Taxation Considerations in Family Provision Claims

Tax is a central, yet frequently underappreciated, aspect of estate administration. This is particularly so in the context of family provision claims, where disputes over entitlement intersect with complex tax issues. Too often, tax is treated as an afterthought – considered only once the substantive terms of a settlement have been agreed. This approach is inherently risky. Tax consequences can materially alter the value of an estate distort the intended effect of the agreed distribution between beneficiaries, and expose legal practitioners to professional liability.

This article provides a structured overview of key taxation issues arising in deceased estates, with a focus on family provision claims. It assumes a typical estate scenario: a deceased Australian tax resident, whose estate is also resident, holding a main residence, superannuation benefits, and a modest investment portfolio. Within that framework, it highlights the importance of integrating tax considerations into every stage of estate administration and dispute resolution.

Core Principles: Capital Gains Tax in Deceased Estates

No tax on Death
As a starting point, the death of an individual does not itself trigger immediate realisation of gains or losses merely because ownership changes by operation of law. Instead, the tax consequences are effectively deferred. Broadly, the legal personal representative (LPR) inherits the tax position of the deceased

Treatment of Pre-CGT and Post-CGT Assets
The distinction between pre-CGT and post-CGT assets remains fundamental. Assets acquired before 20 September 1985 lose their pre-CGT status upon death. They are taken to be acquired by the LPR for their market value at the date of death. This “reset” makes accurate valuation at death essential.

By contrast, post-CGT assets retain their historical cost base. That cost base passes from the deceased to the LPR and then to beneficiaries, ensuring that tax is only relevant on a subsequent disposal.

However, exceptions exist. For example, a deemed disposal may occur immediately before death if assets pass to tax-advantaged entities that are not deductible gift recipients or residents in circumstances involving non-taxable Australian property passing to non-residents. These exceptions can create unexpected tax liabilities if not identified early.

The Main Residence Rules
The deceased’s main residence is subject to concessional treatment. Where the dwelling was the deceased’s main residence at death and not used to produce income, the LPR is taken to acquire it for market value. If the property is sold within two years of death, any capital gain or loss is disregarded.

The two-year rule is critically important in practice. Where estate administration is delayed – often due to litigation or complexity – a full exemption may be lost unless the Commissioner exercises a discretion to extend the period. Administrative guidance allows, in certain circumstances, for a safe harbour extension of up to 42 months from the date of death, provided specific criteria are satisfied.

Notably, the exemption is broader than commonly assumed. It can apply to pre-CGT dwellings regardless of whether they were the deceased’s main residence. This creates opportunities in estates holding multiple properties.

Practical Challenges: Timing and Complexity
Despite the apparent clarity of the rules, practical application is often complex. Ownership interests may be split between pre and post-CGT components, particularly in cases involving joint tenancy. The date of acquisition for CGT purposes is the contract date, not settlement, which can produce counterintuitive outcomes.

Where delays arise from litigation, including family provision claims, practitioners must carefully assess whether the criteria for an extension are satisfied and ensure that appropriate records are maintained.

Family Provision Claims and CGT Outcomes

Deeds of Family Arrangement
Family provision disputes are frequently resolved by a deed of family arrangement rather than court determination. From a tax perspective, such deeds can preserve CGT roll-over relief, provided they satisfy specific requirements.

An asset will be treated as “passing” to a beneficiary if the deed:

• settles a genuine claim to participate in the estate; and
• involves consideration limited to the variation or waiver of that claim.

Importantly, a formal court proceeding is not required. A communicated intention to challenge the will may suffice, provided the arrangement is made within the relevant statutory timeframes.

When Roll-Over Relief Does Not Apply
The distinction between a variation of entitlement and a commercial transaction is critical. Where a beneficiary pays money to the estate to secure an asset, the transaction may be characterised as a purchase (in whole or part) rather than a variation of rights. In such cases, a full CGT roll-over may not apply, and the estate may realise a taxable gain.

This issue commonly arises where one beneficiary wishes to retain a particular asset – such as a family home – and compensates other beneficiaries to achieve that outcome. Unless carefully structured, this can create an unintended tax liability for the estate.

Embedded Tax Liabilities
Estate assets may carry latent CGT liabilities at the date of death. While courts have historically been reluctant to account for hypothetical future tax in determining provision, parties are free to negotiate on this basis. Failure to do so can result in inequitable settlements, particularly where beneficiaries receive assets with materially different tax profiles.

Superannuation Death Benefits

Nature and Distribution
Superannuation death benefits do not automatically form part of an estate unless paid to the LPR. Instead, they are distributed in accordance with the terms of the relevant superannuation fund – including by way of binding nominations, reversionary pensions, or trustee discretion.

From a tax perspective, the treatment of these benefits depends on several factors:

• whether the recipient is a “tax dependant”;
• whether the benefit is paid as a lump sum or income stream;
• the taxable and tax-free components of the benefit; and
• the age of the relevant parties.

Tax Dependants vs Non-Dependants
The definition of a dependant for tax purposes differs from that under superannuation law. Spouses and minor children are generally treated as tax dependants, while financially independent adult children are not. This distinction has significant implications.

