Page 682 - SAIT Compendium 2016 Volume2

IN 79 Income Tax acT: InTeRPReTaTIon noTes IN 79
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.
Produce 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 produce is bequeathed to the person’s spouse. The proceeds under paragraph 35 of the Eighth Schedule will generally be determined by reducing the market value of the produce deemed to be disposed of under paragraph 40(1) of the Eighth Schedule by the amount of the produce included in closing stock.*
In determining the base cost of produce, 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 produce which has been fully allowed under section 11(a) will have a base cost of nil.
The base cost of produce acquired before 1 October 2001 may be determined using the time-apportionment, market value or 20% of proceeds method under paragraphs 26 and 27 of the Eighth Schedule.
Deceased estate
The deceased estate is deemed to acquire the assets from the deceased person for an amount of expenditure equal to the market value of those assets 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 executor of 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.
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 produce 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 produce 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 produce 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 produce was not made part of an existing farming operation. As a rule, an heir or legatee who disposes of inherited produce on capital account will have a base cost for that produce equal to its market value on the date of death of the deceased person. The produce 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 produce. An heir or legatee who inherits such ‘natural increase’ produce will also acquire it at a base cost of nil. The proceeds from a sale of produce 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 produce 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 produce for revenue expenditure equal to its market value [paragraph 4(1)(a)(ii)(aa) read with section 25(2)]. The base cost of the
* Under paragraph 35(3)(a) of the Eighth Schedule. † Under paragraph 20(3)(a) of the Eighth Schedule. ‡ Paragraph 40(2)(a) of the Eighth Schedule.
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