This article deals with taxation related to the estate of a deceased person. This is part 3 of a series of articles related to Estate Duty and discussed the valuation thereof.
When a natural person (taxpayer) dies, that person is called a ‘deceased person’ and all his or her assets on the date of death will be placed in an estate. This estate is called an estate of a deceased person (commonly known as a ‘deceased estate’). Assets in a deceased estate can amongst other things include immovable property (house), movable property (car, furniture, etc.), cash in the bank, etc. The person who administers a deceased estate is called an ‘Executor’. Once the Executor has finalised all the administration in the deceased estate, the remaining assets (after paying all the debts) will be distributed to the beneficiaries.
A beneficiary can consist of either heirs and/or legatees. A legatee is a person who receives a specific asset from the deceased estate. An heir is a person who receives the balance of the estate (that is after all disposals to a legatee are finalised).
What is estate duty?
Estate duty is the duty levied under the Estate Duty Act, 1955 (the ED Act) on the dutiable amount of an estate of a deceased person.
Is there a distinction between a deceased person and the deceased estate for income tax purposes?
Yes. The deceased person’s liability for tax and year of assessment comes to an end at the date of death and a new taxpayer, namely, the deceased estate comes into existence in respect of any income and liabilities that arise after the date of death. Although the deceased estate is treated as a natural person, it is not regarded as the same natural person as the deceased person.
In general, a deceased estate is not a person but a collection of rights and obligations of the deceased person administered by an executor. However, for income tax purposes, a deceased estate is regarded as a “person” by way of the inclusion of such an estate in the definition of a “person” as defined in section 1(1) of the Income Tax Act.
What rate of tax applies to a deceased estate?
A deceased estate is treated as a natural person for income tax purposes, except for the application of sections 6, 6A and, 6B of the Income Tax Act. Therefore, the rate of tax applicable to individuals also applies to a deceased estate. The exclusion of deceased estates from the application of section 6 of the Income Tax Act means that the tax thresholds applicable to individuals do not apply to a deceased estate.
The first year of assessment for the deceased estate commences on the day after the date of death and ends on the last day of February. If the L&D account becomes final before the end of the year of assessment, the year of assessment will end on such date. For subsequent years of assessment, the executor of a deceased estate must continue to submit income tax returns for each year of assessment until the L&D account becomes final.
A deceased estate is specifically excluded from the definition of “provisional taxpayer” as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act. A deceased estate cannot settle a tax liability by way of provisional tax.
The residence of a deceased estate in South Africa for income tax purposes follows the residence of the deceased person at the time of death. This determination of residence for income tax purposes is wide and can be by way of physical presence or by being ordinarily resident in South Africa. For estate duty purposes, the concept of residence is narrow and determined by whether the deceased person was ordinarily resident in South Africa.
For income tax purposes, the worldwide income of the deceased person would be subject to tax in South Africa. However, for estate duty purposes, only the property situated in South Africa is included in the deceased estate.
The following types of income are taxable in the deceased estate:
• All local and foreign income, except for a non-resident deceased estate where only the income amassed in South Africa is subject to tax.
• Investment income (including local interest income exceeding R23 800).
• Rental income from immovable property.
• Trading income.
• Farming income.
• Trust income.
• Capital gains on assets disposed of by an executor.
• No IRP5/IT3a type income, for example, lump sums or vesting of share options.
• Any income received after the date of death, for example, a bonus, relating to a period before death accrues to the deceased person as at the date of death and not to the deceased estate. This income must be declared in the deceased person’s last return.
Any income (investment, rental, or trade) that has accrued over a period of time that relates to a period before and after the date of death must be split between the deceased person and the deceased estate. The income that accrued up to the date of death must be included in the return of the deceased person and the income that accrued after the date of death must be included in the income and expenditure account of the L&D account. L&D accounts are liquidation and distribution accounts used by Executors.
What is the impact on the income and expenditure that arises after death if the deceased person was married in community of property?
Where the deceased person was married in community of property and income (investment and rental income) is earned by the deceased estate, 50% of such income must be declared by the deceased estate and the surviving spouse must declare the other 50%.
