The income tax and real property gains tax implications of
deceased estates
This article is relevant for candidates preparing for the P6 (MYS), Advanced Taxation exam and focuses on the tax implications, which ensue in Malaysia when an individual dies.
This article aims to promote a comprehensive understanding of the tax implications arising from the death of an individual for the purposes of both income tax and real property gains tax (RPGT). Among other things, it discusses the taxation of deceased estates in Malaysia and the RPGT treatment of real properties of a deceased individual.
This article will examine the tax impact of the demise of a non-Muslim individual in Malaysia.
This article is organised as follows:
A Meaning of terms
B Tax administrative aspects
C Income tax treatment of a deceased estate and beneficiaries
D An illustrative income tax computation of a deceased estate
E Completion of administration of a deceased estate
F RPGT implications
G Illustrative RPGT treatment
A recurring example will be used throughout the article to illustrate the key concepts.
References to ‘the Income Tax Act’ and the RPGT Act’ refer to the Income Tax Act 1967 and the Real Property Gains Tax Act 1976, respectively.
A living individual is a chargeable person in his own right, unless, of course, he is incapacitated, in which case, an agent may be appointed to act on behalf of the incapacitated person for tax purposes.
When an individual dies, all his assets or wealth beneficially owned by him at the time of death constitute his ‘estate’, hence the term ‘deceased estate’. The estate is then said to be administered by his trustees, or administrators, who act as the legal representatives of deceased individual. The deceased estate exists from the day after the date of death until the date of completion of the administration of the estate.
All income accruing to the deceased individual up to and including the date of death is taxable under the name of the deceased individual. All income accruing thereafter constitutes the income of the deceased estate taxable under the name of the executors.
Who is the executor or is entitled to become the executor depends on whether the individual died leaving a will (testate) or without a will (intestate). The term testator is used to refer to the individual who has made a will.
In a testate case, the testator appoints one or more trustees to carry out the stipulations of the will. The trustee may be anybody whom, in the opinion of the testator can be relied upon to execute the will and look after the estate to the best advantage and interest of the beneficiaries. The trustee himself may or may not be one of the beneficiaries. It may even be a trustee company. The trustee will apply to the court for a grant of probate, which enables them to administer the estate.
If it is an intestate case, the beneficiaries [as determined under the Distribution (Amendment) Act 1997] can apply to be the administrator/s and apply for the letters of administration (LA).
Whether it is a case involving a trustee (under a will) or administrators (where there is no will), the duties of an executor will apply with regard to tax matters during the period of executory administration of the deceased estate.
1. Estate Duty abolished in 1991
Currently, Malaysia does not have any form of death tax, estate duty or inheritance tax. There was an estate duty in place until 1 November 1991 when it was abolished. This means that, in Malaysia, there is no final tax on the accumulated wealth of a deceased individual.
2. Duty to notify and posthumous assessments
The executor is required to inform the Inland Revenue Board (IRB) of the demise of the deceased individual in a prescribed form [under s74(3)(a) of the Income Tax Act and s14(4) of the RPGT Act.
The IRB must issue any assessment or additional assessment (relating to the deceased individual or in respect of any disposal of real property by the deceased individual) within three years after the year in which the date of death was communicated to them.
Example 1
Mr Dee died testate on 13 March 2015 and his brother, Mr Ee, is the trustee as per his will.
On 1 July 2015, Mr Ee informed the IRB of the demise of Mr Dee by submitting the prescribed form. Three years after the end of the year 2015 will be three years from 31 December 2015 – ie 31 December 2018.
Therefore, any assessment or additional assessment from the IRB (in respect Mr Dee’s income or any disposal of real property attracting RPGT) for any period up until his death, must be issued by 31 December 2018, failing which the assessment will be time-barred.
If Mr Ee had only informed the IRB of Mr Dee’s demise on 5 January 2016, the IRB would have had until 31 December 2019 (three years from 31 December 2016) to issue any outstanding tax assessments or additional assessments relating to Mr Dee’s income or RPGT liability prior to his demise.
3. Tax returns
The responsibility to furnish the relevant tax returns is best illustrated with an example.
Example 2
Following on from example 1, Mr Dee derived income from two businesses, interest from a loan to a friend, and rental income. His income from all three sources for the period 1 January 2015 to 13 March 2015 will be taxable under his own name.
The business income, interest income and rental income which accrued to Mr Dee for the period from 14 March 2015 to 31 December 2015 will form the income of the deceased estate for the year of assessment (YA) 2015. Such income is subject to tax under the name of Mr Ee, as the executor.
As the executor, Mr Ee will be responsible for furnishing the tax return for the YA2015 for Mr Dee as well as the tax return for YA2015 for the deceased estate. Income for the following year, YA2016, will be subject to tax as the income of the deceased estate in the name of Mr Ee, as the executor.
