SARS has published an updated 57-page guide explaining the principles and procedures to follow when submitting an INDIVIDUAL ITR12 RETURN FOR DECEASED AND INSOLVENT ESTATES.
The purpose of this document is to provide assistance to complete an income tax return for individuals where there is income received or accrued to a deceased or insolvent estate.
This document is applicable to:
- executors representing individuals who have passed away on or after 1 March 2016, and
- appointed trustees/administrators where an individual becomes insolvent and income accrued or business conducted from the date of sequestration.
DECEASED ESTATES
Upon the death of an individual taxpayer, there are two types of assessments that must be taken into account: a pre-date of death assessment and a post-date of death assessment.
PRE-DATE OF DEATH ASSESSMENT
This assessment is for income and deductions applicable to the taxpayer up to the date of his/her death.
For assistance to complete an ITR12 return for income and deductions up to date of death please refer to the “Comprehensive Guide to the ITR12 Income Tax Return for Individuals” which is available on the SARS website (www.sars.gov.za).
POST-DATE OF DEATH ASSESSMENT – DECEASED ESTATE
This assessment is for income earned and deductions applicable to the deceased estate after date of death. For example this can include rental and/or interest income earned by the deceased estate.
For individuals who have passed away on or after 1 March 2016, a second income tax registration is required for the deceased estate if taxable income accrued to the deceased estate. This registration will be triggered by either the executor of the deceased estate or by SARS.
For more information please refer to the guide “How to Complete the Registration, Amendments and Verification Form (RAV01)” which is available on the SARS website.
The SARS Guide provides guidelines to help you declare post-death income, deductions, and CGT transactions on the income tax return.
INSOLVENCY
When a natural person becomes insolvent, a possibility of dealing with three taxpayers might arise:
the insolvent person for the period before sequestration (taxpayer 1).
the insolvent estate (taxpayer 2).
the insolvent person for the period after sequestration (taxpayer 3).
The effect of insolvency from an income tax point of view is to terminate the tax status of the insolvent person before sequestration and to substitute it with a new taxpayer from the date of sequestration, that is, the insolvent person after sequestration. In addition, the natural person (insolvent person after sequestration) receives a new taxpayer identity from the date of sequestration. Where there are assets in the insolvent person the assets will be disposed of under the insolvent estate.
A separate tax return must be submitted for each of the periods identified above.
THE INSOLVENT PERSON BEFORE SEQUESTRATION
A final tax return must be completed for the insolvent person for the period from the first day of the year of assessment to the day before the date of sequestration.
For assistance to complete an income tax return for income and deductions up to the period prior to the date of sequestration please refer to the “Comprehensive Guide to the ITR12 Income Tax Return for Individuals” which is available on the SARS website (www.sars.gov.za).
THE INSOLVENT ESTATE
The insolvent estate is registered as a separate tax entity and a new income tax reference number is allocated to it. The insolvent estate will come into being only if there are capital gains and losses that must be accounted for in case where assets are disposed to third parties.
Its first period of assessment will commence on the date of sequestration and end on the last day of February that follows thereafter. The second and subsequent years of assessment will commence on 1 March of that year and end on the last day of February that follows thereafter. The period of assessment during which the estate is wound up will commence on 1 March of that year and end on the date when the estate is finally wound up.
THE INSOLVENT PERSON AFTER SEQUESTRATION
An insolvent person who enters into employment or carries on a profession or business after his sequestration, is liable for tax on that income in its own right.
The first tax period will run from the date of sequestration to the last day of that year of assessment.
For assistance to complete an income tax return for income and deductions after the date of sequestration please refer to the “Comprehensive Guide to the ITR12 Income Tax Return for Individuals” which is available on the SARS website
(www.sars.gov.za).
RETURN FOR DECEASED OR INSOLVENT ESTATES
At present, the return that must be completed for deceased or insolvent estates is the same as the income tax return used for individuals. This means that there are certain sections on the return that are NOT applicable to a deceased or insolvent estates.
The SARS Guide specifies which sections these are and which options to select.
DONATIONS TO THE COVID-19 SOLIDARITY FUND
Where a donation was made by the deceased or insolvent estate to an existing PBO during the year of assessment and another donation to a Solidarity Fund during the “lockdown period” (i.e. on or after 1 April 2020 but on or before 30 September 2020, as per section 8(4) of the Disaster Management Act, 2020.), the current 10% deduction for a donation to the PBO and an additional 10% deduction for a donation to the Solidarity fund will be applicable. The excess will be carried forward to the following year of assessment and be subject to the 10% on the PBO rule. This will be applicable for the 2021 year of assessment.
The legislation requirement is to increase the deduction available for donations to the Solidarity Fund whereby the tax-deductible limit for donations (currently 10 per cent of taxable income) will be increased by an additional 10% for donations to the Solidarity Fund during the 2020/21 tax year. In the event that the taxpayer does not make a donation to the PBO, the whole donation to the Solidarity fund will then be subject to the 20% tax deductible limit on the taxable income.
Ideally, an ITR12 return must be completed and submitted for a deceased or insolvent estate via eFiling. If the deceased or insolvent estate is not registered for eFiling, a profile will need to be created.
If necessary, a visit to the nearest SARS Branch via an appointment may be scheduled.
