New legislation has recently been announced regarding governing the taxation of deceased estates. This is the first significant change to these provisions in almost 50 years.
The new regulations have clear definitions between the deceased person and the deceased estate and they further outline details regarding the disposal by a deceased person in a brand new section 9HA which has been introduced. Other changes include changes to Estate Duty legislation and to the capital gains tax legislation too.
"…but in this world nothing can be said to be certain, except death and taxes."
- Benjamin Franklin, in a letter to Jean-Baptiste Leroy, 1789
It is well known that death and taxes are inevitable. However, after having had no significant changes to these provisions for almost 50 years in South Africa, the Grant Thornton Tax team were somewhat surprised to see the changes announced recently to legislation governing the taxation of deceased estates.
The changes saw:
- The introduction of a new section 9HA;
- A re-write of the entire section 25;
- The introduction of a new ‘taxpayer’;
- Changes to the Estate Duty legislation; and
- Changes to the capital gains tax legislation.
Essentially, the changes seek to align the tax treatment trigger for income and gains and losses whether of a capital or revenue nature, to be on a person’s death, with the current exceptions being preserved.
Subsequent income received by or accrued to the deceased estate will be taxed in the hands of the deceased estate. Also, roll-over relief will apply in respect of transfers from the deceased estate to an heir or legatee.
The changes apply to persons who die on or after 1 March 2016.
According to the new regulations, at date of death a person ceases to be a taxpayer (“the deceased person”) and a new taxpayer comes into existence, namely the ‘deceased estate’.
The tax treatment for the ‘deceased person’ and the ‘deceased estate’ are:
The deceased person:
- will be taxed on income received or accrued prior to death;
- is entitled to deductible expenses and allowances incurred prior to death;
- will be taxed on employment lump sums;
- will be taxed on lump sums from pension, provident, retirement annuity funds (“RAF”) and preservation funds;
- will be deemed to dispose of certain assets at market value as outlined in the new section 9HA; and
- is required to submit a tax return on this basis.
The deceased estate:
- Section 25, which has been largely rewritten in the new legislation, deals with the taxation of a deceased estate, the surviving spouse and heirs or legatees;
- The 'representative taxpayer', as defined, of a deceased estate is usually the Executor; and
- Deceased estate must register as a taxpayer and will be treated as a “natural person”, as defined, for tax purposes, e.g. certain exemptions applicable to a natural person will apply.
Section 9HA: Disposal by a deceased person
At the date of death the deceased person is deemed to have disposed of all his or her assets at market value to the deceased estate.
However, prior legislation exclusions are still preserved under the new legislation, namely:
- Assets transferred to surviving spouse;
- Certain long-term insurance policies; and
- Pension, provident, RAF and preservation funds.
Where the assets are transferred to a surviving spouse, certain roll-over relief provisions apply namely, the surviving spouse 'steps into shoes' of the deceased person in respect of the asset, namely:
- Cost/'base cost' of asset;
- Date of acquisition; and
- Used assets in same manner, i.e. capital or revenue.
Where the assets are transferred directly to an heir or legatee, the new provisions regard the disposal to be between the deceased estate and the heirs. As a result, the capital gain will be calculated at market value of the assets as at the date of death, which is deemed to be transferred to the deceased estate and the deceased estate is deemed to have disposed of the asset at same market value. Therefore a nil capital gain will result in the hands of the deceased estate.
Section 25: Taxation of a deceased estate
The largely re-written section provides that income received after death constitutes income of the deceased estate and accordingly taxable in the hands of the deceased estate.
Previously income was taxed in the hands of ascertained heirs or legatees and expenses for the benefit of such heirs or legatees were similarly allowed as a tax deduction in their hands. This practice was not supported in tax legislation.
The new provisions allow for the deceased estate to be taxed as a natural person, namely:
- Marginal tax rates (maximum 41%);
- Capital gains tax inclusion rates.
However the following will not apply to deceased estates, namely:
- primary, secondary or tertiary rebates;
- medical tax credits;
- additional medical tax credits; or
- annual interest abatement/exemption.
- Assets acquired from the deceased person is deemed to be at a cost for capital gains tax purposes, which is calculated at the market value as at date of death.
Therefore, in respect of assets disposed of to an heir or legatee, the base cost is equal to such market value and any subsequent expenditure incurred by the deceased estate. It is important to note that any assets disposed of to a surviving spouse (if not directly bequeathed to surviving spouse), the base cost will equate to the ‘base cost' for the deceased person.
Logistics…registration as taxpayer
The creation of the new taxpayer for deaths on or after 1 March 2016, necessitates the registration of the deceased estate as a taxpayer with the South African Revenue Service (SARS).
We understand that SARS requires the following as part of the registration process:
- Executors will need to present themselves at the SARS contact centres with all relevant documents;
- SARS will issue the new taxpayer number if the application was successful;
- It is important that the deceased person must first be registered and coded as an estate before the new entity will be registered; and
- If the deceased person was not on register for income tax, the Executor would have to first request that SARS registers the deceased person, thereafter the new entity will be registered.
Amendments to the Estate Duty legislation: excessive contributions to retirement funds
The change is effective 1 January 2016 and applies to an estate of a person who dies on or after that date. The new provisions provide that contributions made on or after 1 March 2015 to any retirement funds, e.g. a pension, provident, retirement annuity fund and/or any preservation fund, will be included in the 'dutiable estate' for Estate Duty purposes where the contributions to such fund is not allowed as a tax deduction either in terms of sections 11(k) or (n), or Second Schedule or section 10C of the Act.
The changes essentially close an old established ‘loophole’ which allowed taxpayers to legitimately reduce their dutiable estate by moving cash into an exempt retirement annuity fund.
See example below:
Assets: House of R3m + Cash of R2m.
Previously: Prior to death a taxpayer would contribute R2m to RAF; as nil taxable income the taxpayer would have nil tax deduction of RAF contributions BUT would be able to reduce estate to R3m (R5m – R2m) with the result that no estate duty was payable.
Now: RAF contribution still no deduction but the R2m cannot be deducted in determining value of estate for estate duty purposes.
Estate duty now on R5m.
For further information or for assistance in understanding your own requirements, please contact our tax team.