To fully comprehend the answer to this question, we must first look at other terminologies and the answers to the questions that follow below. 

When is a person insolvent?

A person is classified as insolvent when their liabilities exceed the value of their assets. Such a person may launch an sequestration application to the High Court to have the person declared insolvent, a process referred to as a voluntary surrender. The sequestration application may also be brought by a creditor, a process referred to as a forced sequestration. 

At the moment upon which the sequestration order is granted, an insolvent estate comes into existence. The process to declare an individual insolvent, the effects and administration of the insolvent estate all being dealt with under the provisions of the Insolvency Act, 24 of 1936.  An estate is only under sequestration if the court has issued an order accepting the voluntary surrender - or forced sequestration of the individual’s estate.

The effects of sequestration

The first and main effect of sequestration is that the insolvent person is divested of their estate, which would immediately vest in the Master of the High Court. Although the insolvent may still be in possession of the assets of the insolvent estate, ownership has automatically transferred to the Master upon the moment the sequestration order was granted.

The Master will proceed to appoint one or more trustees to take control of the sequestration process and administration of the insolvent estate for the benefit of the creditors. Upon their appointment, the insolvent estate, including ownership of all assets, will automatically vest in the trustees.

In most cases the insolvent would enter into a contract with the appointed trustees to re-purchase their household assets from the insolvent estate, in monthly instalments over a certain period. This to not happen automatically and cannot be guaranteed - websites that claim indiscriminately that once you sequestrate, you will keep your assets are making claims they cannot possibly ever guarantee.  

The additional effects of sequestration is to stay civil proceedings instituted by creditors against the insolvent, until the appointment of a trustee. 

Assets of the Insolvent's spouse  

The additional effect of the sequestration of the separate estate of one of two spouses who are not living apart under a judicial order of separation shall be to vest in the Master, until a trustee has been appointed, and, upon the appointment of a trustee, to vest in him all the property (including property or the proceeds thereof which are in the hands of a sheriff or a messenger under a writ of attachment) of the spouse whose estate has not been sequestrated (hereinafter referred to as the solvent spouse) as if it were property of the sequestrated estate, and to empower the Master or trustee to deal with such property accordingly, but subject to the following provisions of this section

What is the effect on SARS and Taxes?

From a tax point of view, when a natural person becomes insolvent, the possibility of dealing with three taxpayers might arise:

  • the insolvent person for the period before sequestration (taxpayer 1)

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 sequestration.

  • the insolvent person for the period after sequestration (taxpayer 3)

The taxpayer must apply for a new income tax reference number once the taxpayer has been declared insolvent in order to interact with SARS in respect of any tax obligations. However, when the insolvency of the taxpayer is reported to SARS and SARS codes the natural person as such, the registration of the income tax number for the period after sequestration is done automatically by SARS. The taxpayer must communicate this new number to his/her employer for purposes of updating his/her IRP5 submissions.The effect of insolvency from an income tax point of view on the taxpayer is to terminate the tax status of the insolvent person before sequestration and to substitute it with a new taxpayer from the date of sequestration, that is, the insolvent person after sequestration. In addition, the natural person (insolvent person after sequestration) receives a new taxpayer identity from the date of sequestration.Upon sequestration, a new entity comes into existence on the date upon which the insolvent person surrendered his/her estate or, in the case of compulsory sequestration, the date of the provisional order if such order is later made final. The insolvent estate is registered as a separate tax entity and a new income tax reference number is allocated to it. The insolvent estate must only be registered for income tax if there are income or capital gains and losses that must be accounted for in case where assets are disposed to third parties.A separate tax return must be submitted for each of the periods identified above.The insolvent person will be assessed as a natural person for the period prior to insolvency, as well as for the period subsequent to insolvency, should any income accrue to him or her in his or her personal capacity. Rebates will only be allowed on a proportional basis. The insolvent estate is not regarded as a natural person and does not qualify for the primary rebates and interest exemption as these provisions are limited to natural persons.

Who is responsible for the tax affairs of the insolvent estate?

The trustee or administrator of an insolvent estate is responsible for the tax affairs of the insolvent estate as part of the process to wind up the insolvent estate.Duties of the trustee. The most important duties of the trustee are:

  • to seek out as many of the debtor’s assets as possible, including but not limited to the seven remedies to recover assets available to trustees as discussed hereunder;
  • to ensure that these assets are liquidated; and
  • to distribute the proceeds in accordance with the prescribed order of preference among the creditors who have proved claims against the estate. Creditors exercise control over the sequestration process at the various meetings where claims are proven and certain other decisions taken. For the purpose of the distribution of assets, the Insolvency Act distinguishes between secured, preferent and concurrent creditors.

Duties of the trustee at SARS as the representative taxpayer

  • Informing SARS of the insolvency of a taxpayer.
  • Engagement with SARS regarding the insolvent estate.
  • Registration of the insolvent estate for tax purposes (if applicable);
  • Submission of tax returns of the insolvent estate (if applicable);
  • Payment of outstanding tax liabilities.

If a trustee or administrator of an insolvent estate fails to comply with the requirements of the Income Tax Act and the Tax Administration Act relating to an insolvent estate, he/she could be held personally liable for any tax payable by him/her in his/her representative capacity if he/she alienates, charges or disposes of the income in respect of which the tax is chargeable or disposes of any fund or money which is in his/her possession from which the tax could legally have been paid.