In terms of section 240 of the Tax Administration Act No.28 of 2011, all Tax Practitioners who complete and submit tax returns on behalf of clients must be registered with a Recognized Controlling Body (RCB) and with SARS. Such tax practitioners have the full authority to prepare AND submit tax returns on behalf of their clients.
Practitioners that are not registered with the RCBs will not have this privilege.
If the deceased estate utilizes the services of a tax practitioner to submit the ITR12 return via eFiling/MobiApp and that tax practitioner is NOT registered with a Recognized Controlling Body, that tax practitioner will only be allowed to complete and save the electronic return but will not be able to submit the electronic return to SARS.
DOCUMENTATION REQUIRED TO COMPLETE THE RETURN
Supporting documents are required to complete an income tax return. Below are examples of documentation/information that may be required:
Certificates received for local interest income, foreign interest income, foreign dividend income, tax free investments.
All information relating to capital gain transactions (local and foreign).
All information relating to the letting of assets.
Financial statements for trading and farming activities (if applicable).
Any other documents relating to income that must be declared or deductions that may be claimed.
Note that you are required to keep all supporting documents for a period of five (5) years from the date of submission of the return, as SARS may request these documents to verify the information that was declared on the income tax return.
PERSON BEFORE SEQUESTRATION AND INSOLVENT ESTATE – THE “ONE AND THE SAME PERSON” RULE
Section 25C deems the estate of the person before sequestration and that person’s insolvent estate to be one and the same person for purposes of:
○ the amount of any allowance, deduction or set-off to which the insolvent estate may be entitled;
○ any amount which is recovered or recouped by or otherwise required to be included in the income of the insolvent estate; and
○ any taxable capital gain or assessed capital loss of the insolvent estate.
This, amongst other things, means that:
○ An assessed loss incurred by the insolvent person can be set off against the insolvent estate’s income.
○ Expenditure and allowances claimed by the insolvent person before the date of sequestration can be recouped in the insolvent estate, for example, depreciation allowances and bad debts previously written off.
○ Debts incurred in the income of the insolvent person before the date of sequestration can be claimed as bad debts by the insolvent estate.
○ The write-off of assets and allowances can continue to be claimed in the insolvent estate.
○ Closing stock taken into account in the insolvent person’s taxable income calculation may be taken into account as opening stock in the insolvent estate’s first taxable income calculation.
○ Any amount that would otherwise be required to be included in the income of the insolvent person may be included in the income of the insolvent estate, for example, the amount allowed as an allowance for doubtful debts or the allowance for future expenditure under section 24C.
○ The reduction or cancellation of debt provisions in section 19 must be kept in mind if the insolvent estate reduces a debt by more than the amount of consideration given for that reduction, for example in terms of a compromise with a creditor.
○ A disposal does not take place when the insolvent person’s assets pass from the insolvent person to the insolvent estate on sequestration.
○ Capital gains and capital losses arising because of disposals by the insolvent estate to third parties will be included in the hands of the insolvent estate but will take into account events that occurred in the insolvent’s hands, for example previous depreciation allowances.
○ As assessed capital loss incurred by the insolvent person before the date of sequestration may be set-off against capital gains arising in the insolvent estate.
For more information, refer to “Interpretation Note: 8 Insolvent Estates of Natural Persons” on the SARS website.
INSOLVENT ESTATE
On sequestration a person’s assets pass to that person’s insolvent estate. The change of ownership usually triggers a disposal, however the ‘one and the same person’ principle brings the two entities together and since a person cannot dispose of something to himself, there is no disposal of the individual’s assets on the date of sequestration.
Capital gains and losses are therefore determined in the hands of the insolvent estate when the assets are disposed of to third parties.
Under Paragraph 83(1) of the Eight Schedule (Income Tax Act), the disposal of an asset by an insolvent estate is treated in the same manner as if the natural person whose estate has been sequestrated had disposed of that asset. This means that the insolvent estate is treated as a natural person and will be entitled to the same exemptions and exclusions the insolvent person would have been entitled to, had the person disposed of the assets.
The purpose of this provision is to ensure that the insolvent estates will not be taxed on the disposal of the personal assets of the insolvent person such as that person’s primary residence (to the maximum amount of the primary residence exclusion), furniture or private motor vehicles. It also confers the same 40% inclusion rate and annual exclusion on the insolvent estate.
The insolvent person before sequestration, the insolvent estate and the insolvent person on and after sequestration share the annual exclusion, in that order, in the year of sequestration. Therefore, to the extent that the insolvent person before sequestration has not used the annual exclusion during the applicable period of assessment, the excess will be available for set-off against capital gains and capital losses arising firstly in the insolvent estate and secondly, if any excess remains, in the insolvent person on and after sequestration.
In the subsequent years, the insolvent estate and the insolvent person on or after sequestration will each be entitled to the full annual exclusion.
Under section 25C the “one and the same person” rule in relation to determining any taxable capital gain or assessed loss of the insolvent estate, an assessed loss in the hands of the insolvent person before sequestration may be carried forward to the insolvent estate. Any assessed capital loss remaining in the insolvent estate at the time it is finally terminated will be forfeited.
As the complete guide is a lengthy 57 pages, the above article serves as a summary only. Please refer to the SARS guide for further detail or contact Fincor Professional Accountants as your earliest convenience for a consultation.
December 2021
Author Craig Tonkin