The saying that “there are 2 things you can’t escape – death and taxes” is certainly true.
And even after death – the tax office can still manage to take their share of tax.
How tax works after your death
Well hopefully when you die you have a will (if you don’t – you can buy a kit at the newsagency to get one done!). The will specifies the executor(s) who will administer the estate according to their wishes. For a husband and wife, the money might go to the surviving spouse, so your spouse might also be your executor. (also, a close friend or advisor who may act as backup executor, is often chosen as well).
Final individual tax return until date of death
A final tax return is prepared until your date of death. So if you died on 1 October 2011 – your executor would have your accountant lodge a tax return showing your income from 1 July to 1 October 2011. The return would be marked final so that the ATO knows that it is a final return.
If a tax return is not required – it is still possible to notify the ATO via a non-lodgement form that the deceased has ‘no further tax returns required’.
Income until the date of death -practicalities
Salary income is easy in that it just goes into the date of death return. Interest, dividends and rental income are calculated until the date of death.
Estate (Trust) return until trust administered
After death, if there is income, you lodge a return for the estate of the deceased.
A deceased estate is a form of trust. A trust tax return may be prepared from the day after death (in the above case 2 October 2010).
If the person has minimal income or assets – the estate return may not be required.
Estate tax returns to be taxed like an individual – for 3 tax years
A deceased estate is taxed like an individual for 3 tax return years after death – so most executors would try to wind up the estate between a year and two – before the maximum 3 year period elapses.
Between 2 and 3 actual years to be taxed like an individual
So if the deceased passed away 25 June 2010 the trust would be taxed like an individual for the 30 June 2010, 30 June 2011 and 30 June 2012 years. So the estate must be wound up by 30 June 2012 (which is 2 years and 5 days after the date of death). (so 3 years of tax returns really turns into between 2 but less than 3 actual years).
A testament is a will (your final will and testament). A testamentary trust is one which is set up because of a person’s will.
Why would you set up a testamentary trust?
You might have a testamentary trust set up from your will if you are not sure that your beneficiaries will be able to handle the money.
For example – if you have young children (or a disabled adult child). Even testamentary trusts have been setup to stop adult children blowing their inheritance.