Australia has not imposed death taxes for almost 40 years.
After then Queensland premier Sir Joh Bjelke-Petersen abolished them in the late 1970s, the other states and Commonwealth quickly followed.
Ian Raspin, managing director of BNR Partners, specialises in dealing with deceased estates.
He said about 18 months ago one of the cases that he took on was for a family member of a man who died, and at the time of his death, had not lodged a tax return for 31 years.
“He was running two businesses in his name as a sole trader,” Mr Raspin said.
“A family member now has responsibility to deal with it [the outstanding tax returns].
“We had to go back and reconstruct as many years as we could – going through bank statements and so on – and then had to go to the tax commissioner to deal with these issues.”
When you die, you become a new taxpayer.
Up until the point of your death you are an individual taxpayer.
Once you die, someone takes control of your assets and holds them on your behalf in a trust.
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To do this, they need to obtain a new Tax File Number (TFN) on your behalf before they can even start dealing with your finances.
For people who have a left a will, the person that fulfils this role after your death is clear.
But for those who have not, the process of a loved one stepping in to establish what assets there are, and how to distribute them, can be a nightmare.
Mr Raspin said his firm commonly sees cases of people who had not lodged a tax return for five to 10 years before their death.
Taking on the role of sorting out this mess is tricky, he said.
“And if you don’t pay the [dead person’s] taxes, you can become personally liable – they [the ATO] can come after your house,” Mr Raspin warned.
He said common issues that his firm had to step in and help fix were undeclared rental and offshore income.
Deceased estates review aims to simplify
Taxation Ombudsman Karen Payne said most people could not afford to pay for a tax adviser to help navigate the system after a loved one’s death.
Her office, the Inspector-General of Taxation, has launched a review into deceased estates to make the process of navigating the tax system easier.
“When a death happens, most people are grieving, most people are shocked, and it’s probably not the best time to be … learning about an entirely new tax system,” Ms Payne said.
“Also, most people don’t want to pay large amounts of fees to professional advisers just because they don’t understand the process.”
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Given more tax returns are now being lodged electronically, and Australia’s population is ageing, Ms Payne said it is crucial these issues are dealt with.
Australian Bureau of Statistics (ABS) data shows there were 158,493 registered deaths in Australia in 2018.
Projections are that this number will rise, given that the number of Australians aged 65 and over is expected to more than double by 2055.
“If you have used myGov to lodge your tax returns, after your death, how is someone going to reinsert themselves in the system to say, ‘instead of speaking to a myGov account, speak to me’?” Ms Payne asked.
Without a will, a loved one cannot act on your behalf
While there are no death taxes in Australia, there is still an obligation to pay tax on the earnings and investments that had been held by the deceased.
This may include taxes on superannuation payouts (generally the ATO will tax super payouts to nominated beneficiaries at 15 per cent) and capital gains taxes owed on any investments, such as shares or property.
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Before that can even happen, a tax return is required if a dead person had taxable income higher than the tax-free threshold of $18,200 in the year they died.
The person responsible for administering a deceased estate is the ‘executor’, or administrator, of the will.
But without a will naming an executor – whether that is a spouse, immediate family member or trusted adviser, the ATO cannot automatically pass on information as it must adhere to strict taxpayer confidentiality provisions.
That means if an unnamed loved one wants to access the information needed to clean up the dead person’s tax affairs, they need to get a letter from the court.
That process alone can cost $5000, Ms Payne said, and can be time consuming.
She hoped her review could deliver suggestions on how to make this part of the process easier.
Ms Payne also suggested the system could be changed so people would not be required to file tax returns if they had fallen below the tax-free threshold and left the tax system years ago.
And for those who are still in the system at the point of their death, she said there is also no logical reason why they should not carry the same TFN afterwards.
This, she said, could be dealt with an abbreviation after the TFN, such as /’deceased’, rather than someone having to get an entirely new number on the deceased’s behalf.
“We need something that doesn’t require you to become a whole new taxpayer in the system,” Ms Payne said.
Tax advisers want easier access to a dead person’s data
Submissions to the IGT’s review closed on Friday.
Accounting groups want to see the system changed so that tax advisers can get easier access to information and so that the average person can navigate the system more easily.
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Institute of Public Accountants’ general manager of technical policy Tony Greco said advisers need to be able to quickly access information on behalf of the dead person.
Since tax agents have moved on to a new online system that they use to communicate with the ATO, access to such information has been lost.
“You’ve got a person who has died, and all of a sudden the agent cannot access the information required to prepare a return,” Mr Greco said.
He noted the ATO recently announced changes designed to address this problem, but that the laws will probably not be passed until early April.
Australian accounting bodies Chartered Accountants Australia and New Zealand and CPA Australia in a joint submission said there were risks posed to the Australian tax system when the tax affairs of a dead person cannot be dealt with “efficiently and expeditiously with the assistance of the tax agent community”.
“It is often the case that, in the period prior to death, important decisions will be made about asset dispositions, donations, accessing superannuation benefits and determining access to superannuation death benefits,” the submission noted.
“It is concerning that Australia’s tax administration system does not provide the legal foundation for tax professionals to directly assist the ATO to obtain assurance that relevant tax and superannuation laws and guidance have been applied in these pre-death transactions.”
The Tax Institute’s senior tax counsel Bob Deutsch said it was important the entire process of dealing with deceased estates was made less cumbersome for taxpayers.
“For the average person, it really should be a streamlined process from the beginning to the end, but it really isn’t,” he said.