The Journey Continues: Decoding Deceased Estates and the “Two-Pot” System
The passing of a loved one can feel like the end of a chapter, but in the world of finance, it marks the beginning of a new one. As an executor, you are not just managing a legacy; you’re navigating a complex financial journey governed by two distinct taxpayers and, now, a new retirement landscape. In this newsletter, we demystify the income tax obligations for deceased estates in South Africa and explore how recent changes, particularly the “Two-Pot” retirement system, impact this crucial process.
The Two Taxpayers: A Tale of Pre and Post-Death Obligations
In South Africa, the Income Tax Act creates two separate taxpayers when an individual passes away: the deceased individual and the deceased estate. Understanding this fundamental distinction is the first step toward proper estate administration.
1. The Deceased Individual: The Final Tax Return
This taxpayer’s journey ends on the date of death. The executor’s role is to ensure all tax obligations up to that point are met. This includes:
Filing Tax Returns: Submitting a final income tax return (ITR12) for the period from the beginning of the tax year to the date of death.
Capital Gains Tax (CGT): A crucial part of this final return is accounting for CGT. Death is considered a “deemed disposal” of all assets, meaning they are treated as sold at market value on the day of death. The gain (or loss) must be calculated, although the estate can benefit from a once-off CGT exclusion of R300,000 in the year of death.
2. The Deceased Estate: A New Tax Entity
This new entity is created from the date of death until the estate is finalized. If the estate generates any income during this period, the executor must register it as a new taxpayer with SARS.
Taxable Income: The estate is liable for income tax on any income it generates after death, such as interest on investments, rental income, or business income.
Tax Rates and Deductions: The estate is taxed at the same progressive rates as an individual but does not qualify for personal rebates. However, it can benefit from certain exemptions, such as the interest income exemption up to R23,800.
CGT on Sales: If the executor sells any assets from the estate, any capital gains realized are taxed in the hands of the deceased estate.
Beyond Income Tax: The Estate Duty Act
Separately, the Estate Duty Act 45 of 1955 imposes a tax on the value of the estate itself.
Abatement: A significant feature is the R3.5 million abatement, meaning no estate duty is payable on the first R3.5 million of the estate’s value.
Tax Rates: Estate duty is levied at 20% on the first R30 million of the dutiable estate and 25% on any amount exceeding R30 million.
Navigating the “Two-Pot” System: A Game-Changer for Retirement Funds
The implementation of the new “Two-Pot” retirement system from September 1, 2024, introduces a new layer of complexity to deceased estates, though it’s important to note how retirement funds are handled upon death.
What is the “Two-Pot” System?
This system divides retirement savings into three components: a Savings Pot (one-third of new contributions, accessible once a year), a Retirement Pot (two-thirds of new contributions, preserved for retirement), and a Vested Component (existing retirement savings before September 1, 2024).
Impact on Deceased Estates:
Crucially, in South Africa, retirement funds, including those under the new “Two-Pot” system, are governed by the Pension Funds Act and do not form part of the deceased’s estate. This means they are not distributed according to the will or subject to estate duty.
Trustee Discretion: Upon a member’s death, the fund’s board of trustees is responsible for identifying and distributing the benefits to the deceased’s financial dependents and nominated beneficiaries, regardless of what the will states.
The Savings Pot: While a member can withdraw from their Savings Pot during their lifetime, any funds remaining in any of the three pots upon death are distributed by the fund’s trustees according to the Pension Funds Act.
Tax Treatment: The beneficiaries will pay tax on any lump sum they receive from the retirement fund, but this is governed by specific retirement fund tax tables, not the deceased’s final income tax return.
Conclusion
The landscape of deceased estates is constantly evolving. As an executor, understanding both the established rules of income and estate tax and the new implications of the “Two-Pot” system is essential. By meticulously managing these responsibilities, you ensure that the deceased’s financial affairs are settled correctly and their legacy is distributed as intended, without unnecessary legal or financial complications.
Happy Women’s Day! To the Heartbeat of Our Nation
The 9th of August, we celebrate Women’s Day, a day that holds a special place in the heart of South Africa. It’s a day to remember the brave women who marched to the Union Buildings in 1956, standing against injustice and fighting for a more equal future for us all. Their courage ignited a fire that continues to burn brightly.
To all the women out there—the mothers, daughters, sisters, friends, leaders, and pioneers—we celebrate you. We celebrate your strength, your resilience, and your unwavering spirit. We honor the quiet power you hold and the loud voices you use to uplift and inspire.
Your contributions shape our families, drive our economy, and enrich our communities. You are the architects of our homes and the innovators in our workplaces. You are the nurturers who care for us and the warriors who fight for what is right.
The 9th of August is a reminder of how far we have come and a beacon for how much further we can go. Let’s continue to support, empower, and celebrate one another, not just on this day, but every single day.
