Non-Resident Executors: Tax and CGT Risks in Australia

Introduction

When a deceased estate in Australia is administered solely by a non-resident executor or administrator, the estate’s tax treatment changes significantly. The estate becomes a non-resident trust for tax purposes, losing access to the tax-free threshold and other concessions available to Australian resident estates.

This classification triggers capital gains tax (CGT) liabilities, foreign resident capital gains withholding on property sales, and higher income tax rates. This article explains the key tax implications and practical strategies for families managing cross-border estate administration.

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Tax Residency Rules for a Deceased Estate

Criteria for a Resident Trust

A deceased estate is treated as a trust for Australian tax purposes, with the legal personal representative acting as trustee. Under Section 95(2) of the Income Tax Assessment Act 1936 (Cth) (‘ITAA 1936‘), the estate is a resident trust estate if either:

• at least one trustee is an Australian resident at any time during the relevant income year; or
• its central management and control is in Australia during that year.

The Australian Taxation Office (ATO) may require evidence showing that high-level decisions about the estate administration were made in Australia. This issue can arise where an executor, beneficiary or estate asset is located overseas.

Classification as a Non-Resident Trust

An estate is treated as a non-resident trust estate for tax purposes where the grant of administration is made solely to an executor or administrator who is not an Australian resident for tax purposes. The same outcome may arise where there are no Australian resident executors.

Section 6(1) of the ITAA 1936 defines ‘resident’ and includes:

• the ordinary concepts test;
• the domicile test; and
• the 183-day test.

The deceased person’s Australian residency or the location of the estate assets does not, by itself, prevent the estate from being classified as non-resident when the sole executor is a non-resident.

Tax Consequences for Non-Resident Administrators

Loss of the Tax-Free Threshold

A deceased estate with a non-resident administrator does not receive the $18,200 tax-free threshold available to resident estates for the first three years after death. As a result, tax may apply from the first dollar of taxable estate income, increasing the estate’s tax liability during estate administration.

The threshold applies to resident estates, while a non-resident estate may be taxed under the non-resident tax regime. This treatment can affect the amount available for distribution to each beneficiary.

Higher Tax Rates & Loss of Concessions

A non-resident estate may face higher income tax rates on income earned from Australian assets after death. The applicable rates are identified by reference to Part II of Schedule 1 to the Income Tax Rates Act 1986.

Other tax consequences may include:

• potential loss of franking credit refunds; and
• additional land tax surcharges in some jurisdictions.

These outcomes can increase the tax burden on the deceased estate and reduce the amount available for distribution. Executors may also face penalties for failing to comply with the tax obligations applying to a non-resident trust.

Ineligibility for the Capital Gains Tax Discount

A non-resident executor may not access the 50% CGT discount when the estate sells an asset held for at least 12 months. The discount would otherwise reduce the capital gain included in the estate’s taxable income.

Entitlement to the discount for taxable Australian property may depend on assessment by the Commissioner under Section 99 of the ITAA 1936. That assessment is discretionary, so the discount is not automatically available to a non-resident estate.

Foreign Resident Capital Gains Withholding Rules for Property Sales

The 15 Percent Withholding Rate

Foreign resident capital gains withholding (FRCGW) applies when a foreign resident executor sells Australian real property. For contracts signed on or after 1 January 2025, the purchaser must withhold 15% of the property’s market value, with no minimum value threshold.

The purchaser must pay the withheld amount to the Australian Taxation Office at or before settlement. The withholding is credited against the estate’s final income tax and CGT liability.

Property covered by these rules includes:

• homes;
• vacant land;
• residential and commercial buildings;
• certain leases; and
• some indirect Australian real property interests.

Clearance Certificates & Variation Notices

An Australian resident vendor may avoid withholding by providing a valid Australian Taxation Office clearance certificate to the purchaser at or before settlement. However, a foreign resident executor cannot use the Australian resident clearance certificate process. 

The executor’s legal personal representative may instead apply for a variation notice if the 15% withholding exceeds the estate’s expected Australian tax liability on the sale.

Without a variation notice, the purchaser must withhold the full 15% and remit it to the ATO. The application should be supported by relevant calculations and evidence. If an amount is withheld, the legal representative may claim it as a credit in the deceased estate’s trust tax return using the purchaser’s FRCGW payment confirmation.

Capital Gains Tax & CGT Event K3 for Non-Resident Beneficiaries

The Trigger for CGT Event K3

CGT Event K3 may arise when a resident deceased estate transfers an asset to a foreign resident beneficiary. Section 104.215 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997‘) applies where the asset is not taxable Australian property in the hands of the foreign resident beneficiary and the capital gain would otherwise escape Australian tax.

