Tax compliance lives beyond death

A deceased estate takes on a (tax) life of its own while being wound up

I started my first job back in September 1987 at the tender age of 18, and approximately nine months later I received my very first income tax return from the Receiver of Revenue (as SARS was known in those days), and I’ve been required to complete an annual return ever since.

With my dear late mother having lived to age 82, I can safely assume that should God bless me with the same number of years here on earth, I’ll have submitted 64 tax returns during my lifetime.  One would therefore think that by the time I depart this mortal coil, SARS will have had enough of me and will happily close my tax file for good.

However, that is not the case.

When a person dies, their executor is required to submit a final tax return for the deceased person, covering the period from the beginning of the tax year up to the date of death.  The executor is also required to register the estate itself as a taxpayer, and will be responsible for completing returns for each tax period from the date of death up to the time the Liquidation and Distribution account has been finalised.

Now anyone who has ever been involved with the winding-up of deceased estates will know that it is a process known as ‘hurry up and wait’.  The ‘hurry up’ part is usually from beneficiaries clamouring for the estate to be wound up so that they can receive their inheritances—a bit like a child whining “Are we there yet?” every five minutes.

The ‘wait’ part is even worse, and includes:

• Waiting for the death certificate and Letters of Executorship to enable the executor to commence the process;
• Waiting for SARS to register the estate as a taxpayer;
• Waiting for tax certificates and other related information from institutions;
• Sitting out certain statutory waiting periods (e.g. the period in which estate creditors need to prove their claims against the estate); and
• Waiting for the Master’s office to respond during the various stages of winding up the estate.

In more complicated estates, the win-ding-up process can therefore take as much as two years, which means that in our example the executor will need to submit three returns on behalf of the estate:

• The first return being from the date of death to the end of the 2022 tax year;
• The second return being for the full 2023 tax year (i.e. 1 March 2022 to 28 February 2023); and
• The third (and final) return being from 1 March 2023 to the date that the Liquidation and Distribution Account has been finalised.

Many rather substantial textbooks have been written about the winding-up of deceased estates, with SARS having added a fair bit of its own literature on the income tax, Capital Gains Tax, and estate duty provisions that not only affect the deceased person but also the estate itself.

Accordingly, the remainder of this article is not intended to be an exhaustive treatise on the subject.  Instead, it will touch on the following four areas:

• The process of notifying SARS of the individual’s death, as well as registering the estate as a taxpayer;
• Tax consequences for the individual in their final tax year up to the date of death;
• Tax matters affecting the estate itself; and
• What needs to be sent to SARS to finalise the deceased estate.

Breaking the sad news to SARS

If the deceased taxpayer had a valid will nominating someone to act as their executor(s), such person(s) will apply to the Master of the High Court (‘the Master’) to confirm their appointment as executor(s).  In cases where no executor was nominated, or the taxpayer died intestate (i.e. without a valid will), the heirs need to submit nominations to the Master, who will then confirm an appointment.

Once the Master of the High Court has issued its Letters of Executorship, the person appointed as executor needs to notify SARS of the taxpayer’s death, and apply for the deceased estate to be registered separately as a taxpayer.  This notification can be made by:

• Booking an appointment with their local SARS branch—such bookings are done online via the ‘Book an Appointment’ screen on the SARS website (sars.gov.za), via e-filing (www.sarsefiling.co.za), or the SARS MobiApp; or
• Submitting a request via the SARS Online Query System (https://www.sars.gov.za/contact-us/send-us-a-query/); or
• Sending an e-mail to SARS—executors who are registered tax practitioners use pcc@sars.gov.za; executors who are not registered tax practitioners use contactus@sars.gov.za.

SARS will then flag the taxpayer’s existing tax number as ‘deceased’, and issue a separate tax number for the estate itself.

Note that SARS will only recognise the executor as the Registered Representative authorised to submit tax returns on behalf of the deceased taxpayer and the estate, as well as to deal with SARS concerning any aspect of the taxpayer’s or estate’s tax affairs.  If more than one person is appointed as a co-executor, they would need to nominate one executor to act as the Registered Representative.

Tax practitioners appointed as executor can act as a Registered Representative of a deceased estate.  However, if the tax practitioner is not the appointed executor, they would need a Power of Attorney authorising them to act on behalf of the executor concerning the deceased taxpayer’s / estate’s tax affairs.

It is also important that an ‘estate late’ bank account in the name of the deceased estate be opened as soon as the Letters of Executorship have been is-sued.  When completing any income tax returns for the estate, the banking details provided on the return must be of this ‘estate late’ account and not the deceased taxpayer’s personal bank account.  This also applies to the taxpayer’s final tax return up to the date of death.

Tax implications for the deceased taxpayer

As indicated above, the Registered Representative is required to complete a final tax return for the deceased tax-payer, covering the period from the beginning of the tax year to the date of death.

