The South African Revenue Service (“SARS”) has recently set out new procedures relating to the process around the filing of income tax returns relating to insolvency. The default position is that where the estate of a person is sequestrated, a separate return must be submitted for the period commencing on the first day of that year of assessment and ending on the date preceding the date of sequestration. A further return is required for the period commencing on the date of sequestration and ending on the last day of that year of assessment (and subsequent years of assessment until the estate is finally wound up). Essentially, therefore, three separate taxpayers will be liable for tax, namely:
- The insolvent person for the period before insolvency (that is, up to the date preceding the date of sequestration);
- The insolvent estate (a new entity for tax purposes from the date of sequestration); and
- The insolvent person for the period on and after the date of sequestration.
SARS indicates that the new requirements are: “in line with SARS’ strategic objectives, increased tax compliance and the increased ease and fairness of doing business with SARS and to comply with legislative requirements, changes to the current processes are required in terms of registration, maintenance, and the management of the status of an insolvent individual and estate”.
From 25 January 2019, individual taxpayers who are voluntarily or mandatorily sequestrated must submit income tax returns in the following manner:
- Insolvent individual: 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 you were declared insolvent;
- Insolvent estate: 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; and
- Individual post-insolvency: You must apply for a new income tax reference number once you have been declared insolvent in order to interact with SARS in respect of tax you may be liable for and returns you need to submit.
The estate of the person before sequestration and the person’s insolvent estate are, however, deemed to be one and the same person for certain purposes, for example, the determination of the deductions and allowances the insolvent estate may be entitled to and the determination of a taxable capital gain or assessed capital loss in the insolvent estate. It also means there is no disposal for capital gains tax purposes when the assets pass from the insolvent to the insolvent estate.
As can be seen from the above, the tax treatment (both substantially and procedurally) of insolvency are complex, and taxpayers are advised to seek professional assistance when dealing with their tax affairs during insolvency.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)