Assets such as shares may be affected by an in-specie distribution. The deceased estate, rather than the beneficiary, is responsible for the resulting CGT, which must be paid before the asset is transferred.

Impact on the Residuary Estate

CGT Event K3 can reduce the value of the residuary estate because the deceased estate bears the associated tax liability. This may leave less available for beneficiaries who receive the residue, including Australian resident beneficiaries.

The impact can be unequal where a will gives a specific asset to a foreign resident beneficiary but does not state who must bear the resulting tax. The estate may pay tax on the transfer from funds that would otherwise have been distributed among residuary beneficiaries.

Main Residence Exemption Limitations

A non-resident beneficiary may not receive the main residence exemption for inherited Australian property. The exemption is subject to strict conditions, including rules applying to property connected with a deceased foreign resident.

For property sold after 30 June 2020, the exemption is generally unavailable where the deceased was a foreign resident, unless the foreign residency lasted less than six years and a life event test is satisfied. Relevant life events include:

• a terminal illness affecting the owner or a family member;
• the death of a family member; or
• a marriage breakdown.

Income Tax Rules for Distributions to Foreign Beneficiaries

Trustee Obligations for Non-Resident Beneficiaries

An executor acting as trustee has two key obligations when a non-resident beneficiary is presently entitled to estate income:

• include the beneficiary’s share of the deceased estate’s net income in the trust tax return; and
• pay tax on the beneficiary’s behalf at the applicable non-resident tax rates.

Beneficiaries are generally not presently entitled to estate income until the estate is fully administered. However, if income is distributed earlier, the executor must assess the beneficiary’s status and meet the relevant tax obligations.

Non-Resident Tax Rates on Estate Income

Estate income distributed to a non-resident beneficiary is taxed at non-resident tax rates, with the rate starting at 30% from 1 July 2024. The estate must withhold the relevant amount and account for it through the trust tax return.

No Medicare levy is payable on a non-resident beneficiary’s share of the estate’s net income. Furthermore, the tax treatment applies whether the distribution is made before final administration or after the estate has been distributed.

Double Taxation Risks

A foreign beneficiary may face tax in Australia and in the country where they live when receiving estate income. Australian-sourced income from the deceased estate may remain subject to Australian tax, while the beneficiary’s home country may also assess the same income under its tax system.

Tax treaties may reduce double taxation, but their treatment of estate distributions can vary. As a result, the beneficiary may need to consider a foreign tax credit claim in their home country for tax paid in Australia.

Practical Solutions for Cross-Border Estate Administration

The Appointment of an Australian Resident Executor

Appointing at least one Australian resident executor, with guidance from wills and estate planning lawyers advising on executor appointments, can help the deceased estate qualify as a resident trust for tax purposes. 

This may reduce exposure to the tax consequences associated with a non-resident trust, including the loss of the tax-free threshold and other concessions.

The executor may be a family member, trusted individual, licensed trustee company, accountant or lawyer. Where a will names a non-resident executor, the available options may include:

• appointing a resident co-executor;
• considering a substitute executor; or
• applying for letters of administration with the will annexed, where the beneficiaries can accept responsibility.

The Liquidation of Assets Before Distribution

A will may direct the sale of Australian property before distribution to foreign beneficiaries. Distributing the net sale proceeds rather than transferring the property itself can simplify the estate administration and reduce the need to deal with complex foreign tax laws.

This approach may also help address the CGT consequences of transferring an asset directly to a non-resident beneficiary. The estate can sell the property, account for any capital gain and tax liability, and then distribute the remaining cash in accordance with the will.

Foreign Investment Review Board Approvals

A non-resident beneficiary who inherits Australian real property may need to apply to the Foreign Investment Review Board. The application process may be costly and time-consuming, and approval is not guaranteed.

Directing the sale of real property before distribution may avoid placing the beneficiary in a position where they must seek approval to hold the property. The will should address the intended treatment of Australian property and the possible tax consequences before estate administration begins.

Conclusion

The choice of executor can affect whether a deceased estate is treated as a resident trust, with consequences for tax rates, the tax-free threshold and available concessions. Property sales, distributions to a foreign resident beneficiary, CGT Event K3 and FRCGW can create further tax liability and compliance requirements.

With these issues considered early, contact wills and estate planning lawyers at LawBridge for practical legal guidance on estate administration, executor appointments and Australian property held by deceased estates. Our lawyers can help assess the estate’s tax obligations, coordinate with taxation advisers and structure the administration to reduce unexpected tax consequences for beneficiaries.

Frequently Asked Questions