Page 610 - SAIT Compendium 2016 Volume2

IN 69 Income Tax acT: InTeRPReTaTIon noTes IN 69
If there is an ascertained heir or legatee any amount received by or accrued to the estate which would have been income in the hands of the deceased person is deemed to be income in the hands of the heir or legatee under section 25 (1). In this situation the deceased estate will not reduce its proceeds under paragraph 35 (3) (a) of the Eighth Schedule.
If there is no ascertained heir or legatee, section 25 (1) deems the amount to be income of the deceased estate, and in this event the amount received by or accrued to the deceased estate must be reduced under paragraph 35 (3) (a) in arriving at its proceeds.
The same principle applies to deductions, that is, section 25 (2) attributes them to an ascertained heir or legatee but leaves them in the deceased estate when there is no such heir or legatee. Thus, when the deductions remain in the deceased estate they will reduce base cost under paragraph 20 (3) (a) of the Eighth Schedule but if they are attributed to an heir or legatee the deceased estate’s base cost will not be reduced. An example of such a deduction is the opening stock of the deceased estate. In this regard the deceased estate is granted an opening stock deduction at market value for the game livestock acquired from the deceased person [paragraph 4 (1) (b) (ii) (aa)]. As a result, its expenditure deemed to have been incurred under paragraph 40 (1A) (a) of the Eighth Schedule will be reduced to nil by paragraph 20 (3) (a) of the Eighth Schedule if there is no ascertained heir or legatee. The deceased estate will accordingly have a base cost of nil for the livestock in question. Conversely, if there is an ascertained heir or legatee there will be no such reduction because the deduction against income will have been attributed to the heir or legatee.
Heirs or legatees
Under paragraph 40 (2) (b) of the Eighth Schedule an heir or legatee is deemed to have acquired inherited game livestock at a base cost equal to the deceased estate’s base cost. This deemed cost is treated as expenditure actually incurred for the purposes of paragraph 20 (1) (a) of the Eighth Schedule and may, depending on the circumstances (see below), be reduced under paragraph 20 (3) (a) of the Eighth Schedule.
A disposal by an heir or legatee would, for example, be on capital account if the inherited game livestock was disposed of at the earliest opportunity and it is not made part of an existing farming operation.
As a rule, an heir or legatee who disposes of inherited livestock on capital account will have a base cost for that livestock equal to its market value on the date of death of the deceased person. The livestock acquired by the deceased estate by natural increase occurring after the date of the deceased’s death would have a base cost to the estate of nil since the estate would not have incurred any expenditure for that livestock. An heir or legatee who inherits such ‘natural increase’ livestock will also acquire it at a base cost of nil. The proceeds from a sale of livestock on capital account will as a rule be equal to the amount received or accrued.
By contrast, an heir or legatee who commences to use the game livestock in a farming operation or brings it into an existing farming operation will be on revenue account. In these circumstances the heir or legatee will acquire that livestock for revenue expenditure equal to its market value [paragraph 4 (1) (a) (ii) (aa) read with section 25 (2)]. The base cost of the livestock established under paragraph 40 (2) (b) of the Eighth Schedule must therefore be reduced under paragraph 20 (3) (a) of the Eighth Schedule by the paragraph 4 (1) (a) (ii) (aa) deduction. An heir or legatee who disposes of game livestock on revenue account will have proceeds of nil because the amount would be included in gross income. *
4.7.3 Insolvency or liquidation
Section 25C deems the estate of a natural person before sequestration and that person’s insolvent estate to be one and the same person for the purpose of determining—
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any allowance, deduction or set off to which that insolvent estate may be entitled;
any amount which is recovered or recouped by or otherwise required to be included in the income of that insolvent estate; and
any taxable capital gain or assessed capital loss of that insolvent estate.
The person before sequestration must submit a return of income for the period commencing on the rst day of the year of assessment and ending on the date before the date of sequestration. † Game livestock will have a standard value of nil for closing stock purposes at the end of that person’s year of assessment in the normal way.
The insolvent estate must submit a return of income for its rst year of assessment from the date of sequestration until the end of that year and for all subsequent years of assessment until the estate is wound up.
The insolvent estate will have an opening stock of game livestock of nil based on the ‘one and the same person’ principle because the closing stock of the person before sequestration was nil. Any assessed loss of the person before the date of sequestration will be brought forward into the insolvent estate. Game livestock will continue to have a standard value of nil for closing stock purposes in the rst year of assessment of the insolvent estate and for the purposes of determining future opening and closing stock. Any amount received by or accrued to the insolvent estate from the disposal of the livestock must be included in the gross income of the insolvent estate.
For CGT purposes there is no deemed disposal on date of sequestration as a result of the ‘one and the same person’ principle in section 25C. Given that game livestock is oating capital there should be no CGT implications when game livestock is disposed of by the trustee of the insolvent estate.
A company that is being wound up or liquidated remains the same taxable entity until it is nally dissolved.‡ In practice a company must submit an interim return of income for the period from the beginning of the year of assessment up to the date immediately before the date of liquidation and another return from the date of liquidation until the end of the year of assessment. Game livestock will have a standard value of nil for opening or closing stock purposes. Any amounts derived by the company after date of liquidation must be included in its gross income.
* The amount received by or accrued to the heir or legatee will be reduced by the portion included in gross income under paragraph 35(3)(a) of the Eighth Schedule.
† Paragraph (b) (i) of the proviso to section 66 (13) (a)
‡ Van Zyl NO v CIR 1997 (1) SA 883 (C), 59 SATC 105.
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