Chapter 18

Partnerships

Jolani Wilcocks
Assisted by Lizelle Bruwer

Outcomes of this chapter

After studying this chapter , you should be able to:

o
describe the legal status of a partnership

o
apply the provisions of the Act that specifically applies to partners

o
explain and apply how specific deductions apply to partners

o
explain the tax consequences for partners on dissolution or termination of a
partnership agreement

o
calculate a partner’s taxable income.

CONTENTS
18.1
Overview

18.2
Legal status of a partnership

18.3
Normal tax consequences for a partnership and its partners (s 24H)

18.4
Accrual of partnership income

18.5
Connected persons

18.6
Employment relationship

18.7
Specific deductions and allowances
18.7.1
Annuities paid to former employees or partners or their
dependents (s 11(m))
18.7.2
Partnership contributions to a fund (s 11(l))
18.7.3
A partner’s contribution to a pension fund, provident fund or
retirement annuity fund (s 11F)
18.7.4
Key person insurance contributions (s 11(w))
18.7.5
Capital allowances
18.7.6
Motor vehicle expenses
18.7.7
Deduction for bad debt (s 11(i))

18.8
Fringe benefits

18.9
Turnover tax (Sixth Schedule)

18.10
Capital gains tax consequences (par 36 of the Eighth Schedule)

18.11
 Limited partnerships (partnerships en commandite) (s 24H(4))

18.12
Dissolution/termination of partnership agreement

18.13
Default by partner

18.14
Comprehensive example

18.1
Overview

A partnership is a legal relationship between two or more persons who carry on a business and to
which each partner contributes either money or labour or anything else with the objective of making a
profit and of sharing it between them. A partnership is not subject to normal tax as it is not a separate
legal entity. The individual partners of a partnership are liable for their proportionate share of the
normal tax on the partnership’s taxable income. The partnership is, however, liable for VAT on taxable
supplies made by the partnership and not its individual partners (see chapter 31).

The Income Tax Act contains specific provisions whereby income received and expenses incurred by a
partnership are deemed to be received and incurred by the individual partners (s 24H). In certain
cases, the partnership is deemed to be an employer of the partners to allow for specific deductions in
the partners’ hands that generally only apply to employees. The formation and dissolution of a
partnership may also have specific normal tax consequences for the individual partners. In addition,
the Eighth Schedule to the Income Tax Act provides for specific capital gains tax (CGT) consequences
for capital transactions involving partnerships. Before these principles are discussed in detail, it is
important to understand the legal nature of a partnership as well as the different types of partnerships
that exists.

8.2
Legal status of a partnership

A partnership is not a separate legal persona distinct from the persons who represent it. This means
that the partnership cannot legally own assets and cannot be held liable for any obligation incurred.
The individual partners own the assets used for purposes of the partnership. The individual partners
may also be held liable for obligations incurred.

There are different types of partnerships. The most basic form of partnership is the general
partnership where all the partners manage the business and are personally liable for its debts. A
limited partnership is one in which certain partners are not involved in the management of the
business and also only liable for the partnership debt to a limited extent. The liability of a limited
partner is usually limited to the partner’s partnership contribution. A silent partner is one who shares
in the profits and losses of the business, but who is not involved in the management of business and
whose association with the business is not publicly known.

18.3
Normal tax consequences for a partnership and its partners (s 24H)

A partnership is not a separate legal entity and it is not liable for normal tax. The individual partners
are liable for normal tax on the partnership’s taxable income. The Act provides that where any trade
or business is carried on in partnership, each partner is deemed to be carrying on such trade or
business (s 24H(2)). It also provides that where the partnership receives income, it is deemed to be
received by each member of the partnership. The same applies for any deduction or allowance for
which the partnership may have qualified. Deductions and allowances are allocated to the individual
partners. The portion of income, deductions and allowances allocated to a specific partner, is the same
as the ratio that the partners agreed in which they will share partnership profits and losses (s 24H(5)).

The taxpayer in Grundlingh v C:SARS (FB 2009) was a South African resident and a partner of a legal
partnership in Lesotho. The court had to consider whether the taxpayer's share of the profits of the
Lesotho partnership was taxable only Lesotho. The double tax agreement between South Africa and
Lesotho provides that the profits of an enterprise of a Contracting State shall be taxable only in that
state unless the enterprise carries on business in the other contracting state through a permanent
establishment situated therein (article 7(1) of the DTA). The taxpayer argued that the Lesotho
partnership was an enterprise of Lesotho and therefore only taxable in Lesotho. However, the court
held that
neither the South African Income Tax Act nor the Lesotho Income Tax Act recognise a
partnership as a separate legal taxable entity
the taxpayer (i.e. the partner) is deemed to carry on the business of the Lesotho partnership
the individual partners, and not the partnership, are tax entities, and are liable to pay taxes
the Lesotho partnership is not an enterprise, liable to pay tax in Lesotho, and therefore article
7(1) of the DTA is not applicable
the profits from the Lesotho partnership was not only taxable in Lesotho in the hands of the
South African resident, but also in South Africa.

