ATO releases new Practical Compliance Guidelines on Taxation of Estates
To be entrusted to act as a Legal Personal Representative (LPR) of a deceased estate is both an honour and a privilege that carries various responsibilities. One such responsibility is an LPR’s obligation to ensure a deceased person’s tax affairs are properly dealt with.
In the event an LPR does not ensure there are adequate funds to meet a deceased’s pre-death tax liabilities or estate tax liabilities, an LPR may be held personally responsible for such debts.
As the Australian Taxation Office (ATO) cannot recover a tax debt from a beneficiary once the estate assets have been distributed, it is essential that an LPR ensures all potential tax liabilities have been properly identified and the estate has adequate funds to meet such liabilities prior to making interim or final distributions.
Additionally, an LPR should consider voluntarily disclosing to the ATO any potential tax liabilities of the deceased so as to minimise exposure to personal liability.
Given the potential for considerable liability being incurred by an LPR, the ATO has issued a Practical Compliance Guideline PCG 2018/4 for the purpose of providing guidance to LPRs of smaller and less complex estates as to when they may safely make distributions to beneficiaries and minimise their risk of being held personally liable for a deceased’s pre-death tax liabilities.
The PCG 2018/4 applies to estates that meet the following criteria:
- In the four years before the person’s death:
- the deceased did not carry on a business;
- the deceased was not assessable on a share of the net income of a discretionary trust;
- the deceased was not a member of a self-managed superannuation fund;
- the estate assets consist only of:
- public company shares or other interests in widely-held entities;
- death benefit superannuation;
- Australian real property;
- cash and personal assets such as cars and jewellery; and
- the total market value of the estate assets at the date of death was less than $5 million and none of the estate assets are intended to pass to a foreign resident, a tax exempt entity or a complying superannuation entity.
In accordance with the PCG 2018/4, an LPR should consider distributing assets to beneficiaries after the expiration of the period in which the ATO has the ability to amend its assessment of the deceased’s tax obligations. Those periods are as follows:
- 2 years from the notice of assessment where:
o the deceased was assessed as an individual, or not carrying on a business, or a sole trader, or in a partnership or beneficiary of a trust; and
o the sole trader, partnership or trust would otherwise qualify as a small business entity with an annual turnover of $10,000,000 for the 2017 financial year or less for earlier financial years.
- 4 years from the notice of assessment where:
o the deceased was assessed as carrying on a business, in a partnership, or a beneficiary of a trust; and
o the business, partnership or trust was not a small business entity.
o The 4 year period will also apply where the ATO concludes the deceased was involved in a scheme of which the dominant purpose was to obtain a tax benefit pursuant to s284-150 of Schedule 1 of the Tax Administration Act 1953.
- No time limit where the ATO concludes there are circumstances of fraud or tax evasion.
The vast majority of deceased’s estates will fall under the 2 year time limit.
Given the complexity of administering a deceased estate and the potential personal liability an LPR may incur, it is essential that an LPR seek legal and financial advice prior to administering a deceased estate.