How the dead frustrate the living

Changes to the Income Tax Act make the winding up of an estate a never-ending process.
Tax leakage from the time of death until the final winding up of the estate has led to an amendment where income is no longer allowed to flow through the estate to an heir or beneficiary, writes Visser. Picture: Shutterstock

Changes to the Income Tax Act which affect the estates of deceased persons have been causing practical problems during the winding up of estates.

Tax leakage from the time of death until the final winding up of the estate has led to an amendment where income is no longer allowed to flow through the estate to an heir or beneficiary.

Since March last year the deceased estate must account for all income and capital gains or losses until the liquidation and distribution account becomes final.

However, during the time from when the account is being drawn up and the time it becomes final, income continues to accrue in the estate, which means the account must be drawn up again to account for the income.

The liquidation account is basically a recording of all the assets and liabilities within the estate and the distribution account is who will benefit, and how much of the assets must be distributed to them once the liabilities have been accounted for.

Cheryl Howard, MD of Talaria Wealth, says it takes time to wind up an estate. In many instances beneficiaries were not aware that income was accruing to them during the winding up process.

This income was not declared in their income tax returns, and the tax on it was lost to the South African Revenue Service (Sars). Howard says this was not because of neglect, but simply because they were unaware of the income accruing to them.

She says Sars’ concerns about the tax on this undeclared income, which has been falling through the cracks, is understandable. However the change – where the income remains in the estate until the liquidation and distribution account is final – causes practical problems.

In terms of the process the account must be left for inspection at the office of the Master of the High Court for a specific time to allow for people (aggrieved beneficiaries, creditors or ex-spouses) to object. Sars will also have to audit the account before it becomes final.

Howard says during this period income such as rental from properties in the estate, dividends from a share portfolio or cash from a bank account that was closed can still accrue in the estate.

“You keep going in a complete circle. As you get to a point where you determine the tax to be paid, the account (liquidation and distribution account) is still open for inspection. Income is still accruing so more tax is payable which needs another liquidation and distribution account to be drawn up.”

The South African Institute of Tax Professionals (Sait) says in a submission to Sars the concern is in the wording “when the account becomes final” and not “when the account is drawn”.

In practice income continues to accrue after the liquidation and distribution account has been drawn up. This income, according to the draft guide to capital gains tax, must be taxed in the estate.

“This would require further income tax returns to be submitted and assessed, and this liability would not have been reflected in the liquidation and distribution account, and if it had been may have prompted further objections.”

Erika de Villiers, head of tax policy at Sait, says in the submission that while these revised assessments are being finalised, further income could continue to arise, which would require yet further returns and assessments. The process goes on ad infinitum.

Sait has requested an amendment to the effect that the estate must account for income up to the point where the liquidation and distribution account is drawn up and not when it becomes final.

Howard says the issue now is that once the account is “final” anything that has subsequently accrued will be the responsibility of the heir or beneficiary.

She explains that before the change, and where beneficiaries were actually aware that they had a tax liability before the estate was finally wound up, they had to pay the tax even though they had not yet received the assets on which they were taxed.

This has had a major impact on the cash flow of beneficiaries.

Following the change (where the income stays in the estate until the account is “final”) the executor can pay the tax with assets that are still in the estate.

The additional income that may accrue after the winding up and until the asset is transferred to the beneficiary will be the responsibility of the beneficiary.

Howard says this liability can also be severe and beneficiaries may have to sell some of the assets to pay the tax.

Taxpayers who realise that they cannot afford an asset have the right to renounce it, but they cannot exchange one asset for another in the estate.

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The heading of the article should be “How the living dead frustrate the living” – referring to the zombies who make these laws.
The extortion racketeers at SARS dream up this nonsense and then, sadly, parliament simply nods its head like a plastic animal in the back window of a 1970’s sedan.

You know this is so very easily solved by the authorities.

All that should happen is that all accruals up to the date of death should be deemed as income to that deceased persons estate. Sars should calculate all the taxes due and the debt amount retrieved from the estate.

All accruals from the deceased date should only become payable once the estate has been wound up and divided/shared etc. That tax is then payable to Sars by the recipients.

WTF is so difficult??????

What you are suggesting is how it used to be. SARS worries about the tax leakage where the income is not declared by the beneficiary of that income. So instead of proper enforcement – all the information was available to enable that under the previous dispensation in the part of the L&D account called the “Income and Expenditure Account” the amendment to the Income Tax Act created this new monster. Trust the tax man to find the most complex solution to a problem that arose in the first place due to his inefficiency.

I didn’t read the article, but how is this delay different from actual practice?

I can’t remember the last time I’ve heard of an deceased estate that has been wound up successfully within the prescribed time frame.

My father’s simple estate took 10 years. It was opened twice, sloppy work by the executers, but they collected their % on every amount found, and then messed up the tax.

My parents died within 1 year of one another – and the attorneys wrapped up each estate within 60 days each

As he called for champagne when he was approaching death in 1900:

”Ah, well then, said Oscar, I suppose that I shall have to die beyond my means”

Oscar Wilde. (1854-1900)

End of comments.

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