On Wed 22.8.2018, the ATO issued Practical Compliance Guideline PCG 2018/4, which one might be forgiven for thinking was about thepersonal liability of a legal personal representative (LPR), of a deceased person’s estate, for the tax liabilities of the deceased, at the time of death. In fact, it is only about when the Commissioner will treat the LPR as having ‘notice’ of a tax liability of the deceased.
This PCG is the result of clamouring by tax and estate lawyers for certainty about when a deceased estate can be distributed, without fear of the LPR being personally liable. The PCG put the concern this way.
3. A liability may relate to either an assessment or an amended assessment that is made after the death of the deceased person. Feedback from practitioners has been that distributions of estate assets are sometimes delayed until after the relevant review period (either two or four years from the date of an assessment), to ensure that the LPR does not have to personally satisfy a liability relating to an amended assessment.
But the PCG doesn’t say why this concern might hinge on ‘notice’ of any particular tax liability of the deceased. It merely jumps from one to the other, as the following passage shows.
4. This Guideline is intended to enable LPRs of smaller and less complex estates to finalise those estates without concern that they may have to fund a liability of the deceased from their own assets. It sets out when an LPR will be treated as having notice of a claim by the ATO (including a claim arising from an amended assessment).
The Tax Administration Act 1953 (TAA) does provide the basis on which a Court appointed executor or administrator (LPR) is liable for the deceased’s tax liabilities (apart from the duty they have, to pay the deceased’s debts, as his/her LPR, out of his/her assets, which have vested in that LPR).
- Division 260 is about collecting taxes and Subdiv E is about collecting them from deceased estates.
- Section 260-140(2) allows the Commissioner, to deal with the LPR, as if he/she were the deceased, and the deceased were still alive.
- Section 260-140(3)(c) makes the LPR liable for the deceased’s taxes, but only in his or her ‘representative capacity’.
The key is what ‘representative capacity’ means.
- It certainly means that the LPR is taxed separately, apart from his or her own affairs (eg. so the Estate has it’s own TFN).
- LPRs would be very happy if it meant that they could only be liable to the extent of the assets available to them, at the time, to deal with. By this, they would hope to exclude assets used to pay other debts, and, perhaps, already distributed to beneficiaries of the Estate. But it does not mean this.
- For instance, a tax debt that exceeded available assets, could push the Estate into bankruptcy (via a State or Territory law, such as s39 of the Victorian Administration and Probate Act 1958). If other creditors have been paid, then they may have to disgorge the payment, they received, if this was a ‘voidable preference’. This is to swell the fund out of which all creditors are paid a dividend.
- It may also be that the LPR can recover an amount distributed, to a beneficiary, in circumstances where he/she can ‘follow the fund’, subject to tracing rules and the beneficiary having ‘notice’ of the Commissioner’s tax debt. This, however, would not leave the LPR out of pocket.
- There is also a doctrine of ‘equitable debt’, under which a beneficiary might have become liable to the Commissioner for a tax debt (when rights against the LPR have been exhausted). An equitable debt arises, “when an unpaid creditor [the Commissioner] of the estate is able to show that a distribution of assets has been made, to the beneficiary, without due provision for the [tax] debt, the assets [are] no longer traceable [in the beneficiary’s hand] and the debt [is] otherwise incapable of recovery” DCT v Brown  HCA 2 [para 1]. However, in this Brown case, the High Court held that such a debt cannot arise, for a Federal tax, as the beneficiary has no right of objection (and there cannot be an incontestable tax, under the Australian Constitution).
- Thus, an LPR’s exposure, to pay the Deceased’s tax debts (out of his or her own funds) principally arises from distributing to beneficiaries, without making provision for the tax debt.
- The law around when an LPR might be liable for this is complex, but does depend on the LPR having ‘notice’ of the tax liability – hence the focus of this PCG, on when ATO officers may treat the LPR as having ‘notice’ of the tax debt.