Thereafter, Mr Ee will be responsible for filing the tax return for the deceased estate until the administration of the estate is completed.
1. Basis period
The basis period for a deceased estate is the basis year [pursuant to s21 of the Income Tax Act]. This is the same rule as that applicable to individuals
2. Receipts and income: whether subject to tax
Death gratuities
Sums received by way of death gratuities or as consolidated compensation for death or injuries are specifically exempted from tax [under paragraph 14 of Schedule 6 of the Income Tax Act].
Employee’s Provident Fund (EPF) withdrawal on death
Only withdrawals (attributable to the employer’s contributions) from unapproved provident funds are deemed to be employment income [under section 13(1)(d) of the Income Tax Act]. As an EPF is an approved fund for the purposes of income tax, any withdrawal from the EPF is not subject to tax.
Life insurance payment
The sum insured is payable upon death: it is therefore not ‘revenue’ or ‘income’ in nature. Therefore, it is not subject to tax on the deceased individual or the deceased estate.
Annuities from a deceased estate
An annuity specifically provided for in a will is deemed to be income derived from Malaysia [under s64 (3) of the Income Tax Act] and hence properly subject to tax in the hands of the recipient [under s4(e)].
Distributions made by an executor to the beneficiaries
Distributions are not regarded as income in nature [under s64(5) of the Income Tax Act] and therefore do not attract income tax in the hands of the beneficiaries
3. Deemed transfer of business assets – controlled sales
Upon the demise of a sole proprietor, there is devolution of asset on death. The business assets are deemed to be transferred to the deceased estate under controlled sale conditions [pursuant to paragraph 38(1)(e) of Schedule 3 of the Income Tax Act].
By application of the controlled sale rules, in the YA in which death occurs:
4. Computation of total income
A special provision [s64 of the Income Tax Act] deals with the income tax treatment of estates under administration.
The total income of a deceased estate is arrived at in much the same way as for an individual.
If the will clearly provides for an annuity, the amount thus paid is deductible in arriving at the total income of the deceased estate [pursuant to s64(3) of the Income Tax Act]. The deduction for such an annuity is to be made after deductions for any current year business loss, prospecting expenditure and pre-operational business expenditure but before any approved donations
As noted earlier in this article, distributions made by the executor to the beneficiaries shall not be regarded as income in the hands of the beneficiaries. It follows that such payments are not tax deductible in arriving at the total income of the deceased estate.
5. Computation of chargeable income and tax charged
In arriving at the chargeable income of a deceased estate, provided the deceased individual died domiciled (1) in Malaysia, the deceased estate will be entitled to a deduction for personal relief (based on the amounts in force in the YA of death). This deduction is available whether or not the executor is an individual and whether or not the executor is resident in Malaysia.
Other than personal relief in respect of the deceased individual, the deceased estate is not eligible for any other tax reliefs (such as child relief, insurance relief, etc).
If the deceased person died domiciled in Malaysia, the deceased estate will be subject to tax at scaled rates, similar to the rates applicable to a resident individual.
(1) Note that the concept of domicile is not the same as the concept of tax residence. While tax residence is mainly based on actual physical presence in a country, domicile refers to the principal place of residence of an individual. This is determined primarily by intent: domicile of origin (where the individual’s father permanently resides and where the individual was born), domicile by operation of law, and domicile by choice.
Example 3
Below is an illustrative tax computation for the deceased estate of Mr Dee for YA2016. It is assumed that Mr Dee’s will specified an annuity of RM60,000 to be paid to his widow, and the executor decided to make a distribution of RM20,000 on 1 February 2016 to his son for his education.
| RM | RM | |
|---|---|---|
| Statutory income – Business 1 Statutory income – Business 2 (current year loss: RM19,000) | 100,000 nil |
|
| 100,000 | ||
| Less: Business loss b/f | ||
| Statutory income from businesses | ||
| Add: Interest income | ||
| Rental income (net) | ||
| Aggregate income | ||
| Less: Current year business loss | 19,000 | |
| Prospecting expenditure | N/A | |
| Pre-operational business expenditure | N/A | |
| Annuity to widow | 60,000 | |
| Approved donation | 1,000 | |
| (80,000) | ||
| Total income | 40,000 | |
| Less: Personal relief for individual [s46(1)(a)] | (9,000) |
|
| Chargeable income | 31,000 | |
| Income tax on first RM20,000 | 150 | |
| Income tax on the remaining RM11,000 @ 5% | 550 | |
| Tax charged | 700 |
1. The RM20,000 distribution to Mr Dee’s son represents a distribution which is not provided in the will. This amount is not deductible in arriving at the total income of the deceased estate. The RM20,000 does not represent income to the son, and thus he is not subject to income tax on the amount.