Lump sum death benefits paid to tax dependants are typically tax-free. By contrast, payments to non-dependants may be taxed at rates of up to 15% or 30% on taxable components.

Payment to the Estate and Timing Issues
Where superannuation benefits are paid to the LPR, their tax treatment depends on who is expected to benefit from them. This assessment must effectively be made by the end of the income year in which the benefit is received.

This creates particular challenges in the context of family provision claims. If a claim is unresolved at the relevant time, it may be unclear who will ultimately benefit from the proceeds. In such cases, a conservative approach – treating the benefit as payable to non-dependants – may be necessary, potentially resulting in higher tax.

Critically, subsequent settlements do not retrospectively alter the tax position. A deed of arrangement entered into after the relevant income year cannot convert a non-dependant outcome into a dependant one for tax purposes.

Tracing and Record-Keeping
Where estates hold multiple sources of funds, it is essential to clearly trace payments to beneficiaries. If a distribution cannot be identified as coming from a non-taxable source, it may be treated as including superannuation proceeds, with adverse tax consequences.

Practical steps such as maintaining separate accounts for superannuation proceeds can mitigate this risk.

Trust Structures and Estate Disputes

Family Trusts
Many estate disputes involve assets held outside the estate, particularly in family trusts.

Unpaid present entitlements and loans owed by the trust to the deceased form part of the estate and must be addressed. Forgiveness of such amounts can trigger tax consequences and should be approached with caution.

Distributions from such trusts to an estate raise several issues:

• whether the estate falls within the class of beneficiaries of the family trust;
• whether the LPR or beneficiaries will be assessed on any family trust net income; and
• whether concessional tax treatment, such as the CGT discount, will be available.

Where net income is assessed to the trustee rather than beneficiaries, punitive tax rates may apply, and concessions may be lost.

Testamentary and Life Interest Trusts
Testamentary trusts are commonly used to provide for competing interests, such as a surviving spouse and children from a prior relationship. However, altering these arrangements after administration can trigger CGT events.

If changes are made during administration through a qualifying deed of arrangement, concessional treatment may be preserved. Once the trust is established and assets have been transferred, however, variations can result in immediate tax liabilities for trustees and beneficiaries.

This underscores the importance of resolving disputes early, before the estate is fully administered.

Allocation of Tax Liability
A recurring issue in family provision settlements is determining who bears any resulting tax liability. This is not always straightforward. Parties may have different assumptions about whether entitlements are expressed on a gross or net basis.

Failure to clearly address this issue in settlement documentation can lead to further disputes and litigation. Courts may ultimately determine the allocation, but this is an inefficient and uncertain outcome. Practitioners should ensure that settlement agreements explicitly deal with tax liabilities, including any CGT triggered by the transaction.

Additional Considerations

Residency of the Estate
The residency status of an estate is a critical factor. If a foreign LPR is appointed, the estate may be treated as a non-resident trust. This can affect tax rates, the treatment of capital gains, and the taxation of distributions to beneficiaries. These issues should be considered at the outset of administration.

Charitable Beneficiaries
Charitable beneficiaries are increasingly involved in estate disputes. Their tax-exempt status can create opportunities, such as the streaming of capital gains to reduce overall tax liability. However, such beneficiaries are also vigilant in protecting their entitlements and may challenge administration decisions that diminish their share.

Right to Occupy
The main residence exemption may extend to periods during which the property is occupied by certain individuals under the will. However, uncertainty remains as to whether similar rights created under a deed of arrangement will receive equivalent treatment. This is an area of evolving administrative guidance.

Conclusion
Taxation considerations are integral to the administration of deceased estates and the resolution of family provision claims. CGT implications, superannuation tax treatment, winding up trust structures, and timing issues can significantly affect the ultimate distribution of an estate.

The key message is clear: tax must be considered from the outset, not at the conclusion of the process. Early identification of tax issues allows for informed decision-making, more effective negotiation, and the avoidance of unintended consequences.

For practitioners, the stakes are high. Failure to properly account for taxation can result in materially different outcomes for beneficiaries and potential professional exposure. Accordingly, where uncertainty exists, specialist tax advice should be obtained.

This is published as a precis of an article written by Ian Raspin and Lyn Freshwater, BNR Partners. The full article can be accessed here.

April 2026

Ian Raspin, Managing Director, BNR Partners

BNR Partners Disclaimer
Every effort has been made to ensure that this publication is free of error or omission. However, BNR Partners Pty Ltd, its employees or agents, shall not accept responsibility for injury, loss or damage occasioned to any person acting or refraining from action as a result of material in this publication whether or not such injury, loss or damage is in any way due to any negligent act or omission, breach of duty or default on the part of any of those parties. This publication is not intended to be and should not be used as a substitute for taking taxation advice in any specific situation. The information in this publication may be subject to change as taxation, superannuation and related laws and practices alter frequently and without warning. None of BNR Partners Pty Ltd, its employees or agents are responsible for any errors or omissions, or any actions taken.