Dealing with the passing of an elderly loved one is never easy. It may involve the stress of having to clear out a house after an elderly parent’s death and/or managing a deceased estate. But you may be wondering, what is a deceased estate exactly?
A deceased estate is essentially all of the assets and liabilities belonging to a person when they have died. Most of the time, the deceased person will have left instructions on what needs to happen with their estate in their will.
Assets can include:
- Bank accounts
- Superannuation and life insurance policies
- Real estate, including a retirement village lease or a nursing home bond
- Personal belongings, such as jewellery and furniture
Liabilities are usually paid out of the estate before they are distributed to beneficiaries. They can include:
- Credit cards
- Personal loans
Who manages the deceased estate?
A legal, personal representative — referred to as an “administrator” or “executor”— is responsible for administering an estate. This person will typically be named in an individual’s will if they have one. Essentially, they make sure the deceased person’s final wishes are carried out, and responsibilities can include:
- Arranging the funeral
- Obtaining a death certificate
- Applying for probate or letters of administration
- Paying debts and income tax in accordance with their state or territory
- Informing the Australian Taxation Office (ATO) and other government bodies
What is the tax rate for a deceased estate?
If you are wondering what is the tax rate for a deceased estate, it depends on the taxable income and the time that has elapsed after an individual has passed away. In terms of time, the income of a deceased estate may be taxed at the same rate as an individual for the first three years and at a higher rate after that.
First three income years
Normally, a trustee who is assessed on the net income of a trust pays tax at the top marginal tax rate. But when you lodge your first trust tax return for the deceased estate, you can apply for a concessional rate of tax. This rate is the same as the individual income tax rates, with the benefit of the full tax-free threshold. It applies to the first three income years of the deceased estate unless there are material changes to the estate’s circumstances. However, deceased estates don’t get the benefit of tax offsets or concessional rebates, such as the low-income tax offset.
Fourth income year and later
For deceased estates that continue to be administered beyond the third income year, the following tax rates apply:
|Deceased estate taxable income (no present entitlement)||Tax rates|
|$0 – $416||Nil|
|$417 – $670||50% of the excess over $416|
|$671 – $45,000||$127.30 plus 19% of the excess over $670
If the deceased estate’s taxable income exceeds $670, the entire amount from $0 will be taxed at the rate of 19%
|$45,001 – $120,000||$8,550 plus 32.5 cents for each $1 over $45,000|
|$120,001 – $180,000||$32,925 plus 37 cents for each $1 over $120,000/td>|
|<$180,001 and over||$55,125 plus 45 cents for each $1 over $180,000|
What happens if a deceased estate is insolvent?
In Australia, you can’t inherit a debt from a relative unless it is attached to an asset you are inheriting. However, what if a loved one passes away, leaving more debt than assets? In other words, what happens if a deceased estate is insolvent?
If a person dies while insolvent, their deceased estate can be declared bankrupt, so executors should get advice from a lawyer before incurring any fees. Here we look at a few different scenarios.
If creditors are calling
In small estates where there are very little assets and relatively small liabilities, you should contact all creditors and advise them that due to the size of the estate, probate or letters of administration are not being applied for. You can advise them the estate has no assets and ask the creditors to “write off” the debt. In more complex matters, the administrator can have the estate declared bankrupt. This can occur by two methods:
- Voluntarily through the executor of the deceased estate applying to the Court
- By a creditor applying to bankrupt the deceased
The administrator of a deceased person’s estate may present a petition to the Court under Part XI of the Bankruptcy Act. They would apply if the deceased estate was insolvent and the provisions of the deceased’s will (if there is one) could not be given effect to.
If an executor of an estate petitions for bankruptcy, they will have to provide the information they have to the bankruptcy trustees and then will cease to have their usual powers as executor as these will go to the bankruptcy trustee. However, executors need to be aware that if they incur costs on the estate after they are aware that the estate is insolvent, they might be personally liable for this.