When calculating the taxable income of the partners in a partnership, it is SARS’s practice that one
first determines the taxable income of the partnership as if it is a separate taxable entity. This amount
of taxable income is then apportioned among the partners according to their agreed-upon
profit-sharing ratio. The partners are then individually assessed on their respective shares of the
partnership income after considering any income derived from sources outside the partnership. Each
partner pays tax according to his total taxable income (including his share of the partnership income)
and the exemptions, deductions and rebates available to him. In this way, the same net effect is
achieved as if income and expenses were separately apportioned between the respective partners (as
contemplated in s 24H).
Should the determination of the taxable income of a partnership result in an assessed loss, the
assessed loss is apportioned among the partners according to their rights to participate in profits or
losses. Each partner is deemed to carry on the trade carried on by the partnership and is entitled to
set off his share of the assessed loss against any income derived during the same year from sources
outside the partnership, subject to the provisions of ss 20 and 20A (see chapters 7 and 12).

In determining the taxable income or assessed loss of a partnership, the Commissioner must have
regard to the terms of the partnership agreement. If, in terms of the agreement, salaries are payable
to the partners or interest is to be credited on capital contributions made by them, the salaries or
interest will be allowed as a ‘deduction’ to the partnership. These amounts will then be included in (i.e.
added to) the taxable incomes of the relevant partners. Drawings made by partners will be capital in
nature and the interest payable by the partner on the amount will be allowed as a deduction from the
taxable income of the relevant partner, whilst the interest charged by the partnership will be taxable in
the hands of the partnership. It is, therefore, the practice of the Commissioner to subject a partner to
tax on his transactions with the partnership as if he were a third party. Partnerships and the partners
are treated as distinct entities for this purpose.

The provisions of s 24H also apply to foreign partnerships. Foreign

partnerships are discussed in chapter 21.

A partner’s normal tax liability can be calculated in terms of the following framework:

Framework for calculating a partner’s normal tax liability

Income and expenses of the partnership as per statement of comprehensive income:

Income

Gross income from trading Rx

Interest received on credit balance of bank account x

Dividends received by partnership x

Expenses
Salaries paid to employees (x
)

Salaries paid to partners (x

)

Contribution to pension fund (contributions on behalf of partners and employees) (x

)

Contributions to medical scheme (contributions on behalf of partners and (x

employees) )

RAF contributions made on behalf of partners (x

)

Bad debt (x
)

Life insurance premiums on the lives of partners (x

)

Depreciation (x
)

Interest paid in respect of partners’ capita (x

)

Net profit as per statement of comprehensive income Rx

STEP 1: Calculate taxable income from partnership:

Net profit as per statement of comprehensive income Rx

Adjusted for income and expenses that are subject to special rules in the
individual partners’ hands:

Less: Interest received on credit balance of bank account (x

)

Less: Dividends received by partnership (x

)

Add: Bad debt x

Add: Life insurance premiums on the lives of partners (not deductible in terms of x
s 11(w))

Add: Depreciation x
Less: Wear and tear (x
)

Adjusted partnership taxable income Rx

Split adjusted partnership taxable income between: Rx

Trade income from partnership a

Interest received on credit balance of bank account b

Dividends received by partnership c

STEP 2: Calculate partner’s pro rata taxable income from partnership

Partner’s share of partnership’s taxable income (Ra × profit sharing ratio) Rx

Partner’s share of partnership’s interest income (Rb × profit sharing ratio) x

Partner’s share of partnership’s dividend income (Rc × profit sharing ratio) x

STEP 3: Add partner’s personal income from partnership

Salary from partnership x

Interest received from partnership x

Contributions to pension fund, provident fund and retirement annuity fund paid
by partnership x

Contributions to medical aid scheme paid by partnership x

Net rental income x

STEP 4: Claim exemptions and deductions per partner

Less: Interest exemption in terms of s 10(1)(i) (x)

Less: Dividend or foreign dividend exemption in terms of s 10(1)(k) or s 10B (x)

Taxable income before specific deductions Rx

Less: Other deductions (s 11(a) and 11(e) as well as travel cost) (x)

Less: Bad debts (s 11(i)) (x)

Add: Taxable capital gain (s 26A) x

Less: Contributions to pension fund (s 11F) (x)

Less: Donations (s 18A) (x)

Taxable income Rx

Normal tax liability of partner Rx

Less: Primary, secondary and tertiary rebates (x)

Less: Section 6quat tax credit for foreign taxes paid (x)

Less: Medical fees tax credit (ss 6A and 6B credits) (x)

Normal tax liability Rx

Example 18.1. Deemed income and expenses

For the 2024 year of assessment, Majola and De Wet Medical Practitioners (a 50:50
partnership between P Majola and K de Wet) received income of R4 500 000. Tax deductible
expenses of R1 600 000 were actually incurred.
Determine P Majola’s taxable income for the 2024 year of assessment.