2. The annuity of RM60,000 payable to Mr Dee’s widow will constitute statutory income [under s4(e)] of the widow for YA2016.
An estate is said to have been determined when the residue of the estate is ascertained or ascertainable. This means the end of executory administration, and therefore marks the end of the deceased estate. What follows is either the full distribution of the residue or the de facto formation of a trust.
If the assets of the estate are fully distributed, there is nothing left to administer and thus no further tax implications.
If it leads to the formation of a trust, the tax treatment will accordingly change to that of a trust.
For the tax treatment of a trust, refer to the technical article ‘Taxation of trusts in Malaysia’ published on the ACCA global website.
When an individual dies, their real properties may be left under a will to a specific legatee. If not, the property is deemed to devolve to the deceased estate.
The devolution of the chargeable assets of a deceased person on his executor or legatee under a will or intestacy or on the trustees of a trust created under a will takes place at no-gain-no-loss. This is because the deceased person is deemed to have disposed of the asset to the executor/administrator/legatee for a price equal to the original acquisition price. Therefore, there is a disposal at this point but no RPGT liability will arise.
Tabulated here are the bases of determining the acquisition date and the corresponding acquisition price of such real properties. All references are to the RPGT Act.
Note on the table:
1. The references to ‘market value’ in the table above refer to market value less any expenses relating to compensation/insurance for the damage or destruction of the chargeable asset or any sums forfeited as a deposit [para 4 (1) (a), (b) and (c) of the RPGT Act].
It can be understood from the table above that if the executor subsequently disposes of a chargeable asset of the deceased estate to a third party, the asset is deemed to have been acquired by the executor on the date of death at the prevailing market price at that date. So there is a disposal here, but the executor is in a somewhat favourable position because there has been a tax free uplift of his allowable cost for RPGT purposes to the market value as at the deceased’s death.
Example 4
Mr Dee died on 13 March 2015, leaving four real properties:
After the disposal of the four properties and settling all Mr Dee’s debts and liabilities, the executor has determined the residue of the deceased estate, which is cash of RM1.8m. The executor, then distributed the cash according to the terms of Mr Dee’s will, which left an equal share to the widow and the son, who therefore each received RM900,000 in cash.
The executor has thus discharged all responsibilities under the will. The deceased estate ceases to exist as all its assets and liabilities have been accounted for.
First property
The deceased person, Mr Dee, is deemed to have disposed of his property to the executor on 13 March 2015for RM100,000. There is no exposure to RPGT at this point as this is a no gain-no loss transfer.
The executor, Mr Ee, is deemed to have acquired the real property on 13 March 2015 for RM350,000. Mr Ee then disposed of the property on 5 June 2015 for RM375,000. His gain is therefore RM25,000 (375,000 – 350,000) and the disposal occurs in the first year.
Second property: the family home
The deceased individual, Mr Dee, is deemed to have disposed of the family home to the legatee (his widow) at no-gain-no loss, thereby not attracting any RPGT liability.
His widow is deemed to have acquired the property on the actual date of transfer of the property – ie 15 July 2015, for RM2m. If she subsequently disposes of the family home, her acquisition date and acquisition price for RPGT purposes are respectively 15 July 2015 and RM2m.
Third property: holiday home
Again, the deceased individual, Mr Dee, is deemed to have transferred the family home to the son at no-gain-no loss, hence not giving rise to any RPGT exposure.
The son was supposed to receive cash of RM300,000 under the terms of the will. As he agreed to accept the holiday home in place of the cash legacy, the acquisition price is RM280,000 (the lower of the cash legacy of RM300,000 and the market value of the holiday home). His acquisition date is 2 September 2015.
Fourth property: shophouse
The deceased individual, Mr Dee, is deemed to have sold the shophouse to the executor at no gain-no-loss at the date of death (13 March 2015). Hence, no RPGT liability arose at this juncture.
The executor, Mr Ee, is deemed to have acquired the property on 13 March 2015 (the date of death) at the prevailing market value of RM2.5m. As he sold it for RM3m, his gain is RM500,000. His holding period is less than one year (13 March 2015 to 1 November 2015). The RPGT chargeable on this disposal will be taxable on the executor but only in his capacity as the executor, and he will be able to pay the RPGT liability from the resources of the deceased estate.
RM900,000 each to the widow and the son
The cash distribution of RM900,000 to each beneficiary has no RPGT implications because no real properties are involved. The sums also do not constitute income to the beneficiaries, and are therefore not subject to income tax in their hands
Written by a member of the P6 (MYS) examining team