Losing a loved one is emotionally overwhelming. For executors, the responsibility doesn’t stop at organising the funeral or distributing assets — it also includes managing complex tax obligations. Before lodging any documents with the Australian Taxation Office (ATO), executors must understand how deceased estate tax works in Australia.
Failure to meet tax obligations can result in delays, penalties, or even personal liability for the executor. This guide explains what you must know about deceased estate tax in Australia, from final individual returns to ongoing estate income tax.
Understanding the Role of an Executor
An executor is legally responsible for administering the estate according to the will. This includes:
- Identifying and valuing assets
- Paying debts and liabilities
- Lodging required tax returns
- Distributing assets to beneficiaries
From a tax perspective, the executor effectively steps into the shoes of the deceased and later acts on behalf of the estate as a separate taxable entity.
Step 1: Lodging the Final Individual Tax Return
One of the first tax obligations is lodging the deceased person’s final individual tax return.
This return covers:
- Income earned from 1 July until the date of death
- Salary and wages
- Investment income (interest, dividends)
- Rental income
- Capital gains triggered before death
The tax return is lodged in the deceased’s name, but marked as “Deceased Estate.” The executor signs the return.
Important points:
- Normal individual tax rates apply up to the date of death.
- Medicare levy may still apply (subject to circumstances).
- Any outstanding prior-year tax returns must also be lodged.
The ATO will issue a Notice of Assessment, which confirms whether tax is payable or refundable.
Step 2: Is the Estate a Separate Tax Entity?
Yes. After death, the estate becomes a trust for tax purposes. This means:
- The estate may need its own Tax File Number (TFN).
- The estate may need to lodge annual trust tax returns.
- Income earned after the date of death is taxed differently.
The estate remains active for tax purposes until all assets are distributed to beneficiaries.
Step 3: Income Earned After Death
Many estates continue to generate income during administration. Common examples include:
- Rental income from investment properties
- Bank interest
- Share dividends
- Managed fund distributions
This income must be reported in a deceased estate trust tax return.
Tax Rates for Deceased Estates
The estate receives concessional tax treatment for the first three income years:
- Tax-free threshold may apply
- Progressive tax rates similar to individuals
- No Medicare levy
After three years, higher trust tax rates can apply if income is not distributed.
Understanding this timeline is crucial for tax planning and timely distribution.
Step 4: Capital Gains Tax (CGT) on Inherited Assets
Capital Gains Tax is one of the most misunderstood areas in deceased estates.
Key CGT Rules:
- No immediate CGT on death
When a person dies, assets transfer to the executor or beneficiaries without triggering immediate CGT. - Main residence exemption
If the deceased’s home was their main residence and not used to produce income, beneficiaries may be eligible for a full CGT exemption if sold within two years of death (subject to ATO discretion for extensions). - Investment properties & shares
Beneficiaries inherit the asset at its cost base (often market value at date of death, depending on when acquired). CGT applies when they sell it. - Pre-CGT assets (before 20 September 1985)
Special rules apply and may reset cost base to market value at death.
CGT mistakes are common and can result in significant overpayment or underpayment of tax.
Step 5: Applying for a TFN and ABN (If Required)
The estate generally needs its own TFN if:
- It earns income after death
- It needs to lodge trust tax returns
An ABN is usually not required unless the deceased was running a business that continues operating during administration.
Step 6: Paying Debts Before Distribution
Executors must ensure all tax liabilities are paid before distributing assets.
This includes:
- Income tax
- Capital gains tax
- Business activity statement (if applicable)
- Outstanding tax debts
If an executor distributes assets before settling tax liabilities, they may become personally liable for unpaid tax.
It is often recommended to obtain a clearance from the ATO confirming liabilities are finalised before full distribution.
Step 7: Superannuation Death Benefits
Superannuation is not automatically part of the estate unless paid into it.
Tax treatment depends on:
- Whether the beneficiary is a tax dependant
- Whether benefits are paid directly or via the estate
- The taxable and tax-free components of the fund
Spouses and dependent children often receive tax-free benefits, while non-dependants may face tax on the taxable component.
Superannuation death benefits can significantly affect estate tax outcomes and should be carefully reviewed.
Step 8: Estate Distribution and Beneficiary Taxation
When income is distributed to beneficiaries:
- The beneficiary declares their share of estate income in their personal tax return.
- The estate may claim a deduction for income distributed.
If income is not distributed, the estate itself pays tax.
Timing distributions strategically within the concessional three-year period can reduce overall tax.
Common Mistakes Executors Make
- Failing to lodge outstanding tax returns
- Distributing assets too early
- Miscalculating capital gains tax
- Ignoring estate income during administration
- Missing the two-year CGT exemption window
- Not obtaining professional tax advice
Estate administration often overlaps with legal and financial complexity. While lawyers handle probate and legal documentation, tax compliance requires specialised knowledge.
How Long Does an Estate Need to Lodge Tax Returns?
An estate must continue lodging annual trust tax returns until:
- All income-producing assets are sold or transferred
- All tax liabilities are paid
- The estate is fully distributed
This can take months or several years depending on complexity, disputes, or asset types.
When Should Executors Seek Professional Help?
Deceased estates can involve:
- Multiple properties
- Family trusts or companies
- Business assets
- Overseas assets
- Cryptocurrency holdings
- Blended families and disputes
Professional guidance ensures compliance with ATO requirements and reduces risk of penalties.
Many executors engage a Deceased Estate Accountant to handle estate tax returns, CGT calculations, and trust compliance matters. For those based in Western Australia, consulting a qualified tax accountant Perth can help navigate local considerations while ensuring national compliance.
Practical Checklist Before Lodging with the ATO
Before submitting any tax return, executors should confirm:
✔ All prior-year tax returns are lodged
✔ Final individual tax return is prepared correctly
✔ Estate TFN is registered (if required)
✔ Income earned after death is recorded
✔ CGT implications are calculated
✔ Superannuation treatment is reviewed
✔ Tax debts are paid or provisioned
✔ Distribution strategy is tax-efficient
Taking a structured approach avoids unnecessary stress and delays.
Final Thoughts
Administering a deceased estate is both an honour and a heavy responsibility. Tax compliance is a critical part of that role. Understanding the difference between the deceased’s final individual return and the estate’s ongoing trust obligations is essential before lodging documents with the Australian Taxation Office.
Executors who take the time to understand estate tax rules — or seek expert guidance — can protect beneficiaries, minimise tax exposure, and fulfil their legal duties with confidence.
While the emotional aspects of loss cannot be simplified, the financial and tax obligations can be managed effectively with careful planning, accurate reporting, and timely action.
If you are acting as an executor, early professional advice can make the entire estate administration process smoother, compliant, and far less overwhelming.