hero in the movie, Kyle, chillingly explains to the target of the Terminator’s mission, Sarah Connor:

“It can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity or remorse or fear, and it absolutely will not stop…………EVER, until you are dead.”

That’s perhaps a tough rap on our Tax Commissioner, but can we take something from our hero’s plea?

While Providence issues little guidance on the question of ones mortality, Courts, legislators and our friends at the ATO have not been shy in making pronouncements in that other sphere of inevitability, tax. Indeed when it comes to the collision of the twin evils of tax payable upon death, these institutions have been more than happy to furnish us with a pathway to salvation. While we’re alive however, we do have some say in what happens next. We have that say in our will.

A will allows a person to control what happens to the things over which they had control in their lifetime, such as their assets, after the person dies. This gives rise to a wide range of possibilities. For example, a will may direct that the executor of the will makes an immediate distribution of those assets to the beneficiaries named in the will – termed an in specie distribution – or that the assets are to be sold and the proceeds distributed in cash. Alternatively, a will may direct that a ‘testamentary trust’ be established in which the assets of the estate are to be invested by the executor\trustee in trust and the resulting income distributed to the beneficiaries, usually nominated in the will.

Before any of this can take place, the will must be located, the executor identified and probate granted by the Court to allow the executor to implement the terms of the will.

Even where the will does not declare the creation of a testamentary trust, the fundamental tenets of trust law apply in relation to the handling of the estate. The deceased assumes the role of settlor, the executor the role of trustee (though these roles can be separately appointed) and the beneficiaries of the will become beneficiaries of a trust.

Depending on the terms of a will, the timing and actions of the executor\trustee, a range of income tax issues may arise. So despite the fact Australia’s tax regime does not include death duties or other imposts directly relating to a person’s passing, the distribution of a deceased’s estate may still attract taxes payable by the beneficiaries and the estate itself.

An executor is required, for example, to arrange for the lodgement of an estate income tax return for financial years after the person’s date of death. Typically, the return will include all income and capital gains derived until the completion of the administration of the estate. This is complicated in the event the income and capital gains of the estate are made available to beneficiaries before completion. As with other trust matters, the question of whether or not the beneficiaries have become ‘presently entitled’ to the income and capital gains of the estate must be determined for tax purposes.

Careful consideration must therefore be given to the timing, and the party responsible for preparing the tax return of the deceased, and decisions on whether the income and capital gains are to be declared in the respective returns of the trust or the beneficiaries’.

Roger Karlsson

rkarlsson@nexiacanberra.com.au

Tax Consultant

19 December 2017

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