Page 436 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5)
• the insolvent estate is deemed to have acquired the trading stock on the same date that it was acquired by the person before sequestration.
Section 9C will thus apply to any disposal by the insolvent estate of shares held as trading stock and the three-year qualifying period will be measured from the date on which the shares were acquired by the person whose estate has been sequestrated. The insolvent estate must account for any recoupment under section 9C(5) of opening stock and any ongoing expenses claimed by the person before sequestration and his or her insolvent estate [section 25C(b)].
15. Death
15.1 Deceased person
On the date of death shares held as trading stock by a natural person are included in closing stock under section 22(1). The death of a natural person results in the termination of that person’s existence as a taxable entity, but does not result in a disposal for the purposes of section 22 because the person continues to hold the shares while he or she is alive. Under paragraph (a) of the proviso to section 66(13)(a) a return of income for a person who dies must be made for the period commencing on the rst day of the year of assessment and ending on the date of death. This period corresponds with the de nition of a ‘year of assessment’ in section 1(1), which includes any period ‘in respect of which any tax or duty leviable under this Act is chargeable’.
Section 22(6) con rms that any reference in section 22 to the beginning or end of a year of assessment must be construed as including a reference to a beginning or end of a period of assessment of less than 12 months.
Section 9C(2) does not apply to shares held on the date of death, even if held for more than three years, because a share can be a qualifying share only if it has been disposed of under the ordinary meaning of a disposal or as a result of a deemed disposal under paragraph 12 of the Eighth Schedule (see 4.3.2). Likewise, because death is not a disposal for the purposes of section 9C, there will be no recoupment under section 9C(5) of opening stock or the ongoing expenditure claimed under section 11(a) during the period that the shares were owned by the taxpayer.
Under paragraph 40(1) of the Eighth Schedule the shares are deemed to be disposed of for CGT purposes for an amount received or accrued equal to their market value on the date of death. The proceeds for CGT purposes will be equal to that market value reduced under paragraph 35(3)(a) of the Eighth Schedule by the amount included in income as closing stock under section 22(1), but not below nil. The base cost of shares acquired on or after the valuation date which are held as trading stock is likely to be nil, since any expenditure incurred in acquiring the shares must be reduced under paragraph 20(3)(a) of the Eighth Schedule by amounts allowed against income. This situation would arise if the cost of acquisition of the shares was allowable as a deduction under section 11(a).
The base cost of pre-valuation date shares may be determined using market value on valuation date, time apportionment or 20% of proceeds (see paragraphs 26 and 27 of the Eighth Schedule). Alternatively, if the deceased person adopted the weighted average method for listed shares or participatory interests under paragraph 32(3A) of the Eighth Schedule, that method must be used.
15.2 Deceased estate
Section 25(1) deems any amount received by or accrued to the deceased estate which would have constituted income in the hands of the deceased person to be income of –
• the deceased estate to the extent that it is not derived for the immediate or future bene t of any ascertained heir or
legatee; or
• In any other case, the heir or legatee.
A hypothetical enquiry is, therefore, called for to determine whether an amount realised by the executor on disposal of a share would have been income in the hands of the deceased person. A share re ected in the deceased person’s nal return of income as closing stock under section 22(1) would have resulted in an inclusion in gross income had it been disposed of by the deceased person. It is therefore necessary to determine whether section 9C(2) would have applied to such a receipt or accrual. In applying section 9C(2) to an amount realised by the executor, the continuous three-year holding period must be measured from the date on which the deceased person acquired the share, and not from the date on which it was acquired by the deceased estate.
Section 9C(5) simply deems there to be an amount included in the taxpayer’s income. Since such an amount is not a receipt or accrual, section 25 cannot deem it to be income in the deceased estate. The disposal by the executor of shares which have been held by the deceased person and his or her deceased estate for a combined period of at least three years will, accordingly, not trigger a recoupment under section 9C(5).
Shares awarded to an heir or legatee by the executor will trigger a disposal by the deceased estate. However, section 25 will not apply because no amount will have been received by or accrued to the deceased estate. There will therefore be no amount to which section 9C(2) can apply.
15.3 Heirs or legatees
For the purposes of section 9C, the three-year continuous holding period is measured from the date on which the shares are awarded to the heir, and not from the date of death of the deceased person.
16. Asset-for-share and unbundling transactions
The corporate restructuring rules in Part III of Chapter II of the Act contain roll-over rules which deem the date of acquisition of equity shares to be derived from other assets. These roll-over rules do not apply in determining the date of acquisition of an equity share for the purposes of section 9C in the case of –
• an asset other than an equity share disposed of under an asset-for-share transaction [section 42(2)(a)(ii)]; and
• unbundled shares acquired under an unbundling transaction [section 46(3)(a)(ii)].
For the purposes of section 9C, the date of acquisition for equity shares acquired under the above circumstances
will be the actual date of acquisition. The general rule is that in an asset-for-share transaction the shares issued to the transferor by the transferee company take on the same date of acquisition as the asset disposed of to the transferee
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