Do I have to lodge a tax return for a deceased parent?

Do I have to lodge a tax return for a deceased person?

The test is the same one that applied while your parent was alive. If they would have needed to lodge a return for the year, a return is needed for the part of the year up to the date they died. If they were a pensioner with no tax withheld, no investments beyond a small amount of bank interest and income under the tax-free threshold, there is usually nothing to lodge, but the ATO still needs to be told that no return is required so the file can be closed.

What catches families out is that there can be two separate returns, each with its own rules:

• The date of death return (often called the final return). This is an individual tax return in your parent's name covering 1 July to the date of death. It includes wages, pension, interest, dividends, rent and business income received up to that day.
• The deceased estate trust return. From the day after death, the estate is treated as a trust. If money keeps coming in, such as interest on the estate account, rent on a property that hasn't yet been sold or transferred, dividends, or a capital gain when the executor sells something, the estate lodges a trust return for that income.

Many simple estates need only the first. Many need neither and only a notification. Estates with property, shares or a business usually need both, sometimes for more than one year.

Telling the ATO, and who is allowed to deal with them

Anyone can notify the ATO that a person has died, and the notification often happens automatically through the state registry death notification process. Notifying is not the same as being authorised. Only the legal personal representative can get information about the deceased's tax affairs, lodge returns or receive a refund. That means:

• The executor named in the will, once probate has been granted (or, in some straightforward estates, on the basis of the will alone, depending on what the ATO accepts).
• The administrator appointed by the court through letters of administration where there is no will or no willing executor.

To be recorded as the authorised person, the executor or administrator generally needs to supply the death certificate, the will and grant of probate or the letters of administration, their own identity details, and your parent's tax file number. Until that is done, the ATO will not discuss the account with you, even if you are the only child and have handled your parent's affairs for years. If your parent had a tax agent, that agent also needs the executor's authority before they can keep acting.

Once authorised, ask the ATO to confirm the lodgment status for every year. This tells you whether there are outstanding returns, debts, or refunds sitting on the account, and it is the first thing an accountant will do.

The date of death return

A date of death return is needed when your parent, for the period from 1 July to the date of death, had any of the following:

• Taxable income above the tax-free threshold.
• Tax withheld from wages, a pension, a super income stream, or interest because no TFN was quoted. Even if no tax is ultimately payable, lodging is how the estate gets that money back.
• Business income as a sole trader or through a partnership, including a farm or a trade they still did part time.
• Rental income, dividends with franking credits, managed fund distributions or a capital gain from something sold before death.
• An ATO request to lodge, or a history of lodging that the ATO expects to continue.

If none of these apply, the executor advises the ATO that a return is not necessary for the final year. This is a simple non-lodgment advice and it closes the year without a return. It is worth getting this right rather than ignoring it, because an open year on the ATO's system can delay finalising the estate.

Died early in the financial year

The return still covers 1 July to the date of death even if that is only a few weeks. The full tax-free threshold is generally available for that short period rather than being reduced, which often means a refund of any tax withheld. The return is lodged after the financial year ends in the usual way, although an executor who wants to wind up the estate quickly can ask about lodging earlier.

What does not go in the final return

Income that arrives after the date of death belongs to the estate, not to your parent. Interest credited after death, rent for periods after death, dividends paid after death and super death benefits all go to the estate return, not the date of death return. Splitting income around the date of death is one of the most common errors in self-prepared returns.

Why it takes longer

A date of death return cannot be lodged through myTax. It is lodged on the paper individual return form marked as a deceased estate return, so processing takes longer than an ordinary online return. Any refund is paid to the estate, which means you will want the estate bank account open before lodging.

Returns your parent never lodged

It is common to discover that a parent stopped lodging years ago, especially after retirement, and nobody knows whether that was fine or not. The executor is responsible for any returns that should have been lodged, not just the final one. The practical approach is:

• Ask the ATO for the lodgment status and the income it has on record for each missing year. Pre-fill data from employers, banks, share registries and super funds usually goes back a number of years and does much of the work.
• Work out, year by year, whether a return was actually required. For some years the right answer will be a return not necessary advice rather than a return.
• Lodge the earlier years before the date of death return so the account is in order.
• If there is tax owing, the estate pays it before distributing to beneficiaries. If there are refunds, they belong to the estate.

Penalties and interest can apply to late lodgment, and the ATO has discretion to remit them. An accountant who handles estates regularly will usually ask for remission as part of the lodgment, explaining the circumstances. Do not distribute the estate until the outstanding years are settled, because the executor can be personally exposed if tax remains owing after the money has gone to beneficiaries.

The second return: the deceased estate trust return

From the day after death until the estate is fully distributed, the executor holds the assets as trustee of the deceased estate. If the estate earns income in that period, the estate needs its own tax file number and lodges a trust tax return for each financial year in which income was received. Typical triggers:

• Interest on the estate bank account, or on your parent's accounts before they were closed.
• Rent from a property that is being sold or transferred.
• Dividends and managed fund distributions that kept arriving.
• Capital gains when the executor sells shares or property rather than passing them to beneficiaries.
• Super death benefits paid to the estate rather than directly to a dependant.

If the estate earned nothing, for example the house went straight to the children and the only bank account was closed quickly with trivial interest, a trust return is generally not needed, but an accountant will confirm that against the actual figures.

The three year concession

For the first three income years after death, income the estate retains (that is, income no beneficiary is yet entitled to) is generally taxed at individual rates with the benefit of the tax-free threshold, so modest interest or rent during administration often attracts little or no tax. After that period the estate can be taxed at higher rates unless there is a reason the administration is still running, so a long-running estate is worth planning around rather than letting it drift.