SOLUTION

Partnership net profit

Income R4 500
000

Less: Expenses (1 600

000)

Net profit (equal to taxable income) R2 900 000

Partner’s pro rata taxable income from partnership

Partnership taxable income (equal to net profit) R2 900 000

 P Majola’s share in the partnership taxable income (50% × R2 900 000) R1 450 000

Note

P Majola will be liable for tax on the above amount even if he does not actually receive the
amount. The reason for this is that the income is deemed to have accrued to and expenses
are deemed to be actually incurred by the partner, P Majola (s 24H(5)).

18.4
Accrual of partnership income

Income is deemed to accrue to or be received by a partner on the same day on which it accrues to or
is received by the partners in common (this refers to the day on which the income accrues to or is
received by the partnership) (s 24H(5)). This applies irrespective of any contrary rule contained in any
law or the partnership agreement.

The effect of the above rule is that partners will be subject to normal tax on an amount that is
received by or that accrues to the partnership irrespective of whether, or when, the amount is
distributed to the partners. The partnership agreement may, for example, provide that profits are only
distributed to partners after the end of a financial year. Despite such a clause in a partnership
agreement, amounts are deemed to be received by or to accrue the partners in the same ratio in
which they have agreed to share profits and losses at the same time that the amount is received by or
accrued to the partnership.

18.5
Connected persons

The Act contains several provisions aimed at combating tax avoidance where transactions are entered
into between connected persons. These are generally aimed at ensuring that transactions between
connected persons are conducted on an arm’s length basis. A connected person in relation to a partner
of a partnership is any other partner of the partnership, as well as any connected person in relation to
other partners in the partnership (par (c) of the definition of ‘ connected person’ in s 1).

Example 18.2. Connected person in relation to the partner

Khosi and Dino are partners in a partnership. Khosi is also a beneficiary of a family trust, the
KL Family Trust. Discuss who will be connected persons (as defined in s 1) under these
circumstances.
 SOLUTION

In these circumstances the following persons are connected persons:

Khosi and Dino are connected persons because they are partners in the same
partnership.
Khosi and the KL Family Trust are connected persons (par (b) of the definition of ‘
connected person’ provides that a beneficiary of a trust is a connected person in relation
to the trust).
Dino and the KL Family Trust are connected persons. Since Khosi and her family trust are
connected persons and Khosi and Dino are connected persons, Dino is also a connected
person in relation to the KL Family Trust.

18.6
Employment relationship

There is no employment relationship between a partner and a partnership. In COT v Newfield (1970
RAD) the court confirmed that the relationship between partners is one of agency and not of
employer-employee. An agency relationship means that the partner will act as an agent of the
partnership and has a legal obligation to act in its best interest.

Since a partnership does not qualify as an employer of a partner, a salary paid to a partner is not
subject to employees’ tax (see definition of ‘employer’ in par 1 of the Fourth Schedule). A partner is,
for this reason, a provisional taxpayer (see chapter 11).

Although a partnership qualifies as a ‘person’ (the definition of ‘person’ in the Interpretation Act, 1933,
includes ‘any body of persons corporate or unincorporated’), amounts paid by a partnership to a
partner do not qualify as ‘remuneration’ as defined in the Fourth Schedule. The definition of
‘remuneration’ in the Fourth Schedule includes ‘salary, leave pay, wage, overtime pay, bonus, gratuity,
commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend’, which
requires a relationship similar to that of an employee or service provider and therefore does not apply
to partners and partnerships.

The Act provides that a partner in a partnership is deemed to be an employee of the partnership and a
partnership is deemed to be the employer of the partners for purposes of the following specific cases:
s 11F, which allows a partner to claim a deduction (subject to specific limitations) for
contributions made to a pension fund, provident fund or retirement annuity fund (see 18.7.3)
s 11(l), which allows a partnership to claim a deduction for contributions made for the benefit of
or on behalf of a partner to a pension fund, provident fund or retirement annuity fund (see
18.7.2)
 contributions made by a partnership for the benefit of a partner to a pension fund or a provident
fund are to be regarded as a taxable fringe benefit (par 2(l) and 12D of the Seventh Schedule –
see chapter 8), and
paragraph 2A of the Seventh Schedule, which provides that a partner is deemed to be an
employee of a partnership for purposes of par 2 of the Seventh Schedule. The effect of par 2A is
that a partner must include fringe benefits in his gross income in terms of par (i) of the
definition of ‘gross income’ and will be subject to normal tax on the fringe benefits provided by
the partnership, similar to fringe benefits provided to an employee. Although the value of a
fringe benefit will be included in a partner’s gross income, it will still not be subject to
employees’ tax.

The following provisions of the Act which specifically apply to employees, will not apply to partners in
a partnership:
par (d) of the definition of ‘gross income’ (termination gratuities) because this paragraph
specifically refers to an office holder, employee or employer
a salary payable to a partner is not subject to employees’ tax
the provisions of s 8(1) that determine the taxable portion of a travel allowance, subsistence
allowance and an allowance granted to the holder of a public office
s 23(m) that limits the deductions that relate to any employment or office held by a person, and
s 12M that provides that amounts that are incurred by a taxpayer as contributions to a medical
scheme in respect of a former employee (or dependent of a former employee) may be deducted
from the taxpayer’s income.

