Recent Guidance from the ATO - Legal Personal Representatives, Tax and Deceased Estates

The ATO has released Practical Compliance Guideline 2017/D12 which provides some welcome clarification regarding when a Legal Personal Representative (“LPR”) may be personally liable for tax liabilities of a deceased estate.

Thankfully for the non-professional LPR, the Guideline provides “user friendly” explanations and a series of practical examples.

General Principles from Practical Compliance Guideline 2017/D12

Despite the fact that the liability of an LPR to pay tax related liabilities being limited to the value of the deceased’s assets, the Guidelines make it clear that an LPR may be personally liable for tax liabilities if they had sufficient notice of those claims.

The question then becomes, what constitutes “sufficient notice”, and this is where the Guidelines offer some assistance.

Whether or not an LPR had sufficient notice is a question of fact. In some circumstances however, an LPR will be deemed as having sufficient notice. Those circumstances include:

  • where the deceased had amounts owing to the ATO at time of death;
  • where liabilities arise from the assessment of any returns lodged by the deceased but not assessed at the time of death;
  • where liabilities arise in respect of outstanding returns;
  • where the ATO gives a notice of intention to the LPR to examine the deceased person’s taxation affairs within 6 months from the lodgement (or advice of non-lodgement) of the deceased’s outstanding returns;
  • where the LPR becomes aware (or should reasonable have become aware) of a material irregularity in a prior years return for the deceased.

The Guidelines also make it clear that the ATO will not treat an LPR as having notice of any further potential ATO claim relating to returns lodged by the LPR where:

  • the LPR acted reasonably in lodging all of the deceased’s outstanding returns (or advice of non-lodgement) and
  • the ATO has not given the LPR notice that it intends to examine the deceased person’s tax affairs within 6 months from the date of lodgement (or advice of non-lodgement) of the last outstanding return.

One Important thing…(Exclusions)

It should be noted the Guidelines apply only to “smaller and less complex estates” that satisfy the following:

  • in the 4 years before the death of the deceased, 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 total market value at the date of death was less than $5 million; and
  • the estate consists solely of shares in public companies, superannuation death benefits, Australian real property and cash and personal assets such as cars and jewellery

Importantly, where the Guidelines do not apply, the LPR continues to have an ongoing risk of personal liability.

 How long after an estate tax return is lodged should an LPR consider distributing estate assets?

It should be noted that once a tax return is lodged, the Commissioner generally has 2 to 4 years, (depending on the nature of the assets in the estate), from the date on which he gives the notice of assessment to amend the assessment.

In other words, while the LPR may not be personally liable if he or she has acted reasonably in lodging all returns and the ATO has not given notice that it intends to examine the deceased’s tax affairs within 6 months, the Commissioner can still amend the notice of assessment up to 4 years from lodgement.

If there are concerns that the ATO may audit the estate, a conservative approach could be to not distribute the estate until 2 or 4 year period has lapsed.

From a practical point of view however an LPR may want to consider:

  • whether sufficient assets can be held in the estate to cover any further estate liabilities should the estate be audited by the ATO;
  • whether it is appropriate to obtain indemnities from the beneficiaries to whom the estate is ultimately distributed to; and
  • whether there are any restrictions in the Will, or any other practical matters to consider with regard to the estate administration.

To find out more about being personally liable for tax liabilities of a deceased estate, or Estate Planning, please contact us.