This final tax return will be completed in the same manner as a normal year-end tax return for an individual taxpayer.  However, it’s important to note the following:

Periods for which records are required

All tax certificates relating to employment, investment income, capital gains, Tax-Free Savings Accounts, retirement fund contributions, and medical scheme membership, as well as any records relating to the taxpayer’s business, trade, or rental property must be provided as at the date of death and not as at the end of the tax year (unless the two dates coincide).

Since most institutions will need to prepare such certificates manually, request these as early as possible—and expect to wait some time for them to be issued.

Capital gains and losses

A taxpayer is deemed to have disposed of all of their assets as at the date of death, thereby triggering a potential Capital Gains Tax (CGT) liability.  How-ever, it’s critical to note that the assets to be taken into account exclude those bequeathed to a surviving spouse.

If the taxpayer was married in community of property, most assets are thus owned jointly and both spouses would normally account for any capital gains and losses on their combined assets in both of their tax returns (with SARS automatically dis-regarding 50% thereof in each return).

Where a taxpayer married in community of property is bequeathing specific as-sets to their surviving spouse, the reality is that they’re only bequeathing 50% thereof (since the other 50% effectively belongs to their spouse already).  How-ever, if such bequests include assets that fall into the CGT net, it’s probably best to exclude the entire asset from the calculation.

The tax treatment of such assets, as well as any assets specifically excluded from community of property as a consequence of a previous bequest to either spouse where the will had stipulated such exclusion, is beyond the scope of this article.  It is recommended that advice be sought from a tax practitioner who specialises in deceased estates.

Taxpayers married out of community of property will only account for their own assets, whether or not the accrual system is applicable.  Assets left to their surviving spouse are excluded from the CGT calculation.

CGT exclusions, and rebates

The annual exclusion for capital gains (i.e. the amount of capital gain that is exempt from CGT in any particular tax year) is increased from R40 000 to R300 000 in the year of death.  Since SARS will have flagged the taxpayer’s income tax number as ‘deceased’, SARS will apply the R300 000 annual exclusion automatically.

All exclusions relating to capital gains (including the R2 million primary residence exclusion and the R1.8 million small business exclusion) will be applied in full, i.e. they are not apportioned for part of a year.

The annual interest exemption, as well as the primary, secondary, and tertiary rebates are adjusted pro-rata for the period between the beginning of the tax year and the date of death.

Tax implications for the estate

Tax returns for the estate itself are completed in the same manner as for an individual taxpayer – even the same form / return template is used.

The deceased estate is taxed in exactly the same way that an individual taxpayer is taxed (income tax as well as CGT), except that the estate does not benefit from the primary, secondary, or tertiary rebate.  This means that there is no ‘tax threshold’ applicable, thus all income is taxed from the first R1.

The first R23 800 of interest income remains exempt (being the exemption threshold for taxpayers under the age of 65).

Deceased estates are not provisional taxpayers.  Since most income from employment, as well as from annuities, normally ceases upon death, it is unlikely that a deceased estate will receive any income from which PAYE is deducted.  This means that any tax liability arising during a particular tax year only becomes payable to SARS upon issuance of an ITA34 assessment.

The process for finalising a deceased estate

Once the Letters of Executorship have been issued by the Master, the following process must be followed:

1. 1. The executor (who will become the Registered Representative) must inform any SARS office that the taxpayer is deceased. The documents required for the coding process include:

• • Copy of the death notice of the deceased (J294) issued by the Master’s Office, or the death certificate;
  • Copy of Acceptance of trust as Executor (Form J190) or Copy of the Letter of Executorship (Form J238);
  • Certified copies of the ID book/card of the deceased person and the executor;
  • Copy of the undertaking and acceptance of the Master’s directions (Form J155) or Copy of the Letter of Authority (J170) (in cases where the estate is less than R250 000)
  • Copy of the Inventory (Form J243)
  • Copy of the last will and testament (where such document exists)
  • The name, physical address, email address and telephone number of the executor, and of their agent (if applicable)
  • In the case of an agent, a Power of Attorney and certified copy of the appointed person’s ID book / card;
  • Copy of the signed final Liquidation and Distribution (L&D) accounts when they become available (if applicable); and
  • The Estate Duty Return (REV267 form).

1. 1. Once the deceased person has been coded as such by SARS, all outstanding tax returns should be submitted up to the date of death. This applies to all tax types, including income tax, VAT, PAYE, SDL, UIF, and estate duty.
   2. As soon as the executor has finalised the L&D account, it should be submitted to SARS, together with the REV267 (estate duty return). SARS will perform an audit for all taxes pre- and post- death.
   3. As soon as all tax liabilities have been paid in full, the Deceased Estate Compliance (DEC) letter is issued for all tax types, including estate duty.
   4. The DEC letter must be submitted to the Master’s Office for the executor to be discharged by the Master.

WRITTEN BY STEVEN JONES

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)