When creditors apply
When creditors apply for bankruptcy, it is a similar process. If a creditor or group of creditors are owed at least $5,000 from a deceased estate, they can apply to the Court using a creditor’s petition under Section 244 of the Bankruptcy Act.
Expenses paid from a deceased estate
Unless an application is made for bankruptcy, the only debts and expenses given priority are funeral and testamentary expenses (any expenses incurred in obtaining administration of any property of a deceased person by an administrator). If the deceased estate is going into bankruptcy, legislation requires the distribution of the remaining assets in accordance with the Bankruptcy Act.
This means that an order under Part XI of the Bankruptcy Act gives the bankruptcy trustee broad powers to investigate transactions made prior to the bankruptcy. It also empowers the trustee to possibly take back assets disposed of prior to bankruptcy.
Creditors applying for probate
If there is a will and an executor knows that an estate is likely to be insolvent, they will sometimes decide not to apply for probate. If this is the case, any interested party can apply to the court for appropriate orders pursuant to Section 15 of the Act. If a creditor still has a debt outstanding against the deceased and no one has applied for a grant of representation, then the law allows that creditor to make an application for a grant, provided the creditor can provide particulars of the debt.
If there is no will, it can be slightly more difficult as the Court prefers that the next of kin applies for letters of administration. Creditors can also apply, but it is very rare.
Creditor powers over a deceased estate
If a creditor applies for probate or letters of administration, they will have all the same powers as an administrator of an estate.
What is a deceased estate notice?
When someone passes away, there are a number of organisations that need to be notified. These can include banks, Medicare and Centrelink. In terms of what is a deceased estate notice, the Australian Taxation Office (ATO) needs to be notified of the individual’s passing but also who will be managing the estate. This is typically done by a relative or a legal personal representative (LPR).
To officially notify them, you will need a death certificate and possibly other supporting documents. A funeral director can often assist with sourcing these. While this is being done, you can “unofficially” let the ATO know, and they will pause the deceased’s tax correspondence until you are ready.
Who can notify the ATO?
In terms of who can notify the ATO of the official notification of death, it can be a:
- Executor or administrator of the estate
- Legal practitioner, BAS or tax agent who previously represented the deceased person or has been appointed by the executor or administrator
In terms of who will manage the estate, only the executor or administrator of the estate can nominate as the person who will manage the estate. However, they can appoint a legal practitioner, tax agent or BAS agent to help them.
How do you notify the ATO?
The same form can be used to officially notify the ATO of a person’s death and who will manage the estate. There are two ways to do this:
- The form can be completed online. Once done, you need to attend an interview at an Australia Post outlet to present your supporting documents. You can keep these documents, and you don’t need certified copies.
- You can complete a paper form and mail it to the ATO, along with certified copies of the supporting documents. The copies must be certified by a Justice of the Peace or other approved certifier, and they are not returned to you.
What are supporting documents?
- Death certificate. This is required to officially notify the ATO of a person’s death. If you do not have one, contact the Births, Deaths and Marriages registry in your state or territory, who can issue one.
- Probate or letters of administration. There are two types of court-issued documents — a grant of probate (for an executor) and letters of administration (for an administrator). You should take it to the Australia Post interview or include a certified copy with your mailed notification.
- Will. You only need to include a will if you have decided not to apply for probate or letters of administration. The ATO will use the will to verify your role in the estate’s tax affairs. However, they cannot record you as the LPR unless you have probate or letters of administration. This means there are legal restrictions on the information and funds they can release to you.
The ATO will then record you as the LPR and enter your name in their records as the authorised contact for the deceased estate.
- 2022, What is a deceased estate? State Trustees
- 2021, Tax rates – deceased estate, Australian Taxation Office
- 2021, Obligations outstanding at the time of death, Queensland Law Handbook
- 2022, Insolvent deceased estates – what you need to know, Rigoli Lawyers
- 2016, How the Bankruptcy Act can help you deal with a deceased’s estate when they are insolvent, Rapsey Griffiths
- 2022, Notifying us of death and who will manage the estate, Australian Taxation Office