Although it has been famously said that nothing is certain but death and taxes, this may be more true of the former than the latter. What is certain is that when a death takes place, somebody has to face up to the task of settling any related tax issues. This article attempts to throw some light on the subject.
When the deceased has left a will behind, it will state who is to act as executor and who is to inherit the estate. Where no will is left, that is known as an intestacy. The estate will then be administered by an administrator appointed by the High Court. The persons who inherit, usually family members, will then be determined under the law of intestate succession.
Syariah law applies to the inheritance of assets left by Muslims, who have only a limited ability to pass their property by will. Their estates are dealt with in much the same way as under intestate succession. The responsible persons, often referred to collectively as “the executor”, will need to consider capital taxes as well as income tax.
There is no estate duty or inheritance tax in Malaysia so unless the deceased died domiciled in a foreign place, these taxes can be ignored.
Real property gains tax will also be of no consequence on death even if an asset has not been owned by the deceased for more than five years because a disposal on death is deemed to take place at the deceased person’s acquisition price, i.e. a no gain/no loss transaction. Executors themselves have no liability to tax on transferring an asset from the estate to a legatee as this is not a disposal.
However, if the legatee subsequently disposes of the asset within five years of its transfer to him he must treat its market value at the time of transfer as his acquisition price. Also, if the executor disposes of an asset of the deceased, otherwise than to a legatee, within five years of death, that is a chargeable disposal on which the market value at the date of death is deemed to be the acquisition price.
At the time of his death on 15 May 2005, Samuel owned two commercial properties. He bequeathed the one in Ipoh to his son James and the executor transferred it to James on 1 February 2006 when its value was RM2 million.
James sold the property for RM3 million on 30 November 2010 incurring incidental costs of RM30,000. The property in Seremban, which was valued at RM2.75 million at the date of Samuel’s death was sold by the executor to a third party at arm’s length for RM4 million on 30 September 2010.
James has a liability to real property gains tax because he sold the Ipoh property within five years of his deemed acquisition date (1 February 2006). The tax is calculated as follows:
No tax is payable on disposal of the property at Seremban as the sale took place more than five years after the deemed date of acquisition (15 May 2005).
INCOME TAX - THE DECEASED
The executors are assessable and chargeable to tax on income of the deceased for the year of assessment in which he died and, where necessary, any previous year. Any income of the deceased received by the executors, which would have been the individual's chargeable income if he had not died and had received it himself at the same time is also included. Different kinds of income are dealt with in different ways. Income from rents, interest and dividends is not apportioned and is treated as income at the time when it becomes receivable (provided that it is eventually received).
Mr. Tan, who passed away on 4th March 2011, owned one property, a bungalow, which he had rented out on a two-year tenancy with a rent of RM5,000 per month payable monthly in advance on the first day of each month. The rent due on 1st March 2011 was paid late and it was collected by the executor after the date of death.
The executor should include the whole of the 1st March rent item, once it is received, as income of the deceased as it was receivable during Mr. Tan’s lifetime. It is not apportioned. The rents due from 1st April onwards will be income of the executor.
Deductions are given for property expenses in the normal way.
Where the deceased carried on the letting of property as a business, rents and expenses are included on the accruals basis. Where the deceased was in business as a member of a partnership, the death has the effect of terminating the partnership but the remaining partners will normally continue the business under a new partnership.
All rights and duties, which would have attached to the deceased with respect to his chargeable income pass to his executors. This means that the executors have the right to claim deductions for such items as are appropriate on his behalf including personal deductions for wife, children etc and to be taxed at graduated rates if the individual was resident in Malaysia. The personal deductions are given for a full year and not apportioned up to the date of death
Assessment of any income of the deceased must be made by the end of the third year of assessment following the year of death. However, the executor is required to submit a self-assessment return and any income so reported is deemed to be assessed automatically. The executor must retain and not distribute any assets of the estate unless he has provided in full for any tax which he knows or might reasonably expect to be payable by him. However, he can only take responsibility for what comes into his hands and, for this reason, he is only liable to the extent of what is received by him.
INCOME TAX – THE EXECUTOR AND THE ADMINISTRATION PERIOD
Traditionally, the executor is given one year, known as the administration period, in which to take charge of the assets, administer the estate and pay all debts, but this period may be shorter or longer than one year. The executor is liable to income tax on the income of this period. When the administration is completed the executor will hand over to the beneficiaries their shares of assets including any income which the executor has received during the administration period. No tax is payable by the beneficiaries on this income.
Where assets are not to be distributed to beneficiaries but are to be held in trust, the provisions relating to trusts will commence to operate at the end of the administration period.
If the deceased person was domiciled in Malaysia at the time of his death, the personal deduction is currently at RM9,000, but no other personal deduction is given for each year of assessment during the administration period. Tax is charged at the graduated rates applicable to a resident individual.
Richard Thornton is author of 100 Ways to Save Tax in Malaysia for Property Investors (ISBN978-983-2631-83-5) and 100 Ways to Save Tax for Malaysian Investors (ISBN978-967-5040-42-9) published by Sweet & Maxwell Asia. See http://malaysiaauthorindex.com/wiki/Richard Thornton. He is also a Fellow of the Chartered Tax Institute of Malaysia.
The two works referred to immediately above contain some valuable insights on how to achieve legitimate tax savings for investors in property and other assets as well as dealing with complex issues such as “When can an investor be taxed as a dealer?” and “Is it a good idea to use a company?” Written in clear simple language, the books contain helpful examples to explain how the tax planning ideas can be put into action. They can be obtained from most book stores, or from the author at firstname.lastname@example.org