18.10
Capital gains tax consequences (par 36 of the Eighth Schedule)

A partnership is not a separate legal entity and it is not a taxpayer for normal tax purposes. As a
result the individual partners must bear the consequences of any transaction that gives rise to capital
gains consequences under the Eighth Schedule.

Disposal of partnership assets when a partner joins or withdraws from the partnership

According to common law, every time that a partner joins or leaves, the existing partnership is
dissolved and a new partnership is formed. These strict common law principles would therefore trigger
a disposal of the entire interest of the partners each time a partner joins or leaves the partnership.
Because of the practical difficulties, SARS does not follow this strict legal approach. Instead, SARS
regards each partner as having a fractional interest in the partnership assets. Therefore, when a
partner withdraws from the partnership and is paid out for his share, there will be a disposal in respect
of the leaving partner’s interest, and a capital gain or loss must be determined for each of the
partnership’s assets. The remaining partners will have an increase in their base costs in respect of
each of the partnership’s assets.
Because partners are connected persons, the proceeds received by the leaving partner are deemed to
be the market value of his partnership interest. When valuing the interest, SARS accepts that the
goodwill need not be included in the market value of his interest where he did not pay for the goodwill
on admission to the partnership.

Disposal of a partnership asset to a third party

In terms of par 36, the proceeds on the disposal of a partner’s interest in a partnership asset are
treated as having accrued to each partner at the time of disposal of that asset, in proportion to each
partner’s interest in the partnership. When there is a disposal of an asset to a third party, the
proceeds must be apportioned among the partners according to the partnership agreement, or if one
does not exist, according to partnership law. In the absence of a specific asset-surplus-sharing ratio,
the proceeds will normally be allocated according to the profit-sharing ratio.

18.11
Limited partnerships (partnerships en commandite) (s 24H(4))

A limited partnership is one in which certain partners are not involved in the management of the
business and also only liable for the partnership debt to a limited extent. The liability of a limited
partner is usually limited to the partner’s partnership contribution.

A limited partner is defined in the Act as a member of the partnership en commandite, an anonymous
partnership or similar partnership or a foreign partnership. A limited partner’s liability towards a
creditor of the partnership is limited to the amount that the limited partner contributed to the
partnership, or limited in any other way (definition of ‘ limited partner’ in s 24H(1)).

The deductions or allowances that may be claimed by a limited partner may not in aggregate exceed
the sum of the amount for which the partner may be held liable to any creditor of the partnership and
any income received by or accrued to the partner from the partnership business (s 24H(3)). Any
deductions or allowances that are disallowed because they exceed these amounts, are carried forward
to the succeeding year of assessment. These amounts may be deducted in the succeeding year of
assessment, but will be subject to the above limitation for the succeeding year of assessment (s
24H(4)).

18.12
Dissolution/termination of partnership agreement

A partnership may be dissolved in a number of ways, such as ceasing to trade, the death or retirement
of a partner, or the admission of a new partner. If any of these events occur, the agreement between
the partners at the time is cancelled. If the partnership continues to trade after one of these events,
for example when a partner dies, retires or a new partner is admitted to the partnership, a new
agreement is entered into between the continuing partners. This means that the old partnership
ceases to exist, and a new partnership is formed.
The tax consequences of payments made to former partners after the dissolution of the partnership
depend on what the payments were made for. Before a number of scenarios are considered, it is
important to remember the following principles:
Income is deemed to accrue or be received by a partner at the same time it accrues or is
received by the partnership (s 24H(5)). This means that even though a partner may not have
received income from the partnership, the amount is deemed to accrue to the partner when it is
received by or when it accrues to the partnership.
Where a taxpayer disposes of income after it accrued to the taxpayer, the amount is still taxable
in the taxpayer’s hands (CIR v Witwatersrand Association of Racing Clubs (1960 A); see chapter
3).
An amount received for the disposal of a right will be of a capital nature if the right forms part of
the taxpayer’s income-producing structure (WJ Fourie Beleggings v C:SARS (2009 SCA) and
Stellenbosch Farmers Winery Ltd v CIR (2012 SCA); see chapter 3).
The disposal of an interest in a partnership asset qualifies as a disposal of an asset for CGT
purposes (see 18.10).
An increase or decrease in a partner’s interest in the partnership assets triggers a part disposal
of the partnership assets for CGT purposes (see 18.10).

Where a former partner receives a lump sum amount from the remaining partners for his share of the
partnership profit for the year up to the date of dissolution, the amount should be included in the
former partner’s gross income. The lump sum amount in this scenario represents a payment of an
amount that already accrued to the former partner. This is so because an amount is deemed to accrue
to a partner at the same time it is received by or accrues to the partnership (s 24H(5)). If, on
dissolution of the partnership, the parties agree to amend the partnership agreement with regards to
the sharing of profits and the outgoing partner receives less than the amount that accrued to him
during the year prior to dissolution, he will still be liable for tax on the amount that accrued to him.
The difference between the amount that accrued to him and the amount that he agrees to receive will
result in a capital loss in his hands. If the agreement results in him receiving more than the amount
that accrued to him, the excess amount will be a capital gain in his hands.

