During the administration of an estate, a solicitor must consider the effects of the:

• relevant state and territory laws relating to deceased estates;

• Schedule 1 of Taxation Administration Act 1953 (Cth);

• Income Tax Assessment Act 1936 (Cth); and

• Income Tax Assessment Act 1997 (Cth).

An executor is appointed by the deceased person's will to administer the deceased’s estate in accordance with the terms of his or her will. The Supreme Court can also appoint an administrator to deal with the deceased estate, where there is no valid will or the person nominated to be executor cannot discharge their duties. The executor or administrator is known as the legal personal representative. The legal personal representative holds the deceased’s estate on trust for the beneficiaries of the estate. The legal personal representative is responsible for administering the deceased’s estate in the best interest of the beneficiaries. Solicitors should always seek specialist tax advice on tax issues where there are uncertainties.

In Taxation Ruling IT 2622, the Commissioner of Taxation identifies the following stages in the administration of a deceased estate following a grant of probate:

• initial stage — the net income of the estate is applied to reduce debts and testamentary expenses;

• intermediate stage — part of the net estate that is not required to pay debts and testamentary expenses, may be paid to beneficiaries;

• final stage — the debts and testamentary expenses are paid or provided for in full and the net income of the estate is available for distribution to residuary beneficiaries. It is at the end of this stage that the estate is said to be fully administered.

The following diagram illustrates the stages of administration of an estate, the responsibilities of the legal personal representative and the tax consequences:

The Commissioner accepts that if, during the intermediate stage, the legal personal representative actually pays some of the income of the estate to, or on behalf of, a beneficiary, that beneficiary is presently entitled to that amount and that amount is taxed to the beneficiary accordingly.

There are three unique classes of taxpayer to consider in relation to the administration of a deceased estate. They are:

• the deceased in respect of the financial year up to the date of death;

• the legal personal representative of the deceased in respect of the net income of the estate and/or any testamentary trust to which no beneficiary is presently entitled;

• the beneficiaries of the estate to the extent that any of them is presently entitled to a share of the net income of the estate and/or any testamentary trust.

The legal personal representative has an obligation to fulfil the taxation responsibilities on behalf of the deceased person and the deceased’s estate and to notify the ATO of the death of the deceased person.

See Tax obligations of the legal personal representative.

The legal personal representative is responsible to lodge a final tax return for the deceased covering the period since the end of the last year of income up until the deceased’s date of death.

Further, if a grant is not taken out within six months of death, the ATO may make an assessment of the tax owing by a deceased taxpayer.

See Tax obligation from time of last return to date of death.

After the date of death, the legal personal representative will need to prepare and lodge a trust tax return for the deceased estate if there is tax payable on the income or if tax has been withheld from that income. The legal personal representative will need to apply for an estate tax file number and file a trust tax return for each income year until the deceased estate is fully administered, that is, where all of its assets and income are distributed to the beneficiaries and no longer deriving income.

See Tax obligation during administration.

It is at the completion of the administration of an estate, where the debts and testamentary expenses are paid or provided for in full and the net income of the estate is available for distribution to residuary beneficiaries that the beneficiary of the estate is taxed on his or her share of the net income of the trust estate.

See Tax obligation for completed administration.

Where an estate has been fully distributed and its administration completed by the legal personal representative, and subsequent audits by the ATO discovered that there are unpaid taxes of the deceased person and further assessment(s) are issued, the legal personal representative is personally liable if he or she distributes property of the estate without meeting its tax liabilities in full.

According to the ATO, under the archived Chapter 32 of its Receivables Policy (there is currently a proposed Practice Statement Law Administration (PS LA 3643) rewrite of Chapter 32 of the ATO Receivables Policy, the legal personal representative is personally liable to the full value of the estate assets if:

• the assets were distributed with knowledge of an outstanding claim by the Commissioner;

• the LPR has not made reasonable attempts to establish any tax-related liability; and

• the LPR has failed to lodge any outstanding returns to the date of death, or for income received by the estate.

See Tax liability after completion of estate administration.

The “net income” of the estate is required to be determined in accordance with the definition of that term in s 95 of the Income Tax Assessment Act 1936 (Cth). This is calculated as the total assessable income of the estate as if he or she were a resident taxpayer in respect of that income, less all allowable deductions.

See How to calculate net income.

This guidance note discussed how estate income is taxed.

See How is estate income taxed.