22 February 2022 – Frequently Asked Questions (FAQs) for the Insolvent Estates of Individuals were compiled on the basis of questions that executors, trustees and the public have about the tax treatment of insolvent estates of individuals. It was drafted to assist executors, trustees and the public to obtain clarity and to ensure consistency on certain practical and technical aspects relating to the insolvent estate of an individual.
When is an individual regarded as insolvent?
A person is referred to as insolvent when their liabilities exceed their assets. An insolvent estate comes into existence when the insolvent person’s estate is under sequestration. An estate is only under sequestration if the court has issued an order accepting the surrender of or sequestration of the individual’s estate.
What is the effect of sequestration?
Individuals that are declared insolvent are sequestrated and dealt with under the provisions of the Insolvency Act, 24 of 1936. The effect of sequestration is that the insolvent person is divested of his or her estate, which is vested in the Master until a trustee has been appointed to take control of the administration and sequestration of the estate for the benefit of the creditors, and, upon the appointment of a trustee, the estate vests in the trustee.
From a tax point of view, when a natural person becomes insolvent, a possibility of dealing with three taxpayers might arise:
- the insolvent person for the period before sequestration (taxpayer 1)
The tax reference number that was used before sequestration will be closed and can no longer be used going forward. Any income tax returns that are outstanding before the date of sequestration must be submitted using the income tax reference number used before sequestration.
- the insolvent estate (taxpayer 2)
The trustee of an insolvent estate must apply for a tax reference number for the insolvent estate. The new tax reference number will then be used for any interactions with SARS from the date of sequestration until the end of the last day, of that year of assessment. This second tax reference number is not compulsory, and is only applicable where the whole or part of any business undertaking of the insolvent person is transferred to the trustee of the insolvent estate.
- the insolvent person for the period after sequestration (taxpayer 3)
The taxpayer must apply for a new income tax reference number once the taxpayer has been declared insolvent in order to interact with SARS in respect of any tax obligations. However, when the insolvency of the taxpayer is reported to SARS and SARS codes the natural person as such, the registration of the income tax number for the period after sequestration is done automatically by SARS. The taxpayer must communicate this new number to his/her employer for purposes of updating his/her IRP5 submissions.
The effect of insolvency from an income tax point of view on the taxpayer is to terminate the tax status of the insolvent person before sequestration and to substitute it with a new taxpayer from the date of sequestration, that is, the insolvent person after sequestration. In addition, the natural person (insolvent person after sequestration) receives a new taxpayer identity from the date of sequestration.
Upon sequestration, a new entity comes into existence on the date upon which the insolvent person surrendered his/her estate or, in the case of compulsory sequestration, the date of the provisional order if such order is later made final. The insolvent estate is registered as a separate tax entity and a new income tax reference number is allocated to it. The insolvent estate must only be registered for income tax if there are income or capital gains and losses that must be accounted for in case where assets are disposed to third parties.
A separate tax return must be submitted for each of the periods identified above.
The insolvent person will be assessed as a natural person for the period prior to insolvency, as well as for the period subsequent to insolvency, should any income accrue to him or her in his or her personal capacity. Rebates will only be allowed on a proportional basis. The insolvent estate is not regarded as a natural person and does not qualify for the primary rebates and interest exemption as these provisions are limited to natural persons.
Who is responsible for the tax affairs of the insolvent estate?
The trustee or administrator of an insolvent estate is responsible for the tax affairs of the insolvent estate as part of the process to wind up the insolvent estate.
Duties of the trustee
The most important duties of the trustee are:
- to seek out as many of the debtor’s assets as possible, including but not limited to the seven remedies to recover assets available to trustees as discussed hereunder;
- to ensure that these assets are liquidated; and
- to distribute the proceeds in accordance with the prescribed order of preference among the creditors who have proved claims against the estate. Creditors exercise control over the sequestration process at the various meetings where claims are proven and certain other decisions taken. For the purpose of the distribution of assets, the Insolvency Act distinguishes between secured, preferent and concurrent creditors.
Duties of the trustee at SARS as the representative taxpayer
- Informing SARS of the insolvency of a taxpayer.
- Engagement with SARS regarding the insolvent estate.
- Registration of the insolvent estate for tax purposes (if applicable);
- Submission of tax returns of the insolvent estate (if applicable);
- Payment of outstanding tax liabilities.
If a trustee or administrator of an insolvent estate fails to comply with the requirements of the Income Tax Act and the Tax Administration Act relating to an insolvent estate, he/she could be held personally liable for any tax payable by him/her in his/her representative capacity if he/she alienates, charges or disposes of the income in respect of which the tax is chargeable or disposes of any fund or money which is in his/her possession from which the tax could legally have been paid.
Deceased Insolvent Estates
If an executor determines that a deceased estate is unable to settle its debts, then or any time before distribution of the estate, the executor must give notice to the creditors of the situation. The notice to the creditors serves to inform them that unless the majority in number and in value of all the creditors instruct the executor in writing to surrender the estate under the Insolvency Act, the executor will realise the assets in the estate in accordance with the provisions of the Administration of Estates Act.
To avoid unnecessary costs and difficulties, the Administration of Estates Act provides that the executor may continue with the administration of the insolvent deceased estate without resigning or waiting until a trustee is appointed.
If the required majority of creditors in an insolvent deceased estate instruct the executor to surrender the estate under the Insolvency Act, the usual rules, which apply to an application to surrender, will come into effect. It is also possible for an executor to bring an application to surrender an insolvent deceased estate without first consulting the creditors.
How do I get the process started to make SARS aware of an estate?
There are two options at this stage to report a new Estate Case to SARS:
- By sending an email to the SARS email addresses or
- by sending it through the new SARS Online Query System.
In order to report a new Estate Case to SARS, it is important that the correct Supporting Documentation be submitted to SARS. Refer to our FAQ on what is required to report the new Estate to SARS.
Update of the Estate’s Representative Taxpayer details
The nominated representative taxpayer of the estate (Executor / Trustee) as duly appointed by the Master of the High Court needs to ensure that the necessary official appointment documents are furnished to SARS in order for the details regarding the estate’s representative taxpayer to be updated. This is vitally important, in the course of the estate initiation and finalisation process, as all communication regarding tax enquiries, eFiling matters and estates compliance is sent to the correct email address. As such, all representative taxpayers should ensure that their personal tax profile with SARS is up to date and reflects the correct contact details and email address. No changes and amendments to the representative taxpayer’s profile shall be done at the time of updating the relationship between the estate and the representative taxpayer. Updates to the representative taxpayer’s personal taxpayer profile can be done via the available electronic channels. Corporate stakeholders (Executor / Trustee) who nominate their employees as the appointed Executor / Trustee of an estate, by the Master of the High Court, should ensure that these employees’ personal tax profile with SARS is updated and current. Their contact details and email address are critical in ensuring direct communication and smooth facilitation of the SARS Estates processes. These updates and changes, as may be required, cannot be done as part of the estate process. Employees need to follow the generally prescribed channels to effect such updates and changes.
How do I change banking details?
If you need to change banking details, see the supporting documents needed for an Estate (Individual or Sole Proprietor), Corporate Executor, Sequestrated Individual/Trust or Company/CC under liquidation.
For more information on changing banking details, you can also see Guide on changing banking details.