RSM Australia

Death is a taxing matter

Wealth Management Insights

There are two certainties in life - death and taxes – simple! 

However to complicate matters the two interact producing complexities as well as planning opportunities.

Whilst family members grieve the passing of a family member, the family advisor needs to ensure financial and taxation matters are attended to in an efficient and respectful manner whilst also ensuring any planning opportunities are effectively utilised.

Taxation of an Estate

Upon a person’s death, there is a requirement to lodge an income tax return up until the date of death. This is the person’s final tax return and is assessed in the normal manner at individual marginal tax rates.

From the date of death until the deceased person’s estate is settled, there can be a requirement that a Deceased Estate Tax Return be lodged.  The tax rates that apply to the deceased estate depend on the period of time after the person’s death.

For the first three income years, income from the deceased estate is taxed at individual marginal rates with full tax-free threshold intact. There is no Medicare levy payable and some concessional rebates are lost. As such the date of death becomes crucial. If a person passes in June, the tax return for that part year counts as one of the three income years.

For the fourth year onwards, the tax rates change to effectively remove the benefit of the tax free threshold and tax is payable from almost the first dollar of income.

Planning Opportunities

Using the three year period

As the first three years of the estate are taxed at individual marginal rates, where the beneficiaries are already in high marginal tax brackets, there is effectively a three year window to leave income in the estate and utilise the individual marginal tax rates rather than winding the estate up. Once the estate is distributed, the assets, and thus income, will be taxed in the beneficiaries tax return. Obviously the taxation benefits need to be weighed up against other factors such as the costs of continuing the estate and the needs of the beneficiaries.

Testamentary Trusts

As an extension to the three year planning opportunity presented by deceased estate, more and more estate planning scenarios are utilising testamentary trusts (also known as will trusts). Without going into detail, these vehicles can provide significant asset protection and taxation advantages such as the ability to distribute income to minors without incurring the prohibitive individual tax rates for minors.

Getting your group structure right

Quite often business owners confuse what assets are actually in their name and hence are able to be dealt with in the will.  For example, investment assets owned by a family trust do not belong to the individual that controls trust.  Perhaps there is a loan to the trust which does belong to the individual.  On the other hand, shares in a private company or units in a unit trust do belong to the unit holders who may include the individual.  These instruments can be dealt with in a will.  Other matters to consider are firstly, whether under your company constitutions you have the right to appoint other directors in your will or secondly, whether under your trust deeds you have the right to appoint new controllers of the trusts.  The key is to ensure that the assets you want to deal with can be dealt with and that you deal with all the necessary issues concerning your group. 

There can be tax implications if you don’t understand these matters properly.

To summarise, whilst the passing of a family member is a distressing time, there are opportunities that advisors needs to be aware of to assist the family in getting the financial and tax affairs effectively managed without being disruptive at such a sensitive time.

Have a question about taxation of deceased estates?

Contact our experts at RSM should you require assistance with a deceased estate or in planning your will effectively.

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