Page 206 - SAIT Compendium 2016 Volume2

IN 8 (3) Income Tax acT: InTeRPReTaTIon noTes IN 8 (3)
An insolvent estate’s rst period of assessment will commence on the date of sequestration and end on the last day of February. The second and subsequent years of assessment commence on 1 March and end on the last day of February, or on the date on which the estate is nally wound up. The individual whose estate is sequestrated must submit returns for the periods before sequestration and after the date of sequestration (see 3.1).
3.6 Setting aside of the sequestration order
The effect of the setting aside of an order of sequestration* is to terminate the existence of the insolvent estate ab initio. Any transaction that took place in the insolvent estate while it was in existence must, therefore, be accounted for in the hands of the individual who has been released from sequestration.
Practically this means that SARS must withdraw any assessment issued to the insolvent estate and must also withdraw the assessment which was issued to the insolvent person in the year the sequestration order was granted by the court (that is, from the beginning of that year to the date preceding the date of sequestration). This is done under section 98 (1) of the TA Act which provides that SARS may withdraw an assessment if it was issued to the incorrect taxpayer or was issued for the incorrect tax period.
SARS must simultaneously issue assessments to the person who has been released from sequestration as if the sequestration never took place. Under section 98 (2) of the TA Act a withdrawn assessment is regarded as not having been issued and accordingly SARS can issue assessments for the respective periods under Chapter 8 of the TA Act.
3.7 Paragraph 19 (5) (b) of the First Schedule
Under paragraph 19 (5) of the First Schedule any natural person who derives income from farming operations may elect that the normal tax chargeable on the taxable income from farming be determined in accordance with the rating formula as provided in section 5 (10).
The trustee of the insolvent estate of a natural person may also elect that the normal tax chargeable on the taxable income from farming be determined in accordance with the rating formula if –
• the farming operations commenced by the insolvent person were carried on by the insolvent estate in the period
of assessment commencing immediately after insolvency (that is, commencing on the date of sequestration);
and
• the election is made within three months after the end of such period of assessment or within such further
period as the Commissioner may approve. In practice extensions will be granted up to a date before the raising
of the assessment.
Once the election has been made it is binding on the insolvent estate for that period of assessment and all future periods of assessment and the insolvent estate will be taxed in accordance with the rating formula.
The average taxable income from farming will be calculated having regard to the gures determined for the insolvent person before the date of sequestration.
The insolvent estate should document the election in writing in the format speci ed in the ITR12 comprehensive guide (available on the SARS eFiling website www.sarse ling.co.za). The document must not be submitted with the annual tax return but must be retained as part of the taxpayer’s records. Section 29 of the TA Act requires records to be kept for ve years from the date of the submission of the return. In context, this means the document will have to be retained for ve years from the date the last return was submitted in which the insolvent estate declared farming income.
3.8 Capital gains tax
On sequestration a person’s assets pass to that person’s insolvent estate. This change of ownership would normally trigger a disposal under paragraph 11 of the Eighth Schedule. However, the ‘one and the same person’ principle (see 3.4) brings the two entities together and since a person cannot dispose of something to himself, there is no disposal of the individual’s assets on the date of sequestration. Capital gains and losses are therefore determined in the hands of the insolvent estate when the assets are disposed of to third parties.
Under paragraph 83 (1) of the Eighth Schedule the disposal of an asset by an insolvent estate is treated in the same manner as if the natural person whose estate has been sequestrated had disposed of that asset. This means that the insolvent estate is treated as a natural person and will be entitled to the same exemptions and exclusions the insolvent person would have been entitled to, had the person disposed of the assets. The purpose of this provision is to ensure that the insolvent estate will not be taxed on the disposal of the personal assets of the insolvent person such as that person’s primary residence (to the maximum amount of the primary residence exclusion), furniture or private motor vehicles. It also confers the same 33,3% inclusion rate† and annual exclusion‡ on the insolvent estate.
The insolvent person before sequestration, the insolvent estate and the insolvent person on and after sequestration share the annual exclusion, in that order, in the year of sequestration. Therefore, to the extent that the insolvent person before sequestration has not used the annual exclusion during the applicable period of assessment (commencing on 1 March and ending on the date preceding the date of sequestration), the excess will be available for set-off against capital gains and capital losses arising rstly in the insolvent estate and secondly, if any excess remains, in the insolvent person on and after sequestration. In subsequent years, the insolvent estate and the insolvent person on or after sequestration will each be entitled to a full annual exclusion.
* This differs to the situation where a person has become rehabilitated through an application for rehabilitation (section 124 of the Insolvency Act 24 of 1936) or through the ef uxion of time (section 127A of that Act). Although in the latter cases the sequestration comes to an end under section 129 of that Act, the original order remains a fait accompli and is not set aside.
† 33,3% (previously 25%) deemed to come into operation for disposals made on or after 1 March 2012 in accordance with the Taxation Laws Amendment Act 22 of 2012.
‡ Paragraph 5 of the Eighth Schedule.
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