Almost half (45 per cent) of Australians die without a will. And from the time someone dies, it usually takes about three years for loved ones to sort out their legal affairs.
- When someone dies, their tax debts don’t disappear, leaving loved ones having to sort out the mess through a tricky legal system
- Australia’s tax ombudsman, the Inspector-General of Taxation, has conducted a review into deceased estates and suggests having digital death certificates to make the process easier
- The issue of death and taxes is a source of common complaints from taxpayers to the ombudsman and the ATO, including claims that tax officers lack empathy
The long and difficult process of sorting out deceased estates could be made easier by allowing digital “death certificates” — or automatic notification using their Medicare number — which is legally enforceable and shared between all layers of government.
This is one of 10 recommendations made by Australia’s tax ombudsman, the Inspector-General of Taxation, in a new report delving into the complicated area of death and taxes.
The area is so legally fraught that each year it results in about 430 complaints by taxpayers to the Australian Taxation Office (ATO) and Inspector-General of Taxation.
“When you die, someone has to pick up the pieces,” Ms Payne said.
“It’s not just a tax matter but about ensuring affairs are left in an orderly state.”
There was no formal requirement to notify the ATO of a death.
But in order to get the deceased person’s tax affairs sorted, the person acting on their behalf — either their tax agent or the executor of their will where there is one — has to jump through various legal hurdles before being able to access records.
“Different government agencies have different systems and they do not necessarily align,” Ms Payne said.
“A ‘tell us once’ approach would also reduce the stress placed on representatives who are likely the relatives or friends of the deceased.”
Currently, multiple notifications of a death are required across federal, state and local government and various other business and community organisations.
160,000 Australians die each year, most with outstanding taxes
ABS data shows almost 160,000 Australians die each year — with about 82 per cent of them aged 65 or over at their date of death and about 55 per cent aged over 80.
State and territory laws determine who can represent the deceased after their death and a “grant of probate”, or letters of administration, are required before the ATO is able to freely engage with the legal representative.
The report notes that different institutions with which the deceased held assets may also impose their own requirements before assets are released.
The legal representative has to lodge any prior-year tax returns that are outstanding and deal with complex estate issues.
While there are no death taxes in Australia, there is still an obligation to pay tax on the earnings and investments that had been held by the deceased.
This may include taxes on superannuation payouts (generally the ATO will tax super payouts to nominated beneficiaries at 15 per cent) and capital gains taxes owed on any investments such as shares or property.
Before that can even happen, a tax return is required if a dead person had a taxable income higher than the tax-free threshold of $18,200 in the year that they died.
Since most taxpayers have reached retirement age at the date of their death, they may not have been required to engage with the tax system for some years before they pass away.
How Medicare numbers could help agencies data match
Ms Payne suggests that one way to make the whole process easier would be to have some sort of digital notification of a death that is shared across all government agencies — federal, state, and locally based.
Australia’s Digital Transformation Agency is currently working with NSW agencies and the ATO on a project to develop a digital death certificate by 2025.
But even then, information sharing across government would be limited due to restrictions surrounding the use of some unique identifiers, such as Tax File Numbers.
Ms Payne suggests there may instead be a benefit in exploring the use of Medicare numbers as a possible identifier.
However, it could take years for such a system to develop, and the report noted to date its development had been held up due to the high cost.
The report suggests that in the interim funeral directors “may be well placed to assist grieving friends and relatives to reduce their stress in dealing with the ATO by obtaining information from them which fills ATO data and information gaps”.
ATO could make it easier to get franking credits
Ms Payne says another common source of complaint by taxpayers about deceased estates relates to how to access a franking credit owed when their loved one passes.
“If you’re alive and don’t have to lodge a tax return — you get your franking credit refunded,” she said.
“But as soon as you die, that form no longer applies to you. There’s no easy way in which people acting on behalf of the deceased can apply.
“You can apply for a tax file number for a trust, and then lodge a tax return for a trust. It goes without saying that as soon as you step into the world of taxation of trusts, the level of complexity goes through the roof.”
The report recommends simplifying tax-filing requirements for a deceased taxpayer, especially simple estates and where filing is necessary to process “low-value” franking credits and other tax refunds.
The report also recommends that the ATO engage with tax practitioners, solicitors and barristers to help develop better guidance for taxpayers dealing with deceased estates.
“Deceased estate issues do not only involve taxation matters but also matters of inheritance, property law, family law, trust law, as well as various state and territory succession laws.”
The report said the ATO does not presently have a dedicated team to deal with deceased estate matters, unlike other government agencies, such as Services Australia.
It suggests “expertise should be developed within the ATO to advise holistically on deceased estate taxation issues”.
The ATO has agreed in full, or part, with all but one of the 10 recommendations.
It disagreed on a part of a recommendation to give binding advice to taxpayers — a move that would possibly help minimise tax disputes — noting that the law was already binding but that “to the extent advice would be about the application of the commissioner’s general power of administration, the ATO does not have the ability to give binding advi