When someone passes away it is important to remember that there are four types of taxes that come into play when dealing with the estate: 1.) Income Tax for the deceased individual (Personal Taxes); 2.) Capital Gains Tax; 3.) Estate Duty Tax; and 4.) Donations Tax (if applicable to the specific Estate).
Income Tax (Personal Taxes)
The executor of the estate has a duty to make sure that all tax returns of the deceased are up to date with the South African Revenue Services (SARS).
If any tax years are outstanding the executor will then have to request the relevant tax certificates/IRP5s from the respective institutions and then send it onto the tax practitioner to have them submitted and uploaded at SARS.
The estate will be charged Income Tax on any and all income, whether it is for dividends received, rental income or interest accrued during the estate administration process.
There are two types of assessments that must be carried out: firstly, a pre-date assessment (all income and deductions that were applicable to the deceased up to their date of death); and secondly, a post-date of death assessment (all income and deductions in the estate from after date of death).
B: If the deceased was a pensioner at the time of death or even a few years prior to date of death, the tax returns should still be completed and submitted to SARS in order for SARS to advise the executor that the taxes are in order and therefore provide the executor with a Tax Compliance Certificate (TCC) for the estate.
Capital Gains Tax
When someone passes away, the deceased individual is deemed to have disposed of their assets. This is because there has been a “change of ownership” as the assets will now be inherited by the heir/s in the estate.
This deemed “change of ownership” attracts Capital Gains Tax for the estate and is payable to SARS.
If the executor of the estate sells property or receives property into the estate then these assets will attract Capital Gains Tax.
However, it is important to note that certain assets in a deceased estate are excluded from Capital Gains Tax. These include: assets for personal use (there are certain exceptions); assets inherited by the surviving spouse; the proceeds from life assurance policies; and interests in pension, provident or retirement annuity funds.
At death, there is a once-off exclusion of R300 000 which means that R300 000 of the gain or loss will not attract any tax on capital gains made.
Any amount over and above R300 000 will have an inclusion rate of 40% and this amount will then attract the applicable tax as per the deceased individual’s marginal rate.
Estate Duty is determined based on the gross value of the Estate.
Each individual is granted a rebate of R3.5 million and Estate Duty is therefore only taxed on the value of the estate over R3.5 million.
Estate Duty is levied at 20% on the first R30 million and then 25% on the value above R30 million.
In terms of Section 4(q) of the Estate Duty Act – the Estate Duty liability in respect of the assets inherited by the surviving spouse is postponed. This means that it is deemed that the deceased individual disposed of the assets on the day of his/her death but the liability for the tax is postponed until the death of the surviving spouse.
Donations Tax does not form part of the calculation of an individual’s Income Tax liability and the Donations Tax calculation is done separately on each occasion that a donation is made.
Donations Tax is not levied on an individual’s income but on the capital transferred which is usually in the form of assets.
There are two parties involved in a donation, i.e. the donor (the person who makes the donation) and the donee (the person who received the donation).
The donor is liable for the payment of the donation tax. If the donor fails to pay his tax within the prescribed period (normally by the end of the month following the month in which the donation took effect or for a period as the Commissioner may allow,) the donor and the donee are jointly and severally liable for the Donations Tax.
Donations (taking into account certain exemptions as discussed below) are subject to donations tax levied at a rate of 20% on the value of the donation and applicable to donations made on or after 1 October 2001.
The following donations are exempt from Donations Tax:
Donations between spouses.
Donations that are made and materialise only when the donor dies. For example, if a person has a life-threatening job.
Donations which the donee will only receive the benefit of upon the death of the donor.
Donations that are cancelled within six months of taking effect.
Traditional councils, traditional communities and certain tribes.
Property located outside the Republic of South Africa. This is only applicable if the donor: acquired the property before becoming a resident of the Republic; or through inheritance from someone who at the date of his/her death was not resident in the Republic; or by using funds from the sale of the property and replacing it with other properties.
Exempt organisations such as: government; provincial administrations; municipalities; etc.