Deceased Estates in Australia: A Step-by-Step Guide to Tax Obligations for Executors

Acting as executor of a deceased estate is one of the most significant responsibilities a person can be asked to take on — and most people have little idea of the tax obligations involved. Mistakes made during estate administration can result in beneficiaries receiving less than they're entitled to, and executors being personally liable for tax shortfalls.

This guide provides a practical, step-by-step overview of the tax obligations associated with a deceased estate in Australia.

Step 1: Notify the ATO of the Death

As executor, one of your first obligations is to notify the ATO of the deceased's death. This can be done by:

• Calling the ATO on 13 28 61
• Lodging a change via the ATO's online services (if you have access)
• Engaging a tax agent to notify on your behalf

You will need a copy of the death certificate, the deceased's Tax File Number (TFN), and your own identification as executor. The ATO will then flag the deceased's account and ensure no further activity (such as automated income matching) creates incorrect tax debts.

Step 2: The Date of Death Tax Return

The deceased person's final individual tax return covers the period from 1 July of the last financial year to the date of death. This is commonly called the "date of death return" and must be lodged by the executor.

This return includes all income earned up to the date of death:

• Salary and wages (final pay, unused leave paid out)
• Rental income up to date of death
• Dividends and interest received
• Business income (if the deceased carried on a business)
• Superannuation income stream payments up to date of death
• Capital gains from asset sales completed before death

The normal individual income tax rates apply to the date of death return. The deceased's tax-free threshold, offsets, and deductions are available pro-rata for the period.

Step 3: The Estate Tax Return (Trust Tax Return)

After the date of death return, the estate itself becomes a taxable entity — technically a trust, with the executor as trustee. If the estate earns income during the administration period (rent from a property, dividends received by the estate, interest on bank accounts), a Trust Tax Return must be lodged for each financial year the estate remains open.

The estate (as a trust) has its own TFN and lodges a trust return. Tax rates for deceased estates are concessional:

• First two years after death: the estate pays tax at individual rates including the tax-free threshold — this can mean significant tax savings if income is modest
• After two years: the estate is taxed at the top marginal rate (47%) on all income — which is a strong incentive to finalise estate administration promptly

Step 4: Capital Gains Tax on Estate Assets

CGT treatment of assets held by a deceased estate is a major area of complexity.

The General Rule: Deemed Acquisition at Death

When assets pass to a beneficiary or are sold by the executor, there are deemed acquisition and disposal rules. For most assets, the beneficiary is taken to have acquired the asset at the date of the deceased's death at the deceased's cost base (not market value at death). This means any capital gain that accrued during the deceased's lifetime is not taxed at death — it's deferred until the beneficiary sells.

Pre-CGT Assets (Acquired Before 20 September 1985)

If the deceased acquired the asset before 20 September 1985 (the introduction of CGT), the beneficiary is taken to have acquired it at market value at the date of death. This effectively wipes any gain that accrued before CGT was introduced — a significant benefit for older estates with long-held assets.

The Main Residence Exemption in Deceased Estates

The deceased's main residence (family home) can be sold CGT-free provided:

• The home was the deceased's main residence and was not used to produce income, AND
• The sale occurs within 2 years of the date of death (a 2-year rule)

If the sale takes longer than 2 years, the ATO may allow an extension for circumstances beyond the executor's control (e.g., complex probate, contested wills), but this is not guaranteed. Acting promptly is important.

Step 5: Superannuation Death Benefits

Superannuation does not form part of the estate (it passes outside the will, unless a binding death benefit nomination directs it to the estate). However, it's one of the most complex tax areas in deceased estate planning:

• Tax dependants (spouse, de facto partner, children under 18, financial dependants) receive death benefits tax-free
• Non-tax dependants (adult children, friends, etc.) pay tax on the taxable component at 17% (including Medicare levy). For large super balances, this can be a significant liability.
• The tax-free component of super is always paid tax-free to any beneficiary
• A reversionary pension continues paying a pension to the surviving spouse without needing to commute the fund

Step 6: Final Estate Distribution

Once all assets are realised or transferred, debts are paid, and all tax returns lodged and assessed, the executor can distribute the remaining estate to beneficiaries. Each beneficiary receives their share according to the will (or intestacy rules if there is no will).

Important: Do not distribute estate funds before settling all tax obligations. If you distribute and then discover a tax debt that the estate can't pay, you as executor can be personally liable for the shortfall.

Common Executor Tax Mistakes

• Failing to lodge the date of death tax return (and incurring penalties)
• Distributing estate funds before all tax liabilities are settled
• Missing the 2-year CGT main residence exemption window on the family home
• Incorrectly treating super as part of the estate (it generally isn't)
• Not keeping adequate records of estate income and asset transactions
• Delaying estate administration beyond 2 years (triggering top-rate tax on estate income)