Deceased Estates

When someone close to you passes away it is an emotional time. At a time when you are grieving for a loved one, the last thing you want to consider is financial and taxation issues. Unfortunately, this is a reality, but please know that we are here to help make this part of the process easier for you.

Deceased estates are taxed differently from individuals and other Trusts. It is the executor’s responsibility for managing the deceased estate and ensuring all taxation requirements are fulfilled.

When a person passes away there is generally a requirement to lodge two income tax returns.

Firstly, there will be a final personal tax return for the deceased for any income earned from the start of the financial year until the date of death.

Secondly, there may also be a tax return for the deceased estate for any income from the date of death to the end of the financial year. An estate return may need to be lodged for each income year until the deceased estate is fully administered.

A deceased estate will be taxed at individual rates with the benefit of the full tax-free threshold for the first three tax returns while the deceased estate is being administrated. If the administration goes beyond the three years then special tax rates apply which are significantly higher than individual tax rates.

Deceased estates have specific rules surrounding lodgement and taxation of estate income and assets. We recommend you contact our office should your required any assistance in administering the tax affairs for an estate.

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Division 7A

Division 7A prevents private companies from making tax-free distributions of profits to shareholders or to their associates. Tax-Free distributions can be in the form of advances, loans and other payments or credits to shareholders or their associates.

It is important to be aware that if a loan arises in the company it must be dealt with prior to the lodgement date of the following year’s income tax return. These loans can be dealt with as follows:

1. The total amount of the loan can be paid in full either by paying the amount of money back to the company, or by declaring a dividend for the amount of the loan balance to be shown as income in the tax return of the shareholder.  Preferably fully franked subject to availability of franking credits; or
2. Enter into a complying Division 7A loan agreement and make the minimum yearly repayment which can be made by either paying the money back to the company or by declaring a dividend as per above.  For the loan to be “complying” the interest rate must equal or exceed the ATO’s benchmark rate and the term of the loan must not exceed 7 years.  For the 2014/15 financial year the interest rate is 5.95%.

It is often easy to forget that a company is a separate legal entity to its owners and that by taking funds for personal use and not treating as wages or dividends can cause issues.  If you do wish to access funds, please call our office before proceeding and we can advise on the best way to record these for you.

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