If, on dissolution of the partnership, the outgoing partner receives an amount from the other partners
as consideration for his share of the partnership assets, the amount will be of a capital nature in his
hands. The amount will qualify as proceeds from the disposal of an interest in the partnership assets
and will be subject to CGT (see 18.10 and chapter 17). If this amount is paid to the outgoing partner
in instalments over an agreed period, the amount that accrued to the outgoing partner is still of a
capital nature. The amount is treated as having accrued to the outgoing partner at the time of disposal
for CGT purposes (par 36 of the Eighth Schedule – see 18.10). However, if, on dissolution of the
partnership, the remaining partners agree to pay an annuity over a specific period to the outgoing
partner, the amount will be included in the outgoing partner’s gross income. This is because par (a) of
the definition of ‘gross income’ provides that any amount received or accrued by way of annuity is
specifically included in a person’s gross income.
Example 18.9. Dissolution of partnership

Mpho, Lungelo and Nelson each contributed R1 000 000 on 1 March 2015 to form a
partnership that acquired a commercial property for R3 000 000. The three partners shared
profits and losses equally. For the period 1 March 2023 to 29 February 2024 the property was
rented out for R30 000 net per month. On 30 November 2023 Mpho sold his interest in the
partnership asset in equal shares to Lungelo and Nelson for R1 800 000 in total. Mpho
received R1 890 000 on 30 November 2023, which was made up as follows:

R900 000 from Lungelo for half of Mpho’s interest in the partnership asset
R900 000 from Nelson for half of Mpho’s interest in the partnership asset
R90 000 from the partnership representing Mpho’s share in the net rental income
received from 1 March 2023 to 30 November 2023.

Calculate the effect of the above on Mpho’s taxable income for his 2024 year of assessment.

SOLUTION
Income

Profit from partnership (representing Mpho’s interest in the net rental income received calculated as
R30 000 × 9 months = R270 000 / 3 partners)

R90 000

Proceeds from disposal of interest in partnership asset (this amount is not included in Mpho’s income,
since it is of a capital nature)

nil

Taxable capital gain (see 18.10)

Proceeds from disposal of interest in partnership asset

R1 800 000

Less: Base cost of interest in partnership asset (the base cost of Mpho’s interest in the partnership
asset is equal to his initial contribution to the partnership)

(1 000 000)

Capital gain

R 800 000

Less: Annual exclusion

(40 000)
 Aggregate capital gain

760 000

Taxable capital gain (R760 000 × 40%)

304 000

Taxable income

R394 000

18.13
Default by partner

Partners are in general jointly and severally liable for the debt incurred by the partnership. This means
that a partnership creditor may recover an amount due to him jointly from all the partners, or from
any of the individual partners.

If a partnership incurs a loss and one of the partners is unable to contribute his share of the loss, the
other partners will have to contribute to make good the loss. The assessed loss in these partners’
hands will be limited to the amount for which they were liable under the partnership agreement. This
is because deductions and allowances are allocated to partners in the same ratio in which the profits
or losses of the partnership are shared (s 24H(5)(b)). The amount that the partners contributed to
make good the loss incurred by the defaulting partner will be an expense of a capital nature. These
partners will have a claim against the partner who could not contribute his share of the loss. If the
amount becomes irrecoverable, these partners will realise a capital loss (see chapter 17).

Chapter 25
Insolvent natural persons
 Rudi Oosthuizen and Madeleine Stiglingh

Outcomes of this chapter

After studying this chapter , you should be able to:

o
explain the tax consequences for an insolvent natural person before
sequestration

o
explain the tax consequences for the insolvent estate of a natural person who
has been sequestrated

explain the tax consequences for an insolvent natural person after

sequestration

explain the tax consequences when an order for sequestration of a natural

person has been set aside.

CONTENTS
 25 .1
Overview

25 .2
The effect of sequestration on various taxpayers (ss 1 and 24H)

25 .3
The insolvent natural person before sequestration (taxpayer one) (ss 6(4), 8B,
8C, 10(1)(i), 11F, 12T, 20(1)(a)(ii), 24A(5), 25C and 66(13)(a)(ii)(aa); par 5(1)
of the Eighth Schedule) (s 25 of the Tax Administration Act)

25 .4
The insolvent estate (taxpayer two) (ss 1, 6, 6A, 6B, 6C, 8(4)(a), 10(1)(i),
11(a), 11(e), 11(i), 11(j), 11F, 12C, 12T, 19, 20, 22(2), 24C and 25C; paras
5(1) and 83 of the Eighth Schedule) (ss 153(1), 154 and 155 of the Tax
Administration Act)

25 .5
The insolvent person after sequestration (taxpayer three) (ss 1, 6(4), 10(1)(i),
11F, 20(1)(a)(ii) and 66(13)(a)(ii)(bb); par 5(1) of the Eighth Schedule) (s 25
of the Tax Administration Act)

25 .6
The effect of the setting aside of an order of sequestration (ss 20(1)(a)(ii) and s
98 of the Tax Administration Act)