All income, both local and foreign (including investment and rental income) as well as capital gains and foreign credits must be reflected as 50%. For a non-resident estate, only local income is included.
Income derived from the carrying on of a trade (except rental income) forms part only of the estate of the person carrying on the trade. The 50/50 split, therefore, does not apply to trade income.
A capital gain of up to R1 million in respect of the disposal of a primary residence may be claimed in the deceased estate, the balance must be reflected in the spouse’s return.
An income tax return should be submitted for each year of assessment until such time as the estate becomes distributable. Even when an estate is finalised during the year of assessment, an income tax return must be submitted for the full year of assessment during which the liquidation process was finalised.
If a deceased estate takes more than one year of assessment to be finalised, the income earned and expenditure incurred after the date of death must be allocated to each relevant year of assessment until the deceased estate is finalised.
The L&D account must be submitted in order to prove any of the following:
• Income received by the executor.
• Assets acquired by the deceased estate from the deceased person.
• Assets disposed of by the deceased estate to an heir or legatee.
• Assets disposed of by the deceased estate to a resident’s surviving spouse.
The assessment of this income up to the date of the final L&D account as approved by the Master will form part of the expenditure in the income and expenditure account of the deceased estate and is due and payable by the executor. The usual expenses as in the income and expenditure account are allowed to be claimed by the deceased estate.
The deceased estate is liable for any tax applicable to income earned during the advertisement period up to approval. Any income earned during the advertisement period up to approval must be declared in the deceased estate’s final income tax return although not reflected in the income and expenditure account of the L&D account.
Any income earned after approval of the L&D account accrues to the beneficiaries (if any). The executor must inform the beneficiaries to declare such income in their respective tax returns.
The following deductions and exemptions are available to the deceased estate:
• The interest exemption for a taxpayer below 65 years of age applies to the deceased estate even if the deceased person was older than 65.
• Any capital gain on the disposal of a primary residence, where the gain does not exceed R2 million, will be disregarded.
• No capital gains tax implication on property that is inherited by a surviving spouse. The rollover will apply.
• The capital gains tax exclusions on personal use assets.
• The deceased estate will be taxed at the same rate and enjoy the same inclusion rate for capital gains tax as is applicable to normal taxpayers.
• The exclusion and inclusion rates as per the current tax year of assessment.
The following may not be claimed by a deceased estate:
• Medical and travel deductions.
• Provisional tax.
• Any rebates.
• Estate duty.
Only professional fees that were actually paid or are payable for the completion of the income tax return, can be considered as a deduction. Refer to paragraph 7.2.1 of the Guide to the Individual Income Tax Return for Deceased and Insolvent Estates and Practice Note 35 “Deduction of Fees Paid to Accountants, Bookkeepers and Tax Consultants for the Completion of Income Tax Returns”.
No expenses may be claimed relating to:
• advertisement costs for debtors and creditors;
• advertisement costs for the L&D account;
• Master’s fees;
• executor’s remuneration (3,5%);
• value-added tax (VAT) on the executor’s remuneration; and
• postage and petties.
An assessed loss, including an assessed capital loss, may not be carried over from the deceased person to the deceased estate. The deceased estate will be allowed to carry over any losses incurred in the deceased estate until the L&D account becomes
A crypto asset is regarded as a movable asset in the deceased estate.
For estate duty purposes, the crypto asset must be included as property in the deceased estate and is valued at the fair market value at the date of death. For income tax purposes, depending on the facts and circumstances applicable, a crypto asset is regarded as an asset or trading stock for tax purposes.
If the crypto asset is treated as trading stock, normal tax will apply and if it is treated as a capital asset, capital gains tax may apply. The crypto asset must be declared in the deceased person’s income tax return. The executor or agent must also declare the crypto asset in the tax return of the deceased estate (if applicable) as well as in the L&D Account.
The executor as the representative taxpayer is required to act on behalf of the deceased person and the deceased estate. The executor is required under the Administration of Estates Act, 1965 to fulfill all duties and obligations in finalising the estate. SARS must be notified of the death of the person, even if no estate duty is payable. If the deceased was not registered for tax purposes, it still needs to be reported to SARS.