Page 609 - SAIT Compendium 2016 Volume2

IN 69 Income Tax acT: InTeRPReTaTIon noTes IN 69
Deceased estate
An executor of a deceased estate must include the market value* of game livestock acquired from the deceased person in opening stock in the deceased estate’s tax computation. For the purposes of applying the limitation rule in paragraph 8 the market value of that opening stock must be taken into account (see 4.3.4).†
Any game livestock still on hand at the end of the deceased estate’s rst year of assessment will be included in closing stock at a standard value of nil, and the same applies to amounts to be included in opening and closing stock in subsequent years of assessment of the deceased estate.
On inclusions in the gross income of the estate and deductions claimable by the estate, see ‘Heirs and legatees’ below.
Heirs or legatees
Any amount received by or accrued to the deceased estate from the disposal of game livestock must be included in the gross income of the deceased estate unless it is derived for the immediate or future bene t of an ascertained heir or legatee, in which case it must be included in the gross income of that heir or legatee [section 25 (1)].
Deductions or allowances relating to game-farming operations conducted by the executor must be claimed by the deceased estate unless they relate to income which has been included in the income of an ascertained heir or legatee under section 25 (1). In the latter event the deductions or allowances must be claimed by the heir or legatee [section 25 (2)]. For example, an ascertained heir or legatee would claim the market value of game livestock acquired by the estate on the date of death.
The amount received by or accrued to an heir or legatee who disposes of game livestock acquired by inheritance will be of a capital nature provided that it was disposed of at the earliest opportunity and not made part of a farming operation (see Capital gains tax below).
By contrast, any amount received by or accrued to a farmer on disposal of inherited game livestock which has been incorporated into the farmer’s farming operations must be included in the farmer’s gross income. Under paragraph 4 (1) (a) (ii) (aa) the farmer will be entitled to an opening stock deduction for the inherited livestock equal to its market value. Any inherited game livestock not disposed of in the year of assessment in which it was acquired will have a standard value of nil for closing stock purposes. However, for the purposes of applying the limitation rule in paragraph 8 the market value of the opening stock must be taken into account.
(b) Capital gains tax
For more information on the capital gains tax consequences of deceased estates, see chapter 16 of the Comprehensive
Guide to Capital Gains Tax (Issue 4).
Deceased person
Under paragraph 40 (1) of the Eighth Schedule a deceased person is deemed to dispose of that person’s assets (with
some exceptions) to the deceased estate for an amount received or accrued equal to their market value on the date of death.
One of the exceptions to this rule is assets bequeathed to the person’s spouse. In that case the surviving spouse is subject to roll-over treatment under paragraph 67 (2) (a) of the Eighth Schedule and steps into the shoes of the deceased person in relation to the asset. This means that the surviving spouse takes over from the deceased person, amongst other things, the date of acquisition, the date of incurral of expenditure and the amount of expenditure on the asset.
Game livestock held on the date of death is thus generally deemed to be disposed of by the deceased person for an amount received or accrued equal to its market value, except if the livestock is bequeathed to the person’s spouse. This amount will comprise the proceeds for CGT purposes under paragraph 35 of the Eighth Schedule. ‡
In determining the base cost of game livestock, any expenditure incurred in acquiring it must be reduced by any portion which has been allowed as a deduction under section 11 (a).§ Thus the cost of any game livestock which has been fully allowed under section 11 (a) will have a base cost of nil. However, to the extent that the cost has been limited under paragraph 8 it will have a base cost equal to the portion not allowed as a deduction under section 11 (a).
The base cost of game livestock acquired before 1 October 2001 may be determined using the time-apportionment, market value or 20% of proceeds method. ¶
Deceased estate
The deceased estate is deemed to acquire the assets from the deceased person for an amount of expenditure equal to their market value on the date of death (paragraph 40 (1A) (a) of the Eighth Schedule).
Paragraph 40 of the Eighth Schedule envisages that an executor will deal with the assets of the estate either by— • awarding an asset to an heir or legatee; or
• disposing of the asset to a third party.
An asset awarded by the executor to an heir or legatee is treated as having been disposed of for proceeds equal to its base cost. **
The deceased estate must determine a capital gain or loss for assets disposed of to a third party. The proceeds on disposal of an asset are reduced under paragraph 35 (3) (a) of the Eighth Schedule by any amount included in gross income or which was taken into account in determining taxable income. Likewise, the base cost of an asset is reduced under paragraph 20 (3) (a) by any amount which is or was allowable or is deemed to be allowed as a deduction in determining taxable income. Whether these proceeds and base cost reductions occur will depend on whether there is an ascertained heir or legatee.
* Determined at the date of death of the deceased.
† Paragraph 4 (1) (b) (ii) (aa).
‡ Since game livestock has a nil value for closing stock purposes under the First Schedule, the proceeds reduction rule
in paragraph 35(3)(a) of the Eighth Schedule will not apply. § Under paragraph 20(3)(a) of the Eighth Schedule.
¶ See Comprehensive Guide to CGT (Issue 4) in 16.1.2.3. ** Paragraph 40(2)(a).
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