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.
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:
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:
The deceased estate:
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:
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:
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.
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:
However the following will not apply to deceased estates, namely:
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.
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:
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.