Death and Taxes – Estate Taxes in New Zealand

10 February, 2016 | Mimi Lewell

They say there are two certainties in life – death and taxes. Unfortunately death does not necessarily mean the end of taxes. As executor or administrator you are responsible for ensuring that income tax returns are filed, and any money owed is paid. Bad advice on how to deal with estate-related taxes could leave you liable as executor.

In most cases final income tax returns will need to be filed for a deceased person (using the person’s individual IRD number they have had during their lifetime) from the 1st of April in the tax year that the person died until the date of death.

Income tax returns will then need to be filed for the person’s Estate from the date of the person’s death until the date that the Estate is distributed.

In terms of income tax, the Estate is considered to be a different entity from the individual and requires a new IRD number. We can apply for an Estate IRD number, or your accountant (or our accountants) can apply for one.

While the Estate must pay tax on any income earned, ‘death taxes’ or ‘death duties’ no longer exist in New Zealand tax law. (They were officially abolished in 1993) This means that there is no tax to be paid on inheritance by beneficiaries.

We usually attend to the preparation of income tax returns after the major distribution of Estate funds has been done, but we can apply for the Estate IRD number at any time once Probate has been granted.

Once the major distribution of Estate funds has been done (usually after the six month waiting period from the date of Probate) we often arrange with our accountants to prepare and file the final individual and Estate tax returns.

When preparing and completing final income tax returns for an estate, we recommend holding aside a small amount of estate funds (ie $5,000 to $10,000 depending on the size of the estate and the potential income tax liability) to cover any tax payments required by the IRD.

Once the interim distribution has been completed we take the amount retained for tax off investment so that no more income is earned and then we instruct the accountants to prepare the income tax returns.

When the prepared income tax returns have come back from the accountants we usually send them out to the Executor(s) / Administrator(s) for signing.

Once the income tax returns have been filed and all expenses (including any tax payable) have been paid and any expected income tax refunds have been received, we distribute the remaining balance (if any) to the Estate beneficiaries, which usually finalises all matters in relation to the Estate.

Occasionally some Estates do not require income tax returns, if the deceased person fits a specific set of criteria outlined by IRD. We can advise you on whether or not the Estate you act for fits this criteria, and if so, apply for the IRD to cease the person’s individual IRD number.

When choosing a law firm to administer an Estate, you should ensure that they have the knowledge to best advise you on how to deal with income tax liability – or you may find that as executor you are now liable for income tax payments and there is nothing left in the estate to pay it!

For expert advice on administering an estate, including advice on filing income tax returns, contact Estates Administrator, Mimi Lewell by phone on 09 837 6831 or email mimi.lewell@smithpartners.co.nz