This year’s Tax Institute’s conference was themed around Death & Taxes. While death is unavoidable (although interestingly, Australian statistics indicate the death rate for 2020 is actually lower than it was in either 2018 or 2019), there are certainly things that may be done within a careful Estate Plan to minimise the tax implications.
This planning may be relevant even where the estate is relatively simple – for example, you may just have minimal assets and some superannuation. If you pass your superannuation to a financial dependent (domestic partner, minor child, person you are caring for or who is caring for you), this can pass tax-free. However, if superannuation death benefits pass to an adult child or other non-dependent beneficiary, it is most likely to be taxable (assuming it was contributed by an employer, or a tax deduction was claimed for the contribution into the superannuation fund). The tax position is even worse if the payment includes a life insurance component within the superannuation fund.
Although it is not always possible to know when your time is up, if you are given a terminal illness diagnosis, you may elect to withdraw all of your superannuation benefits during your lifetime and pay no tax on the distribution to yourself. This may then pass through your Will to your nominated beneficiaries – again with no tax payable.
Some accountants and financial planners may also assist with strategies within a superannuation fund to minimise the tax payable upon death. This can depend on your age and employment status, but it is worth talking about if you are motivated by tax minimisation.
Sometimes, a beneficiary of an Estate may want to ‘disclaim’ their entitlements. This is often motivated by a desire to retain pension eligibility. It is not necessarily a significant issue when dealing with an Estate, but if there is a trust involved, it is important to consider the timing of the disclaimer and the potential tax implications. In the case of FCT v Carter, the Commissioner of Taxation argued that if a beneficiary of a trust disclaimed their interest in the trust income after 30 June, they were still presently entitled to the income at 30 June and should be taxed on their entitlements.
For people with more complex structures, such as trusts and companies, it is very important to consider any possible tax issues arising from loans to companies from shareholders, and potential forgiveness of those loans upon death of the shareholder. Where a person is owed money from a related company, sometimes they may want to forgive that loan upon their death, because the company doesn’t have liquid assets to repay the loan, and their intention is for the company to continue to operate. In a Private Binding Ruling on 20 June 2009, the tax office outlined that, if the loan to a shareholder is forgiven by the Executor of an Estate before Probate is granted, there is no deemed dividend because the Executor is not yet the shareholder. However, once probate is granted, the Executor becomes the shareholder, so forgiveness of the debt from the Estate may invoke section 109F of the Income Tax Assessment Act, and operate as a deemed dividend (which will have tax implications).
Another important consideration for tax in an estate plan involves interests in assets overseas. Many countries have death duties, and there can be fairly complex rules as to when these apply depending on domicile and where the assets are held (depending on the country). However, careful planning can assist in minimising the applicable taxes if this is addressed early enough.
In some cases, a person acting under Power of Attorney may take on the role of tax planning for an upcoming Estate, but it is crucial for the document establishing the Power of Attorney to provide the nominated attorney(s) with the appropriate powers to deal with the structures in the most tax effective way.
Our Wills & Estates lawyers have extensive experience providing Estate Planning advice stand alone or in conjunction with a financial advisor. We provide tailored advice to ensure that we minimise any tax implications. For more information, or to make an appointment with our Wills & Estates lawyers, contact our support team or phone us on +61 3 9822 8588.
Insight by Rohani Bixler.