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.
The graphic alongside illustrates an example of an individual who died partway through the 2022 tax year. Their executor will this submit a final return in the individual’s name covering the period 1 March 2021 up to the date of death.
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:
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:
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:
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:
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:
Written by Steven Jones
Steven Jones is a registered SARS tax practitioner, a practicing member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.
This article is a general information sheet and should not be used or relied upon as 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 financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)