Beneficiaries and estate income

Once a beneficiary is presently entitled to a share of the estate's income, that share is reported in the beneficiary's own return rather than taxed in the estate. Which approach applies, and in which year, is something the executor chooses to some extent, and it affects the overall tax paid by the family. This is the single biggest reason estates with investment income benefit from advice before the end of each financial year.

Common worries: inheritance tax, the family home, shares and super

Is there inheritance tax?

No. Australia has no inheritance tax, estate tax or death duties. Receiving money or assets from a parent's estate is not income to you and does not go in your tax return. What does exist is income tax on income earned (before or after death) and capital gains tax when inherited assets are eventually sold.

Capital gains tax on the family home

Death itself does not trigger CGT, and neither does transferring an asset from the estate to a beneficiary. CGT becomes relevant when the asset is sold. For the family home, if it was your parent's main residence and was not being used to produce income at the time of death, a sale by the estate or a beneficiary that settles within two years of the date of death is generally fully exempt. The ATO can extend that period in some circumstances, such as delays caused by a contested will or a difficult sale, but the extension is not automatic. If a beneficiary moves in and lives there as their own main residence, the exemption can continue further. If the house is kept and rented out, CGT starts to accrue from the relevant date and record keeping becomes important.

Capital gains tax on other assets

For shares, investment property and other assets, the beneficiary steps into a cost base rather than starting fresh:

• Assets your parent bought after capital gains tax started in September 1985 generally pass with your parent's original cost base, so the eventual gain is measured from what they paid, not from the value at death.
• Assets your parent acquired before CGT started generally pass with a cost base equal to market value at the date of death.
• The 50 per cent CGT discount can still be available on a later sale, and the holding period generally includes the time your parent owned the asset.

This means the executor needs to find or reconstruct purchase records for shares and property. Old contract notes, dividend reinvestment statements and settlement statements are worth their weight in gold here, and a share registry can often supply transaction history. If the executor sells assets rather than transferring them, the gain is reported in the estate's trust return instead.

Super paid to the estate

Super is not covered by the will unless the fund pays the death benefit to the estate. When it is paid to the estate, the executor reports it in the estate's trust return. Whether any tax applies depends on who ultimately receives the money: payments that end up with a tax dependant (such as a spouse or a child under 18) are generally tax free, while the taxable component going to adult, financially independent children can be taxed in the estate. Super paid directly by the fund to a dependant does not go through the estate's return at all. Because the tax outcome can differ depending on how the benefit is paid, it is worth getting advice before the fund makes the payment, not after.

What to gather before you start

• Death certificate, the will, and the grant of probate or letters of administration.
• Your parent's tax file number, last lodged return and any ATO correspondence, including debt or lodgment reminders.
• Bank statements for every account, covering the full financial year of death and the period since.
• Income statements or payment summaries from employers, Centrelink or the Department of Veterans' Affairs, and super income stream statements.
• Dividend statements, share registry holdings, managed fund annual tax statements and any purchase history you can find.
• Rental property records: agent statements, loan statements, rates, insurance, repairs and the original purchase documents.
• Business records if your parent was still trading, including BAS lodgments, invoices and the accounting file.
• Super fund correspondence about the death benefit and who it is being paid to.
• Private health insurance statement for the final year.

Missing records are normal. ATO pre-fill, bank archives and share registries can rebuild most of a year, and an accountant will tell you which gaps actually matter.

Common mistakes

• Distributing the estate before the ATO position is finalised, then finding tax or an earlier year is owing.
• Putting income received after death into the date of death return, or leaving it out altogether because nobody realised the estate needed its own return.
• Lodging the final return through a family member's myGov or myTax. It cannot be done that way and the attempt causes confusion on the account.
• Ignoring the "return not necessary" step because there was nothing to lodge, leaving the year open indefinitely.
• Missing the two year window on the family home because the sale drifted, without asking about an extension.
• Letting a rental property or share portfolio sit in the estate for years without deciding whether income should go to beneficiaries, then losing the concessional treatment.
• Not keeping the executor's own records separate. Expenses the estate pays, such as funeral costs, are estate matters, not deductions in the final return.

When it is worth handing to an accountant

If your parent was a retiree with a pension, one bank account and no investments, the executor can often handle the notification and the return not necessary advice without help. It becomes worth getting an accountant involved when any of the following is true:

• Your parent ran a business, had an ABN, or was a partner in a farm or trade. There may be BAS, GST cancellation and a final business schedule as well as the return.
• There is a property other than the family home, or the family home is being rented or held beyond two years.
• There are shares or managed funds, particularly holdings bought decades ago where the cost base has to be reconstructed.
• Several years are unlodged and you don't know whether they needed to be.
• Super is being paid to the estate and the beneficiaries are adult children.
• The estate will take more than a year to administer and will keep earning income.
• You are the executor and you want someone else to be responsible for getting the ATO side right before you distribute.

A registered tax agent can be authorised by the executor to deal with the ATO, lodge the date of death return and the estate trust returns, request remission of any penalties on late years, and advise on how distributions to beneficiaries affect the total tax the family pays. Fees depend on how many years are involved, whether there are business or investment schedules, and how much reconstruction is needed, so ask for a scoped quote once the executor has the lodgment status from the ATO. Use the form below to describe what the estate holds and we will match you with an accountant who handles deceased estates.

Related reading: Capital Gains Tax Help for inherited property and shares, Trust Tax Return for how a trust return is put together, and Business Tax Accountant if your parent was still trading.