The responsibility to pay taxes does not disappear upon death. The Inland Revenue Board (IRB) can collect the outstanding taxes of the deceased in priority over the other creditors. While sorting out the affairs of the deceased, it is mandatory to settle the outstanding taxes with the IRB, otherwise it will not be possible to close the affairs of the deceased individual and distribute the assets to the beneficiaries.
Income tax and Real Property Gains Tax (RPGT) matters are dealt with in the same way, whether the deceased prepared a will or otherwise. If there is a will, the court will appoint the executor, otherwise, an administrator will be appointed. The executor/administrator has a responsibility to inform the IRB of the date of the death of the individual. Any executor/administrator who fails to comply with this requirement will be jointly and severally liable to pay a penalty equal to the tax due.
Taxes of the deceased
The IRB has three years after the end of the year of assessment in which it has been informed to issue assessments to collect the outstanding taxes and penalties of the deceased individual up to the time of death. If there is any delay in informing the IRB of the date of the death, the three-year time bar will be extended accordingly.
Taxes during the administration of the estate (executor’s responsibilities)
The executor/administrator is responsible for filing the tax returns until the administration of the estate is completed. The taxation principles will be akin to the taxation of an individual (at scaled rates).
Any annuity provided for a will is deductible against the income of the estate and the person receiving it will be taxed in Malaysia whether or not he is a resident in Malaysia. Distributions made by the executor to the beneficiaries will not be deductible to the estate nor will it be taxable at the hands of the beneficiaries.
If the individual died domiciled in Malaysia, the deceased’s estate will be entitled to personal tax relief as a normal individual. The concept of “domicile” is normally based on where the individual permanently resides and regards it as his permanent home.
Transfer of assets from deceased to the executors/administrator
There is no income tax, RPGT or stamp duty upon the estate taking over the administration of the deceased individual.
The RPGT treatment for the transfer of the properties to the beneficiaries (during or at closure of the administration) will not attract RPGT as will done on a “no-gain-no-loss” basis where the disposal price is deemed to be equivalent to the acquisition price of the property. Subsequently, when the beneficiary sells the property, the acquisition date and acquisition price of the property in computing chargeable gain will be the date of the transfer to the beneficiary and the market value at the date of the transfer.
If the executor/administrator disposes of any properties to third parties, the acquisition date will be deemed to be at the date of death and the acquisition cost for RPGT will be based on the market value on that date.
Stamp duty will be payable by third party purchasers of the property under the normal stamp duty rules. However, there will only be a nominal stamp duty of RM10 for any transfer of assets to the beneficiaries upon the closure of the administration or as directed by the courts.
It is important that the tax affairs of the estate are properly managed to avoid any unnecessary penalties. Any delay in the settlement of taxes can also delay the closure of the administration of the estate.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.