Executor’s Liability for Tax (New ATO Guidelines)

An Executor of an estate takes on responsibility for the debts of the deceased (including their tax debts). Most estates are administered and distributed within 12-18 months, whereas the ATO can review and amend tax returns for up to 4 years.

So, what happens if an Executor distributes the estate, only later to find that there is an outstanding tax debt, due to a reviewed and amended tax assessment? Is the executor at risk of personal liability?

This is a particular issue for executors who are not also beneficiaries such as accountants or other professional advisors. Short of holding back distribution for 4 years, how can they mitigate the risk of liability?

The new guidelines issued on 5 July 2017 (in draft) seek to clarify the circumstances when an Executor can distribute without concern of ongoing risk of personal liability for tax of the deceased without waiting for the amendment period to run.

Draft Guidelines

Basically, if an executor has:

  1. obtained a grant of probate (or letters of administration); and
  2. completed the administration of the estate; and
  3. ensured that all tax liabilities outstanding at the date of death have been paid;
  4. had no notice (actual or constructive) of an irregularity in the prior returns, or has had such notice but has brought it to the attention of the ATO; and
  5. lodged all prior outstanding returns (or provided an advice that lodgment is not required), and acted reasonably in doing so; and
  6. waited for 6 months to pass after the lodgment of the final return (or advice that lodgment is not required), without the ATO notifying the executor that it will be examining the deceased’s affairs;

then, subject to certain exceptions, the ATO will treat the Executor as having no notice of a claim and therefore the Executor is practically able to distribute the estate without ongoing exposure.

Exclusions

The guidelines only apply to relatively simple estates. They do not apply where:

  • the deceased ran a business; or
  • the deceased received trust distributions; or
  • the estate was worth over $5 million; or
  • the assets included interests in related companies or trusts.

For executors acting in these estates, the ongoing risk of personal liability for the tax of the deceased remains.  In those cases, the executors can consider:

  • Lodging appropriate notices to creditors and waiting out the timeframes (but note this will not protect in relation to known debts, or where the ATO considers the Executor was on notice of an irregularity);
  • Waiting out the ATO review period before distributing (could be up to 4 years); or
  • Seeking indemnities from the beneficiaries to whom distributions are to be made.

How can we help

Moores has a team of lawyers specialising in assisting professional executors.  

If you require any further information, please do not hesitate to contact us.