What the deceased estate 3-year rule is
The deceased estate 3-year rule is a tax rule. For the estate's first 3 income years, the executor pays tax on the estate's income at the same rates as an individual, with the full $18,200 tax-free threshold. It applies whether or not there is a will. It is not a deadline to finish the estate, and the state doesn't take over an estate after 3 years.
The first income year starts the day after the date of death and ends on the next 30 June, so the concession can end only a little over 2 years after death. The ATO says most estates are finalised within 6 to 12 months.
It's also different from the 2-year rule for capital gains tax, which lets you sell an inherited home free of CGT if settlement happens within 2 years of death. Both are explained below.
The main steps in administering an estate
Whether or not there is a will, the executor or administrator usually works through these steps:
Step 1: Notification and Probate
Immediately following the individual's death, the next of kin or appointed executor must notify the relevant authorities and initiate the probate process. Probate is the legal procedure that authenticates the deceased's will (if one exists) and grants the executor or administrator the authority to manage the estate.
In NSW, if you apply for probate more than 6 months after the death, you must explain the delay to the Supreme Court. Family provision claims must generally be made within 12 months of the death.
Step 2: Asset Identification and Inventory
Once the probate process is underway, the executor or administrator must identify and document all the assets that comprise the deceased's estate. This includes real estate, investments, bank accounts, personal belongings, and other valuable items. A comprehensive inventory is essential for ensuring all assets are accounted for and properly distributed.
Step 3: Debt Resolution
Before the estate can be distributed, the deceased's debts must be paid, including any tax owing. The executor lodges a date of death tax return for the period from 1 July to the date of death, plus any earlier returns that weren't lodged.
Step 4: Asset Distribution
Once debts are settled, the remaining assets go to the beneficiaries under the will or, if there is no will, under the intestacy rules. While the estate earns income, the executor may need to lodge a trust tax return for the estate each year until it is finalised.
What changes after the third income year
The three-year mark isn't a deadline with a penalty. It changes how the estate's income is taxed.
For the estate's first three income years, its income (rent, interest, dividends) is taxed at individual rates with the full $18,200 tax-free threshold. No Medicare levy is payable, but the estate doesn't get tax offsets such as the low income tax offset. You claim these rates when you lodge the estate's first trust tax return.
From the fourth income year, the tax-free amount drops to just $416 and higher rates apply to the rest. The current figures are on the ATO's Tax rates – deceased estate page.
What this means in dollars: on estate income of $60,000 a year, losing the concession costs about $2,900 in extra tax each year past year three (at 2025–26 rates).
The ATO says this concessional period can't be extended beyond the first three income years. If the estate is still earning income after that, the higher rates apply. Don't confuse this with the separate 2-year CGT window for an inherited home, which can be extended.
What commonly keeps an estate open
These are the usual reasons an estate runs past its third income year:
Disputes and Challenges
Disagreements among family members, beneficiaries or creditors can delay the estate. A contested will or a family provision claim can easily keep it open past the third income year.
Complexity of the Estate
Estates with businesses, trusts, overseas assets or several properties take longer. They usually need both a solicitor and a tax agent.
Emotional Factors
Losing someone is hard, and the paperwork adds stress. Getting help early can take some of that load off the family.
Two scenarios that show why the timeline matters
The rental property that waited too long. An estate holds a rental property earning $60,000 a year. Probate took a year, the family debated selling, and the property is still in the estate in year five. From year four, the estate lost the individual rates and the $18,200 threshold. That cost about $2,900 in extra tax each year, paid out of the beneficiaries' inheritance.
The family home and the 2-year CGT rule. This is separate from the three-year income rule. An inherited home can generally be sold free of capital gains tax if settlement happens within 2 years of the death. Miss that window and CGT can apply to the growth since the death. For example, a home worth $1.2 million at death that sells for $1.35 million in year four could bring up to $150,000 of gain into the tax net. Part-exemptions can apply. Get advice before listing, not after settling.
- The full exemption needs the deceased to have acquired the home before 20 September 1985, or the home was their main residence just before death and wasn't being used to produce income.
- It isn't available if the deceased had been a foreign resident for more than 6 years at the time of death.
- The ATO's safe harbour (PCG 2019/5) allows up to 18 extra months if set conditions are met, such as a contested will. Longer extensions need a request to the Commissioner.
- More detail: CGT on inherited property.
The lesson in both cases: plan the timeline early. It's easier to sell within the CGT window and wind up the estate before the higher rates apply.
If you're an executor and need help with estate tax returns or CGT, see our deceased estate services.
Contact us or call 0488 854 200.
Common questions
Why is estate planning important in Australia?
Estate planning ensures assets are distributed according to your wishes, minimises disputes among beneficiaries, and can reduce the tax and administrative burden on your estate. Without a valid Will, your estate is distributed under intestacy laws that may not reflect your intentions. A complete plan also addresses superannuation, powers of attorney, and advance care directives.
Does superannuation form part of my estate?
No. Superannuation is not automatically an estate asset and does not pass according to your Will. Your super fund trustee decides who receives the death benefit, guided by any binding death benefit nomination you have made. Without a valid binding nomination, the trustee has discretion to pay your legal personal representative or directly to a dependant.
What taxes apply to inherited assets?
Australia has no inheritance tax. But selling inherited assets can trigger CGT. If the deceased acquired the asset after 19 September 1985, you generally take over their cost base. Pre-CGT assets, and a home that was the deceased's main residence, start at market value on the date of death. For the 50% CGT discount, post-CGT assets count the deceased's ownership period. See capital gains tax.
Changes from 1 July 2027: for capital gains that accrue from that date, the 50% CGT discount is replaced with cost base indexation and a minimum tax of 30% on certain gains. Gains that accrued before 1 July 2027 keep the 50% discount, and different rules apply to new residential builds. See the ATO's capital gains tax reform page.
What is probate and when is it required?
Probate is a court order confirming a Will is valid and authorising the executor to administer the estate. It is generally required for estates that include real property, or when financial institutions require legal authority before releasing assets. Smaller estates where assets are held jointly may not require probate. The process is handled through the Supreme Court of the relevant state.
How often should I update my will?
Review your Will after any major life event: marriage (which automatically revokes most Wills), divorce, birth of children, significant changes in financial position, or a beneficiary or executor dying. As a general rule, review every three to five years even without a triggering event to ensure it remains current.