25 .7
Other tax consequences (s 5(10), par 19(5) of the First Schedule, s 53 of the
VAT Act)

25 .8
Comprehensive example

<JD:"par 25.1 ">25.1 Overview

This chapter deals with the normal and other tax consequences of the insolvency of a natural person.
Insolvency of a natural person means that the person’s liabilities exceed his/her assets and that
he/she is unable to pay his/her debts as and when they become payable. Either the person
himself/herself or the person’s creditors can apply to the court to have the estate of the insolvent
person sequestrated. When an order of sequestration is granted by the court, the estate of the
insolvent person vests in the Master of the High Court. The Master appoints a trustee to liquidate
assets of the insolvent estate and to pay creditors and liquidation costs to the extent that there are
available funds in the estate.

There are various normal tax consequences that need to be considered in respect of the insolvent
person, for example the tax liability from the beginning of the person’s tax year until the date of
sequestration. Income could accrue or be received after sequestration, and it should be established
who is liable for tax on that income. There could also be other tax consequences, for example where
the insolvent person was a VAT vendor at the date of sequestration.

25.2
The effect of sequestration on various taxpayers (ss 1 and 24H)

When a natural person becomes insolvent, three taxpayers must be considered:

the insolvent natural person for the period before sequestration (taxpayer one)
the insolvent estate (taxpayer two)
the insolvent natural person for the period from sequestration onwards (taxpayer three).

When a natural person (taxpayer one) becomes insolvent, his/her current tax status is terminated on
the day before the date of sequestration of his/her estate. On the date of sequestration, a new
taxpayer, namely the insolvent estate (taxpayer two), comes into existence. The purpose of taxpayer
two (the insolvent estate) is to sell all the assets of the person and to use the money to pay the
outstanding debt. The insolvent natural person himself/herself is regarded as a new taxpayer
(taxpayer three) from the date of sequestration. The insolvent natural person (taxpayer three) will be
taxed on any income that he/she derives in his/her personal capacity from that date. For ease of
reference, the rest of this chapter will generally refer to ‘taxpayer one’, ‘taxpayer two’ and ‘taxpayer
three’.

Schematically the three taxpayers can be illustrated as follows:

The Insolvency Act, 1936 (Act 24 of 1936) (‘the Insolvency Act’) provides for two possible routes to
follow to sequestrate the estate of a natural person:

1.
The person can apply to the courts to have his/her own estate voluntarily sequestrated
(voluntary surrender). The court may grant such an order if certain requirements are met.

2.
 The person’s creditors may approach the court to request the sequestration of the person’s
estate (compulsory sequestration). Once again, certain requirements must be met before the
court will grant such an order.

In the case of voluntary surrender, the date of sequestration is the date on which the surrender of the
estate is accepted by the court. In the case of compulsory sequestration, the date of sequestration is
the date of the provisional sequestration order, provided such order is subsequently made final (i.e.,
not set aside by the court) (definition of ‘date of sequestration’ in s 1(1)).

It is also possible that, once the court has granted a sequestration order, the person’s circumstances
could change, resulting in him/her being able to settle his/her outstanding debts. In such a case the
court may set the sequestration order aside, so that the person can carry on as before, as if the
sequestration order had never been granted.

For persons who carry on business activities in the form of a partnership, it is important to understand
the consequences of sequestration for the partnership as well as for the individual partners. For the
purposes of the Insolvency Act, the partnership has an estate that is separate from the estates of the
individual partners. The Insolvency Act provides that if the estate of a partnership is sequestrated, the
estates of each individual partner (subject to certain exclusions) must generally be sequestrated at the
same time. However, if the personal estate of one of the partners is sequestrated, it does not
necessarily result in the estates of the partnership or other partners also being sequestrated.

The insolvency of a partner brings about the dissolution of the partnership, as the sequestrated
partner’s share in the partnership is withdrawn. A new partnership agreement is entered into between
the remaining and any new partners.

Although the partnership itself is regarded as a separate legal entity for the purposes of insolvency
legislation (as explained above), the partnership is not regarded as a separate taxable person for
income tax purposes. Even though the insolvent estate of a person constitutes a separate ‘person’ (as
defined in s 1), the taxable income of a partnership is taxed in the hands of the individual partners in
accordance with the profit share agreement between the partners (s 24H). Therefore, the tax
consequences that are discussed in the rest of this chapter will only apply to individual partners, either
in the case of their own sequestration (separate from the partnership) or when their estate is
sequestrated because of the partnership being sequestrated.

25.3
The insolvent natural person before sequestration (taxpayer one) (ss 6(4), 8B, 8C,
10(1)(i), 11F, 12T, 20(1)(a)(ii), 24A(5), 25C and 66(13)(a)(ii)(aa); par 5(1) of
the Eighth Schedule) (s 25 of the Tax Administration Act)

A final income tax return has to be completed for taxpayer one for the period from the first day of the
year of assessment to the day before the date of sequestration (s 66(13)(a)(ii)(aa) of the Act read
with s 25 of the Tax Administration Act).

