Understanding the Deceased Estate 3-Year Rule by ATO

Losing a loved one is undoubtedly a difficult experience, and in the midst of grief, dealing with administrative matters can be overwhelming. Among the important considerations is the handling of the deceased's estate, which involves managing their assets, and liabilities, and ensuring proper tax compliance. In Australia, the Australian Taxation Office (ATO) has established guidelines related to deceased estates, including the notable "3-year rule." In this article, we will delve into the specifics of the Deceased Estate 3-Year Rule by the ATO and provide clarity on its implications.

What is the Deceased Estate 3-Year Rule?

The Deceased Estate 3-Year Rule is a provision outlined by the ATO that relates to the taxation of income generated by an estate after the death of an individual. In essence, it states that the estate of a deceased person will continue to be taxed as if they were still alive for a period of up to three years following their death. This rule primarily affects the tax treatment of income earned by the estate during this three-year period.

How Does the Deceased Estate 3-Year Rule Apply?

The application of the Deceased Estate 3-Year Rule hinges on the nature of income generated by the estate during the specified period. It mainly affects income earned from assets that were owned by the deceased individual. This could include sources such as rental income from properties, interest on investments, dividends from stocks, and similar forms of income.

During the three-year period, the estate's income is reported under the deceased's Tax File Number (TFN), and is subject to the same tax rates and thresholds that would apply to them if they were alive. The estate's trustee or executor is responsible for lodging tax returns on behalf of the estate during this period.

Exceptions to the Rule:

While the Deceased Estate 3-Year Rule is a general guideline, there are exceptions that can alter its application:

  1. Deceased Estate Finalization, what is it? If the estate is fully administered and finalized within the three-year period, the rule will not apply beyond that point. Finalization typically involves distributing assets to beneficiaries and settling any outstanding liabilities.
  2. Testamentary Trusts: In cases where a testamentary trust is established through the will of the deceased, the income generated within the trust is taxed according to trust tax rates, not under the 3-year rule.
Key Considerations:
  1. Seek Professional Guidance: Dealing with a deceased estate and its associated tax implications can be complex. It's recommended to consult with a tax professional or a legal advisor who specializes in estate matters to ensure proper compliance with the ATO's regulations.
  2. Timely Reporting: Executors or trustees should ensure that tax returns are filed accurately and on time for the deceased estate. Failure to comply with reporting requirements can result in penalties.
  3. Beneficiary Tax Implications: Beneficiaries who receive assets from the estate may also have tax obligations. They might need to report capital gains or income earned from these assets in their individual tax returns.

In Conclusion:

The Deceased Estate 3-Year Rule established by the ATO serves as a crucial framework for handling the taxation of income generated by an estate after an individual's passing. Executors and trustees bear the responsibility of understanding and adhering to this rule while properly managing the deceased's assets and liabilities. By seeking professional advice and timely reporting, the process can be navigated with greater ease, ensuring that both the memory of the deceased and their beneficiaries are respected and cared for in accordance with the law.

Tax File Number

At the worst time of your life, the last thing you want to think about is tax.

When a loved one dies, however, their affairs must be dealt with at some stage. This includes their tax obligations. Death and Taxes need to be dealt with regardless if there is a will in place or not.

To deal with a deceased tax return, the help of a solicitor is highly recommended.

Someone will be granted the role of executor or administrator of the estate of the deceased person (this is usually stipulated in a will). This is if the deceased has accumulated wealth

According to the Australian Tax Office

From a tax perspective, there are a few things that the executor or administrator has to do.

The Australian Taxation Office (ATO) must be contacted and informed that your loved one has passed away. When you notify them of the death, they can tell you if the person had any outstanding tax returns for prior income years.

If you have a tax agent, they will be able to tell you all the outstanding tax returns, by looking up their tax agent portal.

All their financial documents must be compiled, and you must lodge a date of death (or final) tax return.

When do I lodge a deceased estate tax return?

This will only need to be lodged if your loved one had tax withheld from their income or had earned more than the tax-free threshold.  Even if they don't have tax withheld, we highly suggest lodging a final tax return with the date of death stipulated on the front page.

Deceased estate 3-year rule ATO

This final tax return differs from a normal tax return as it doesn’t cover the full financial year - it only covers up to the day that the person died. All income and tax deductions until that day are inputted into the final tax return.

There are still tax obligations that can occur after that day, such as income earned from investments or the sale of assets that may or may not be subject to capital gains tax.

In these circumstances, the executor or administrator of the estate will need to apply for a separate and new tax file number for the estate.

The estate is treated as a separate taxpayer and will pay tax as if it was an adult individual resident taxpayer.  Apply here for a TFN application for a deceased estate click here, DEATH AND TAXES.

How long can a deceased estate exist

This special treatment of the estate is received for up to three tax returns after the date of death (in fact, it is for two years from the date of death).

We know that this time is very stressful, even without these additional obligations. The support of a tax professional during this process can ease the burden, as this is a role we are accustomed to taking. Contact us to find out how we can aid you, even if we weren’t the accountant for your loved one. We’re here to help.