Deceased estate administration sits at the intersection of probate law, income tax, and CGT — and bookkeepers engaged to assist an executor or trustee need to understand all three dimensions. The bookkeeping challenge is not just about recording transactions correctly; it is about understanding the distinct tax treatment that applies to an estate as a legal entity separate from the deceased and from the beneficiaries.
The Estate as a Taxpayer
When a person dies, their estate becomes a separate taxpayer — a trust for income tax purposes. The Legal Personal Representative (LPR, typically the executor named in the will or an administrator appointed by the court) is responsible for lodging the estate's tax return and for paying any tax liabilities.
There are potentially two income tax returns to file in the year of death:
- The final individual return (the "date-of-death return"): covering the deceased's income from 1 July to the date of death. This is filed under the deceased's TFN and includes all income derived up to death.
- The estate's first trust return: covering income derived by the estate from the date of death to 30 June (or to the end of the administration period if it spans multiple years). The estate is assigned its own TFN and files as a trust.
The bookkeeper's first task is to establish the cutoff date and ensure that all income (salary, interest, dividends, rent) is correctly allocated to the pre-death period (individual return) or the post-death period (estate return).
The Date of Death Balance Sheet
The LPR requires a balance sheet of the deceased's assets and liabilities as at the date of death. This is the foundation of the estate administration. It includes:
- All bank and investment accounts, valued at date-of-death balance
- Shares and securities, valued at the closing ASX price on the date of death
- Real property, valued at market value (a formal valuation from a registered valuer is best practice and is required if the asset is subsequently sold)
- Business interests, including any partnership interest or discretionary trust entitlement
- Superannuation (noting that super is not necessarily a deceased estate asset — it depends on whether a binding death benefit nomination exists and to whom)
- Loans and liabilities owed by the estate
The balance sheet serves as both the probate document (in some jurisdictions) and the CGT cost base starting point for the LPR.
CGT Cost Base Rules for Estate Assets
The CGT rules for deceased estates are contained in Division 128 of the ITAA 1997. The general rule is that a deceased person is deemed not to have made a capital gain or loss on their assets at the date of death — the CGT event is deferred. The LPR (or beneficiary, if assets are distributed) "inherits" the cost base.
The inherited cost base depends on when the deceased acquired the asset:
- Pre-CGT asset (acquired before 20 September 1985): the cost base becomes the market value at date of death. This effectively resets the cost base and means any subsequent gain accrues from zero.
- Post-CGT asset held at least 12 months: the cost base is the deceased's original cost base (the LPR inherits the original cost, not the date-of-death market value).
- Post-CGT asset held less than 12 months: the cost base is the deceased's original cost base.
When the LPR or beneficiary sells the asset, they calculate the capital gain using the inherited cost base. The 50% CGT discount applies if the combination of the deceased's holding period and the LPR's/beneficiary's period is more than 12 months in total.
For the main residence: if the deceased's home was their main residence at death, the LPR or beneficiary has up to two years from the date of death to sell it and access the full main residence exemption. If the home is not sold within two years, the exemption is apportioned and there will be a partial taxable gain.
Estate Income During Administration
Income earned by the estate during the administration period — interest on bank accounts, dividends on shares, rent from an investment property — is assessable income of the estate. If the administration period spans multiple financial years, the estate files a trust return each year.
Estate income that is distributed to beneficiaries during the administration period is taxed in the beneficiary's hands (via a trust distribution and section 97 inclusion). Undistributed income is taxed in the estate at individual marginal rates (with a top rate of 45 cents for income above $18,200 — note that the tax-free threshold is available to the estate in the year of death and the following year, after which the 45% rate applies to all income above $416).
Franking credits attached to dividends are still available to the estate and flow through to beneficiaries who receive trust distributions.
Superannuation Death Benefits
Superannuation does not automatically form part of the deceased estate. If a valid Binding Death Benefit Nomination (BDBN) exists directing the super to a dependant (spouse, child under 18, or person in an interdependency relationship), the trustee of the super fund pays the benefit to that person directly — it never enters the estate.
If the BDBN is to the estate (or there is no BDBN), the super is paid to the LPR and becomes an estate asset. The tax treatment of the death benefit depends on whether the ultimate recipient is a dependant for super tax purposes — if they are, the taxable component is tax-free. If not (e.g., adult children over 18 who are financially independent), the taxable component is subject to tax at 15% (plus Medicare levy).
The bookkeeper handling the estate must know the TFN withholding position and the trust structure for any super death benefit paid to the estate — this affects both the estate's tax liability and the amount available for distribution to beneficiaries.
Practical Bookkeeping Steps for Estate Administration
- Open a dedicated bank account for the estate as soon as practical after probate is granted
- Transfer all estate income to that account (redirect dividends, rent, etc.)
- Pay estate liabilities (funeral costs, probate fees, ongoing property costs) from that account
- Keep a schedule of all receipts and payments with dates, amounts, and nature
- Prepare the date-of-death asset and liability schedule
- Identify the CGT cost base for each asset
- For any asset sold during administration, calculate the capital gain and include in the estate trust return
- Distribute income and capital to beneficiaries per the will, obtaining a Deed of Variation where the will's distribution is impractical
- File the final estate trust return and close the TFN once administration is complete
The bookkeeper's records for an estate administration must be retained for at least five years from the date of the estate's final tax return. In practice, retain them for the limitation period that applies to the residuary beneficiaries' potential claims — typically five to six years.