Although certain amounts may be received or may accrue only after the date of sequestration, they
are still deemed to accrue to taxpayer one. The following are examples of such deemed accruals:
 An employee must include in income any gain on the sale of qualifying equity shares derived
from a broad-based employee share plan if the shares are sold within five years from the
granting thereof (s 8B). However, sequestration of the employee within five years will not
result in any inclusion in income for either taxpayer one or taxpayer two (s 8B(1)(c)). Amounts
received by the trustee upon the sale of these shares will be subject to capital gains tax in the
hands of taxpayer two (s 25C(c)). Taxpayers one and two will be deemed to be one and the
same person for the purposes of determining the base cost and capital gain or loss in respect of
the disposal by the trustee.
Equity instruments acquired by directors and employees of a company (on or after 26 October
2004) are taxed when they vest in the director or employee (s 8C). The vesting date depends on
the type of equity instrument. The Act is not clear on what happens if a natural person is
sequestrated before vesting takes place. Section 8C does deal with the scenario where a natural
person dies before vesting takes place. It provides that vesting takes place immediately before
death, but only if all conditions are or may be lifted upon death (it therefore depends on what
the agreement stipulated when the options were awarded to the director or employee) (s
8C(3)(b)(iv)). It is submitted that one should also determine the vesting consequences in the
case of insolvency from the underlying agreement between the employer and the employee or
director. If all restrictions are lifted upon insolvency, the vesting would occur in the hands of
taxpayer one. However, if certain restrictions are still applicable (for example if the shares must
be sold back to the employer), vesting will only take place in the hands of taxpayer two.
Shares received under certain circumstances before 1 October 2001 in exchange for fixed
property or other shares are deemed to have been disposed of by taxpayer one on the day
before the date of sequestration (s 24A). This disposal is deemed to be for a consideration equal
to the lesser of the market value on that day and the market value on the date of the original
exchange (s 24A(5)).

The primary and secondary rebates available to taxpayers one and three will be apportioned
proportionately between the periods before and after sequestration (SARS Interpretation Note No. 8).
It used to be unclear whether the limited local interest exemption (s 10(1)(i)) would also be
apportioned between taxpayers one and three. From years of assessment commencing on or after 1
March 2023, the interest exemption must be apportioned if a person’s year of assessment is less than
12 months (proviso to s 10(1)(i)). Therefore, taxpayers one and three must apportion (share) the
interest exemption in the year of sequestration, based on the number of days in the relevant
taxpayer’s final (taxpayer one) or first (taxpayer three) period of assessment, relative to 365 or 366
days.

Remember

The apportionment of rebates should usually be calculated on the ratio where the completed
months included in the assessment represents the numerator and 12 the denominator
(completed months assessed/12) (s 6(4)). It is, however, the practise of SARS to apportion
the rebates on a daily basis (days included in assessment/(365 or 366)).
An assessed loss of taxpayer one can be set off against the income of taxpayer two from the carrying
on of any trade in South Africa (s 20(1)(a)(ii) read with s 25C(a)). This will happen if the trustee of
the insolvent estate continues with a trade that was carried on by taxpayer one before sequestration.

An assessed loss of taxpayer one cannot be carried forward to taxpayer three unless the order of
sequestration has been set aside. If the order is set aside, the amount to be carried forward to
taxpayer three will be reduced by the amount that was allowed to be set off against the income of
taxpayer two from the carrying on of a trade (proviso to s 20(1)(a)(ii)). This could happen if the
trustee continued with a trade of taxpayer one and taxpayer two has already been registered as a
taxpayer before the sequestration order is set aside (see 25.2.4).

For the purposes of certain provisions, taxpayers one and two are deemed to be one and the same
person (see 25.4). One of these is the limitation applicable to the annual and lifetime contributions to
tax-free investments (s 12T(1)(b)). The R36 000 annual contribution limitation is not apportioned for
a part of a year of assessment. The total of allowed contributions made by taxpayers one and two
during any year of assessment is therefore limited to R36 000.

The limitation of R350 000 applicable to contributions to retirement funds (s 11F) is not apportioned
for a proportional year of assessment. In taxpayer one’s final year of assessment, the deduction for
qualifying contributions is therefore subject to the usual limitations (see chapter 7.4.1), with no
apportionment of the R350 000 amount. Please note that there is an amendment (applicable to years
of assessment commencing on or after 1 March 2024) to the provisions of s 11F which has the effect
that the amount of R350 000 is only available once during any year of assessment for a specific
natural person. For example, if a person emigrates during a year of assessment, that person is still the
same natural person, but will have two periods of assessment during the year of their emigration.
Prior to the amendment, the person would be entitled to the full R350 000 for each of those two
periods of assessment. The effect of the amendment is that the R350 000 limit applies to the entire
year of assessment (from 1 March of a year of assessment until 28/29 February of the following year
of assessment). However, in the case of insolvency of a natural person, taxpayers one and two are
separate taxpayers, while taxpayer two is not a natural person. This means that the R350 000 is not
shared between taxpayers one and two.

