During yesterday's webinar, a question was raised i.r.o. rental income received by a person after death, by the estate. I have the same situation. Again the scenario of "in community of property" exist . As quoted per your previous guidanceQRN19533893, th
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
I’ll start by explaining some basic principles. The first is that there are effectively two separate persons involved when a person dies.
That is, in the first instance, the deceased person, and that person ceases to be a taxpayer at date of death and accounts for all accruals until date of death and all deemed disposals at date of death in the return of income for the period from 1 March of the year of death until the date of death.
The second person is the ‘estate of a deceased person’. The Act, unfortunately, also uses the term the deceased estate, but that is not really relevant to your request. You’ll notice that, section 1(1) of the Act states that in the Income Tax Act “unless the context otherwise indicates … "person" includes … the estate of a deceased person” – see paragraph (b).
As explained in the 2015 Explanatory Memorandum, before 1 March 2016, “the deceased estate is (was) treated as a conduit in respect of the income received by it if it has been derived for the immediate or future benefit of an ascertained heir or legatee.” This changed with effect 1 March 2016 and was explained, in the Memorandum, as follows:
“Subsequently, income received by or accrued to the deceased estate will be taxed in the hands of the deceased estate and roll-over relief will be provided in respect of transfers from the deceased estate to any heir or legatee. As a rule, the legislation will allow for the deceased estate to be treated as a “natural person” (as defined in section 1 of the Act) for tax purposes. Some of the exemptions applicable to a natural person, excluding rebates contemplated in section 6, section 6A and section 6B, will apply to the deceased estate.”
This was brought about by the amendment to section 25 of the Income Tax Act. Section 25(1) of the Act is clear - income received by or accrued to or in favour of any person in his or her capacity as the executor of the estate of a deceased person … must be treated as income of the deceased estate of that deceased person. That means that the income doesn’t accrue to a legatee or heir, with a vested right to the income and must be taxed in the second person, or the ‘estate of a deceased person’. That is why, see paragraph 2(g) of the 2019 notice to submit a return, requires that (unless there is a specific exclusion in paragraph 3), every estate of a deceased person that had gross income must submit a return. This is also what “must be treated as income of the deceased estate of that deceased person” - it is treated as income of the second person and not of the deceased (the first person).
The fact that the parties were married in community of property, I admit, introduces a complex issue, as far as income derived from the letting of fixed property is concerned. Section 7(2A), applies until date of death. The marriage is dissolved, on date of death. You could read section 7(2A)(b) - amount received or accrued as contemplated in paragraph (a) which would have been income in the hands of that deceased person had that amount been received by or accrued to or in favour of that deceased person during his or her lifetime – as referring to the 50% of the interest earned after death on the money. But, in my view, there is an actual accrual only in respect of the 50%. The deceased had a 50% in the property until date of death. Thereafter the estate, or the executor in a sense has the interest in the property. This is because, for purposes of income tax, “the deceased estate of a person acquires an asset from that person”. This is where, as I indicated, the wording in the Act differs, but it is clear that this means that the asset is actually acquired by the estate of the deceased person (for tax purposes). This is the second taxpayer that I referred to. This means that the asset is then jointly owned by the surviving spouse and the estate of the deceased person. The rental must then be split between the estate and the surviving spouse and taxed accordingly.