Page 204 - SAIT Compendium 2016 Volume2

IN 8 (3) Income Tax acT: InTeRPReTaTIon noTes IN 8 (3)
The court found that –
• the income derived by the trustees could not be said to be income of a person under a legal disability;
• merely because a person fell under the de nition of a ‘trustee’ as de ned in section 1* of the Act did not necessarily
mean the person was a representative taxpayer;
• the de ned term ‘trustee’ could not be regarded as correlative to the term ‘trust’ and, for a trustee to be a representative
taxpayer, he had to be a trustee of the income that was the subject of a trust; and
• as a result, the trustee of the insolvent estate was not liable for tax on any income accruing to the insolvent estate in
his personal capacity or in his capacity as a representative taxpayer.
A number of amendments were subsequently enacted to ensure that income received by or accrued to an insolvent estate on or after 4 July 1997 is subject to tax.
3. Income Tax
3.1 Three separate entities exist for income tax purposes
The assets of a taxpayer, whose estate has been sequestrated, vest in the trustee or administrator who is appointed to take control of the administration and sequestration of the estate for the bene t of the creditors. The effect of insolvency, from an income tax point of view, is to terminate the tax status of the taxpayer and to substitute, in that taxpayer’s place, a new entity from the date of sequestration, that is, the insolvent estate† In addition, the natural person receives a new taxpayer identity from the date of sequestration.
Three separate taxpayers will, therefore, be liable for tax, namely:
The insolvent person for the period before insolvency (that is, up to the date preceding the date of sequestration); The insolvent estate (a new entity for tax purposes from the date of sequestration); and
The insolvent person for the period on and after the date of sequestration.‡
•
•
•
The insolvent person will be assessed as a natural person for the period before insolvency, as well as for the period subsequent to insolvency, should any income accrue to that person in his or her personal capacity. Given that the two periods of assessment are each less than 12 months, the rebates permitted for each period will only be allowed on a proportional basis.§
3.2 The insolvent estate is a ‘person’ for income tax purposes
Section 5 (1) requires every person to pay income tax on taxable income received or accrued during the year of assessment ending on, in the case of a person other than a company, the last day of February. A ‘person’ speci cally includes ‘an insolvent estate’.¶
The insolvent estate must register as a separate entity for income tax purposes. The requirements relating to the registration of taxpayers are regulated by Chapter 3 of the TA Act. An ‘insolvent estate’ is de ned in section 1 (1) as ‘an insolvent estate as de ned in section 2 of the Insolvency Act, 1936 (Act No. 24 of 1936)’.
Section 2 of the Insolvency Act, 1936 de nes an insolvent estate as ‘an estate under sequestration’.
An estate is only under sequestration if the court has issued an order accepting the surrender of or sequestration of the taxpayer’s estate. The provisions relating to insolvency do not therefore apply to a taxpayer who merely assigns his or her assets for the bene t of his or her creditors in the absence of such a court order.
A partnership is not a separate entity for income tax purposes. However, from an insolvency law perspective, the estate of a partnership is separate to the estate of the individual partners. Section 13 (1) of the Insolvency Act, 1936, provides that if the estate of a partnership is sequestrated, the estates of each partner, excluding a partner en commandite and certain special partners as de ned, must generally be simultaneously sequestrated.**
The position is different if the personal estate of a partner is sequestrated as this does not necessarily result in the partnership or the estates of the other partners also being sequestrated.†† The sequestration of a personal estate of a partner results in a dissolution of the partnership by virtue of the withdrawal of such partner’s share in the partnership.‡‡ From the insolvent person’s perspective there will be three entities to consider for income tax purposes (see 3.1). From the other partners’ perspective they will need to consider the impact of the dissolution of the partnership in their hands.
An insolvent estate is not a natural person. Accordingly, an insolvent estate does not, for example, qualify for the primary rebate as contemplated in section 6 or for the interest exemption in section 10 (1) (i). These provisions are limited to natural persons. An insolvent estate is, however, taxed at the same rates of tax applicable to natural persons.§§
* As it was at that time.
† ITC 349 (1936) 9 SATC 66 at 69
‡ Although the insolvent person before and after sequestration is referred to as separate taxpayers. the insolvent
person is technically the same natural person.
§ Section 6 (4).
¶ Section 1 (1), de nition of a ‘person’.
** Section 13(1) of the Insolvency Act, 1936; P M Meskin et al Insolvency Law [online] (LexisNexis: May 2012)
in Chapter 3.1; JJ Henning and E Snyman-Van Deventer under ‘Partnership / Dissolution of partnerships / Causes and formalities 19 (Second Edition Volume) LAWSA [on-line]
(My LexisNexis: 30 June 2006) in paragraph 310.
†† JJ Henning and E Snyman-Van Deventer under ‘Partnership / Liquidation and distribution of assets / General’ 19 (Second Edition Volume) LAWSA [on-line] (My LexisNexis: 30 June 2006) in paragraph 316.
‡‡ JJ Henning and E Snyman-Van Deventer under ‘Partnership / Dissolution of partnerships / Causes and formalities’ 19 (Second Edition Volume) LAWSA [on-line] (My LexisNexis: 30 June 2006) in paragraph 310.
§§ The relevant tax table is applicable to natural persons, deceased estates, insolvent estates and special trusts.
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