The guideline is confined to PPR’s of simpler Estates, namely those where:
- the deceased did not carry on a business, was not assessable on a share of the net income of a discretionary trust and was not an SMSF member in the 4 years prior to death;
- the Estate assets consist only of cash, personal assets, public company shares or other interests in widely held entities, death benefit superannuation and Australian real property; and
- the total market value of the estate assets at the date of death was under $5m and none of the assets are intended to pass to a foreign resident, tax exempt entity (so a charitable bequest would see you ejected from this protection) or to a complying superannuation entity.
The PCG advises that he will treat the LPR as having ‘notice‘ of a tax-related liabilities, in the following circumstances.
- Amounts the Deceased owed at the time of death – for which, usually, a Notice of Assessment would have issued (or deemed to have been issued under ‘self assessment’ provisions). [para 9]
- Amounts arising under returns the Deceased had lodged (but no assessment had issued). [para 10]
- Amounts arising under outstanding returns. [para 11] An LPR should enquire of the ATO about these (if they don’t already know about them). [para 11]
- Amounts under amended assessments, where the ATO has given the LPR notice that it will examine the affairs of the Deceased. The Commissioner also undertakes to issue any amendments promptly, so as to not hold up the administration (including the distribution) of the Estate, any longer than is necessary. [para 12]
- The LPR will NOT be treated as having ‘notice’, where: (i) the LPR has acted reasonably in lodging all of the Deceased’s outstanding returns; and (ii) within 6 months, of lodging those returns, the ATO has not advised that examine the Deceased’s affairs. [para 13] This is one of the key advances for practitioners, as the Commissioner is, in effect, directing staff not to issue amended assessments, to the Deceased, without giving the LPR notice.
- The LPR will NOT be treated as having ‘notice’, where: (i) the LPR discovers a material irregularity in a return of the Deceased, (ii) the LPR advises the ATO of this, in writing, and (iii) within 6 months, issue an amended assessment or advise it is going to examine the Deceased’s affairs further. [paras 14 & 15] This, too, is one of the directions, to staff, designed to give LPR’s comfort (or defacto protection, to distribute within 6 months of dealing with the ATO).
- If the LPR discovers further assets, after administering the Estate, he/she will have notice, of any further tax liabilities, but only up to the amount of those further assets. [para 26] The Commissioner notes that these further assets might, themselves, represent undisclosed income. Even so, para 26 does not set any period, within which the ATO must advise they’ll investigate further (say 6 months), to give LPRs some assurance that they can distribute these later discovered assets, too.
The guideline finalises Draft PCG 2017/D12 and contains some changes from the draft, including tightening the eligibility criteria with respect to SMSF members and assets passing to certain entities. A Compendium to PCG 2018/4, also issued today, outlines the ATO’s response to comments made about the draft.
DATE OF EFFECT: 22 August 2018.
[LTN 161, 22/8/18; Tax Month – August 2018]
Comprehension questions (answers available)
- Are some LPRs/Advisors sufficiently concerned about the possibility of the deceased having tax liabilities, that they do not know of, when administering the Estate, that they defer the distribubiton of the Estate, to the beneficiaries, for the whole of the Commissioner’s 2 or 4 year limit on amending assessments?
- Are LPRs liable to pay the deceased’s tax liabilities, on the same basis as all of the deceased’s other debts?
- Could an LPR be personally liable for the deceased’s tax, if they had notice of the tax debt, but distributed to beneficiaries, without making provision for its payment?
- Does this PCG set an administrative ‘safe harbour’, for the administration of a deceased Estate, by saying when the Commissioner will treat an LPR as having ‘notice’ of a tax-related liability?
- Does he advise that an LPR will have notice of tax liabilities arising under returns the Deceased has lodged or outstanding returns, which the LPR will have to lodge?
- Will an LPR have notice of any tax liability which issues more than 6 months after the LPR lodges the relevant return?
- Will the LPR have notice of any tax debt, that might arise from a significant ‘irregularity’ in the Deceased’s tax returns, if the ATO doesn’t act within 6 months of the LPR advising the ATO of the irregularity?