Winding up estate blues

TAX LEAKAGE: INCOME ACCRUING IN INTERIM HAS LED TO AN AMENDMENT

Before, beneficiaries weren’t aware income was accruing to them in the windingup process. The tax on it was lost to Sars. Moneyweb

Changes to the Income Tax Act, which affect the estates of deceased persons, have been causing practical problems in winding up estates. Tax leakage from death until the final winding up of the estate has led to an amendment where income cannot flow through the estate to an heir or beneficiary.

Since March 2016, the deceased estate must account for all income and capital gains or losses until the liquidation and distribution account is final.

However, from when the account is being drawn up to when it becomes final, income keeps accruing in the estate, so the account must be drawn up again to account it.

Talaria Wealth’s Cheryl Howard says many beneficiaries weren’t aware income was accruing to them in the winding-up process. This income wasn’t declared in their income tax returns, and the tax on it was lost to Sars.

She says Sars’ concerns about this are understandable.

However, the change – where the income remains in the estate until the liquidation and distribution account is final – causes practical problems.

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

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 (e.g. creditors) to object. Sars also has to audit the account before it’s final. During this period, income, e.g. rental, dividends or cash from a closed bank account can still accrue in the estate. According to the draft guide to capital gains tax, this income 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.”

Sait’s Erika de Villiers 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 where the estate must account for income until the liquidation and distribution account is drawn up, 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 heir or beneficiary’s responsibility.

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

Following the change, the executor can pay the tax with assets from the estate.

Income wasn’t declared in their tax returns.