Deceased estates with foreign executors — Australian tax implications

Administering a deceased estate can be a complex and time-consuming process, particularly when the deceased held substantial assets or had outstanding liabilities. The complexity increases significantly when assets are located across multiple jurisdictions.

In cases where an individual who owns property in Australia passes away while residing overseas, the executor may face unforeseen Australian tax consequences, especially when selling that property as part of the estate administration.

These tax implications are most likely to arise when probate is granted exclusively to an executor who is not an Australian tax resident. Under such circumstances, the estate may be classified as a non-resident trust for Australian tax purposes. As a result, it may lose access to certain tax concessions that are otherwise available to estates administered by Australian resident executors.

If the executor is a non-resident, the implications include the following:

• Capital gains tax (CGT) 50% discount — The estate will be ineligible for the CGT 50% discount. Generally, the executors of a deceased estate may be entitled to apply the CGT 50% discount to reduce any capital gain on the sale of assets of the estate, provided that the assets were held by the executor for a minimum of 12 months. For this purpose, the executors are treated as having acquired the asset upon the deceased’s death. If the estate is a non-resident trust, the trust may be ineligible to access the CGT 50% discount to reduce any capital gain.
• No tax-free threshold — If the executor is a non-resident, the estate will not be eligible for the concessional tax rates and will instead be taxed as a non-resident. This means that the estate will not have the benefit of the tax-free threshold of $18,200 applicable to residents, which applies for the first three years following the deceased’s passing. Accordingly, if investment income is generated in Australia in the estate, there will be a higher tax liability.
• CGT withholding regime — If the executor is a foreign resident, the ‘foreign resident CGT withholding regime’ will apply to any sale of Australian land by the executor, regardless of the contract price. Under this regime, the purchaser must withhold 15% of the purchase price and remit that amount to the Australian Taxation Office (ATO) as a non-final withholding tax. When the executor subsequently lodges the estate’s tax return, the final CGT liability will be determined, and the executor may receive a refund of some of the withheld CGT (depending on the ultimate tax liability).

We briefly note that under the CGT withholding regime, the executor may also apply to vary the rate of withholding to below the requisite 15%, to avoid excess withholding. This may be relevant where the land is pre-CGT or was eligible for a partial main residence exemption.

The above complexities which arise where the estate is a non-resident trust may be eliminated by the appointment of an Australian executor to the deceased estate. This step will ensure that the deceased estate will be treated as an Australian resident trust for tax purposes.

When is a deceased estate an Australian resident trust?

Under Australia’s tax regime, a deceased estate will constitute a resident trust in an income year if either of the following conditions is satisfied:

• a trustee of the trust estate was an Australian tax resident during the year; or
• the ‘central management and control’ of the trust estate was in Australia at any time during the year.

The ‘central management and control’ test may be satisfied where, for example, the Australian family of the deceased provides instructions to a foreign executor on the sale or investment of estate assets. However, the ATO will require evidence of such instructions to demonstrate that the high-level decisions of the estate were made in Australia.

In contrast, the appointment of an Australian resident trustee (i.e. an executor or administrator) will be sufficient to ensure that the estate constitutes an Australian resident trust.

Appointing an executor who is an Australian tax resident ensures that the deceased estate is treated as a resident trust for both income tax and CGT purposes. This classification allows the estate to access the 50% CGT discount on the sale of trust assets, provided the asset has been held for at least 12 months. Additionally, the estate qualifies as a resident trust under the CGT withholding rules, enabling the executor to obtain a clearance certificate from the ATO. This certificate confirms to the purchaser that the vendor is an Australian resident, thereby removing the obligation to withhold tax on the transaction.

Preparing a Will is one of the most important steps you can take to protect your legacy and ensure your wishes are carried out. Whether you’re deciding who to appoint as your executor or navigating the complex tax implications of estate administration, expert guidance can make all the difference.

Choosing the right executor

The role of an executor is critical. They manage your estate, carry out your instructions, and ensure legal and financial obligations are met. Selecting the right person requires careful consideration of their residency, capability, and trustworthiness.

Did you know that appointing an Australian resident as your executor can have significant tax advantages? It may ensure your estate is treated as a resident trust for income tax and capital gains tax purposes, potentially unlocking valuable concessions.

Understanding tax implications

Estate administration can trigger unexpected tax consequences, especially when assets are held across borders. Our team can help you:

• Navigate CGT and income tax rules
• Understand the benefits of resident trust status
• Apply for ATO clearance certificates to avoid unnecessary withholding

How can Rigby Cooke help?

If you’re in the process of preparing a Will and need guidance on selecting an appropriate executor, or if you require expert advice on the taxation aspects of administering a deceased estate, please contact a member of our Tax or Wills, Trusts & Estates team.

Important Note:

We note this article discusses the tax implications where the executor of a deceased estate sells an asset of the estate as part of the administration process. The tax outcomes will differ if the executor directly transfers an estate asset to a beneficiary, in accordance with the terms of the deceased’s Will. In that case, there are CGT concessions and no CGT withholding requirement.