Page 228 - SAIT Compendium 2016 Volume2

IN 12 Income Tax acT: InTeRPReTaTIon noTes IN 12
In ITC 1435 (50 SATC 117) it was held that with regard to an asset in respect of which a wear and tear allowance has been allowed, a recoupment can only arise if that asset is sold, destroyed or otherwise disposed of and as a result thereof the taxpayer receives payment in excess of the tax value of the asset. The tax value of an asset is the purchase price less any wear and tear or depreciation allowances allowed in respect of that asset.
Section 8 (4) (a) should be applied by taking into account the provisions contained in sections 8 (4) (b) to 8 (4) (j). 2.2 Section 25 (1)
Section 25 (1) of the Act provides that:
‘Any income received by or accrued to or in favour of any person in his capacity as the executor of the estate of a deceased person, and any amount so received or accrued which would have been income in the hands of the deceased person had it been received by or accrued to or in favour of such deceased person during his lifetime, shall, to the extent to which such income or amount has been derived for the immediate or future bene t of any ascertained heir or legatee of such deceased person, be deemed to be income received by or accrued to such heir or legatee, and shall, to the extent to which such income or amount is not so derived, be deemed to be income of the estate of such deceased person.’
The purpose of section 25 (1) is to deem income accruing to the estate of a deceased person (‘the estate’), that will be used for the bene t of an heir or legatee, to be the income of the heirs and legatees. Where such income is not for their immediate or future bene t it is deemed to be income of the estate. In order for this section to apply (that is to tax the income that accrued to the estate in the hands of the heir or legatee), three requirements must be met, namely: 2.2.1 Income in the hands of the deceased person prior to death
The amount that accrued to the estate must represent an amount that would have been subject to income tax in the hands of the deceased person had that amount accrued to such person prior to his or her death.
This aspect needs to be considered on a factual basis. Assets of a private nature, for example, the private residence of the deceased person sold by an executor, would not be income in the hands of such deceased person. On the other hand, if trading stock of a business carried on by the deceased person prior to his/her death is sold, the proceeds from such a sale would be income.
Similarly where a business asset, for which an allowance was previously allowed in the determination of the taxable income of the deceased person, is disposed of by the executor, a recoupment of such allowance would have been income in the hands of the deceased if such asset was sold during his/her lifetime.
2.2.2 Ascertained heir or legatee
An ascertained heir or legatee must be present. An ‘ascertained heir or legatee’ means a de nite heir or legatee with vested rights. Heirs who have renunciated their inheritance cannot be said to be ‘ascertained heirs or legatees’. Where the will provides for a bequest to children still to be born, it cannot be said that such heirs are ascertained heirs.
In the case of an estate where the deceased left no will, the heirs will be ascertainable in accordance with the principles laid down in the Intestate Succession Act 81 of 1987.
2.2.3 Immediate or future bene t
The heir must have a vested (unconditional) right in the asset or the proceeds, should the asset be sold. An heir or legatee does not have a vested right if the will makes the inheritance, and the income derived therefrom, contingent upon the happening of an event, such as a marriage. The marriage may never occur.
An immediate enjoyment of the bene t is not a requirement. The receipt of an inheritance and income therefrom can be postponed to a future date, for example, until the heir attains majority. The heir will have a vested right to the inheritance and income as it is accumulated for his/her bene t. However, it must be noted that the terms of each will must be considered in deciding whether an heir or legatee has a vested right or not.
If assets were sold to settle the debts of the estate, none of the proceeds from the disposal are derived for the immediate or future bene t of the heir or legatee and accordingly section 25 (1) is not applicable [ITC 1293 (41 SATC 166)].
If all three of the above requirements have been met, the income is deemed to be the income of the heir or legatee. The income is taxable during the year in which the income accrues or is received by the executor; not the date of the actual receipt by the heir or legatee.
If the rst requirement (paragraph 2.2.1) has been met, but not the second or third requirement, the income is deemed to be the income of the estate. The executor will then, as the representative of the deceased estate (see paragraph (e) of the de nition of ‘representative taxpayer’ in section 1 of the Act), be obliged to register the estate for income tax purposes as a separate taxpayer and to render returns of income for the periods until such time as the estate is wound up.
The de nition of ‘person’ in section 1 also includes the estate of the deceased person. The rates of tax applicable to persons (other than companies) will also apply to the estate. The estate, however, does not qualify for the primary rebate (section 6 of the Act) and the exemption in respect of investment income (section 10 (1) (i) (xv) of the Act).
Section 25 (1) also applies to income accruing after date of death, for example, interest earned on capital invested while the estate is being wound up. The section provides that to the extent to which such income is not derived for the bene t of an ascertained heir or legatee it will be deemed to be income of the estate.
3. Example
Mr X died on 1 May 2001 and left his whole estate to his daughter, Y. The only asset in the estate was a plant used by Mr X to operate a small manufacturing concern. The plant was purchased by him 10 years ago at a cost of R500 000. It has been fully depreciated in terms of section 12C of the Act. The value of the plant at the date of death is estimated to be R600 000.
The following tax consequences will arise as a result of the different ways in which the asset is dealt with in the winding up of the estate :
3.1 The executor of the estate sells the asset (proceeds less than the debts in the estate)
The executor had to sell the plant in order to ensure that the debts (in excess of R600 000) of the estate are settled. The plant was sold for R600 000.
220
saIT comPendIum oF Tax LegIsLaTIon VoLume 2