Finally! Additional Comfort for Executors! Practical Compliance Guideline 2018/4

Executor Personally Liable

An executor can become personally liable for tax debts of the deceased if the executor makes estate distributions whilst they are taken to have notice of a claim by the Australian Taxation Office.

PCG 2018/4 provides guidance on when an executor or administrator will be treated as having notice of a claim by the Commissioner, including a claim arising by way of amended assessment.

Importantly, the PCG does not deal with liabilities that an executor may have in relation to the deceased estate after the person’s death. It also does not deal with executors who have not obtained probate. However, executors or administrators without probate or letters of administration are not personally liable for the tax liabilities of the deceased.

Rightly, executors should be cautious of administering an estate to its beneficiaries prior to the expiration of the relevant review period (2 or 4 years), as they can be held personally liable for any tax debts of the deceased.

This can often delay beneficiaries receiving the entitlements under the estate, who are often impatient regarding receiving their distributions. This is where PCG 2018/4 can be used to alleviate tensions or pressure to distribute.

PCG 2018/4

This guideline is intended to enable certain legal representatives of less complex estates to finalise those estates before the expiration of the relevant review period, without concern that they may have to fund an outstanding tax liability of the deceased person from their own assets.

The guideline sets out when a legal personal representative will be treated as having notice of a claim by the ATO. This concept is important, as the executor will not be personally liable for the deceased’s tax debts if they can rely on not having notice of claim by the ATO.

The biggest change to the guidelines is the value of the estate has been increased from $5 million to $10 million. Given the large increase in property prices, the increase to the value of the estate is a welcome change and should provide further comfort to executors.

In order to rely on the PCG, the estate must be “less complex”. An estate is “less complex” if all of the following apply:

1. in the four years before the deceased died, they did not carry on a business, did not receive trust net income and was not a member of a self-managed superannuation fund;
2. the assets of the deceased only consist of public company shares, superannuation death benefits, Australian real property, and cash/cash investments or personal assets;
3. the total market value of the assets was less than $10 million at the date of the deceased’s death (including superannuation); and
4. none of the assets pass to a foreign person, a superannuation entity, or a tax-exempt entity.

The guideline provides legal personal representatives with situations and circumstances in which the legal personal representative will be treated as having “no notice” of a claim, allowing the estate to be distributed without tax concerns (generally 6 months after lodgement of outstanding tax returns or bringing irregularities to the attention of the ATO).

Fitting into the guidelines can ensure that the estate can be distributed in a timely manner and with comfort to the executors that they are not going to be held personally liable for tax debts in the future!

Key Takeaway

The guidelines can be relied upon for executors in circumstances where an estate is relatively small and simple. The increased $10 million threshold will likewise increase the number of legal personal representatives who can rely on this guideline.

To ensure protection, a legal personal representative who can rely on this guideline may wish to delay administration of the estate until 6 months after the latest tax lodgements or communications with the ATO.

For large and complex estates, the PCG cannot be relied upon, and the legal personal representative should continue taking care in finalising the estate, particularly where there are complex tax circumstances involved.