30/10/2018

In some circumstances the legal personal representative ('LPR') of a deceased person's estate may be personally liable for the outstanding tax-related liabilities of the deceased.

When may an executor/administrator incur personal liability?

The term LPR includes an executor who has obtained a grant of probate or an administrator who has obtained letters of administration.

An LPR is in charge of collecting the assets of the deceased person, attending to payment of any outstanding debts and liabilities, and subsequently distributing the residue of the estate to the beneficiaries. If an LPR distributes the estate without satisfying the advertising requirements prescribed in the relevant State/Territory legislation, they will not be protected from claims from creditors of which they were not aware of at the time of distribution and may be personally liable in the absence of sufficient estate assets.  

On top of the above responsibilities, the LPR is responsible for lodging any outstanding tax returns for the deceased person up to the date of date (including a Return Not Necessary Advice if appropriate) and will also be held personally liable if the assets are distributed while the LPR had (or were deemed to have) notice of a claim by the ATO.  This is because the ATO cannot recover the estate assets once they are in the hands of the beneficiaries.

Scope of the Guideline

In order to assist the LPR in finalizing particular types of estates without risking personal liability (or creating lengthy delays by waiting for the expiration of the relevant review period before distributing the assets), the ATO released Practical Compliance Guideline PCG 2018/4 in August 2018.  The Guideline does not address liabilities that are incurred after the death of the deceased person and does not apply where probate or letters of administration have not been obtained as, in this situation, a different collection mechanism applies for the deceased’s outstanding tax liabilities.

Whether an LPR had or is deemed to have notice of a claim from the ATO will depend on the specific circumstances of each case, however the Guideline outlines determining factors and examples of when a LPR will be deemed to have notice of a claim from the ATO and when they will not.

Does the Guideline apply to all types of estate?

The Guideline is intended to only apply to what the ATO deems to be ‘smaller and less complex estates’; which are estates where:
-    in the four years prior to their death, the taxpayer:
o    did not carry on a business;
o    was not a member of an SMSF; and
o    was not assessable on a share of the net income of a discretionary trust;
-    the assets only include listed shares or units, death benefit superannuation, real property in Australia, cash and personal assets;
-    the total market value at date of death is below $5 million; and
-    none of the beneficiaries are foreign residents, a tax exempt entity or a complying superannuation entity.

When will the LPR be treated as having notice?

Broadly speaking, the ATO will treat the LPR as having notice of a claim by the ATO when there are:
-    amounts owing at the time of death (including interests);
-    liabilities owing from outstanding income tax assessments;
-    liabilities owing from outstanding tax returns;
-    liabilities from amendments arising out of a review by the ATO; and
-    further assets are discovered after completion of the estate’s administration.

When will the LPR be treated as not having notice?

On the other hand, the ATO will consider the LPR did not have notice of a claim where:
-    the LPR acted reasonably in lodging all of the deceased person’s outstanding returns, including a Return Not Necessary Advice; and
-    the ATO did not give notice to the LPR of its intention to examine the deceased person’s taxation affairs within 6 months of lodgment of the last outstanding return(s) by the LPR.

The Guideline includes 3 examples which may be of assistance to some LPRs.  

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.