Please note that when taxpayer one’s assets pass to taxpayer two at sequestration, there is no actual
or deemed disposal of assets by taxpayer one (such as in the case at the death of a natural person).
Since taxpayers one and two are deemed to be one and the same for purposes of determining
allowances, recoupments and capital gains or losses (s 25C), it follows logically that a person cannot
dispose of his/her assets to himself/herself. The assets are realised only when they are sold by the
trustee out of the insolvent estate (taxpayer two).

In the year of sequestration, taxpayers one, two and three (in that order) share the R40 000 annual
capital gains tax exclusion. This is according to par 3.8 of SARS Interpretation Note No. 8, which has
been confirmed by the introduction of the proviso to par 5(1) of the Eighth Schedule (for years of
assessment commencing on or after 1 March 2023).

The trustee of the insolvent estate (taxpayer two) is responsible for the tax affairs of taxpayer one for
the period prior to the date of sequestration. Any tax payable by taxpayer one on income earned prior
to the date of sequestration, even if it has become payable only after that date, is a debt due to SARS
by taxpayer two. The trustee must admit the claim and accord it the preference to which it is entitled
in terms of the Insolvency Act.

25.4
The insolvent estate (taxpayer two) (ss 1, 6, 6A, 6B, 6C, 8(4)(a), 10(1)(i), 11(a),
11(e), 11(i), 11(j), 11F, 12C, 12T, 19, 20, 22(2), 24C and 25C; paras 5(1) and 83 of
the Eighth Schedule) (ss 153(1), 154 and 155 of the Tax Administration Act)

The definition of a ‘person’ includes both a natural person and an insolvent estate (s 1). Therefore,
taxpayer two exists separately from taxpayer one and is registered as a separate tax entity. A
separate income tax reference number is allocated to taxpayer two. Its first period of assessment will
commence on the date of sequestration and end on the last day of February that follows thereafter.
The second and subsequent years of assessment will commence on 1 March of a year and end on the
last day of February that follows thereafter. Its last period of assessment will end on the date when
the insolvent estate is finally wound up.

Taxpayers one and two are, however, deemed to be one and the same person for the purposes of
determining the following:
The amount of any allowance, deduction or set-off to which taxpayer two may be
entitled (s 25C(a)). The following are examples:

–
Closing stock of taxpayer one in his or her last period of assessment will become opening
stock of taxpayer two in its first period of assessment (s 22(2)).

–
The write-off of business assets can continue in taxpayer two (for example in terms of s
11(e) or s 12C).

–
Assume that taxpayer two disposes of depreciable assets in respect of which taxpayer one
previously claimed capital allowances. In determining the possible deduction of a s 11(o)
allowance, the cost and tax value of the assets to taxpayer two will be taken as the cost
and the tax value of taxpayer one.

–
If an amount that has previously been included in the income of taxpayer one later
becomes irrecoverable (by the trustee), taxpayer two could be entitled to a bad debt
deduction (s 11(i)).
–
Any assessed loss (s 20) from taxpayer one’s final tax calculation may be carried forward
to taxpayer two.
Any amount which is recovered or recouped by or otherwise required to be included in
the income of taxpayer two (s 25C(b)). The following are examples:

–
 Assume that taxpayer one has previously written off a debtor and claimed a deduction (in
terms of s 11(i)). If the debt is later collected by the trustee, the recoupment (s 8(4)(a))
of the previously allowed deduction must be included in the income of taxpayer two.

–
If taxpayer one previously claimed any wear-and-tear allowances (for example in terms of
s 11(e) or s 12C), they could be recouped in the hands of taxpayer two when those assets
are sold by the trustee (s 8(4)(a)).

–
Any deduction that taxpayer one claimed in his/her final period of assessment in respect
of doubtful debts will be added back to the income of taxpayer two in its first period of
assessment (s 11(j)).

–
An allowance claimed by taxpayer one in his/her final period of assessment for future
expenditure in respect of a contract will be added back to the income of taxpayer two in
its first period of assessment (s 24C).

–
The provisions relating to the concession or compromise of debt may lead to recoupments
if a debt is reduced by more than the amount of consideration received, for example if a
debt is reduced in terms of a compromise with a creditor (s 19 – see chapters 13 and 17).
Any taxable capital gain or assessed capital loss of taxpayer two (s 25C(c) and par
83(1) of the Eighth Schedule). The base cost of any asset for taxpayer two, is equal to
taxpayer one’s base cost. Taxpayer two is entitled to the same capital gains tax exemptions and
exclusions as well as the same inclusion rate that taxpayer one would have been entitled to as a
natural person, for example, the primary residence exclusion and the personal-use asset
exclusion. In the year of sequestration, taxpayers one, two and three (in that order) share
the R40 000 annual exclusion (par 3.8 of SARS Interpretation Note No. 8 and the newly
introduced proviso to par 5(1) of the Eighth Schedule). In subsequent years, taxpayers two and
three will each be entitled to a full annual exclusion of R40 000.
The annual and lifetime contributions in respect of tax-free investments (s
12T(1)(b)). The R36 000 annual contribution limitation is not apportioned for a part of a year
of assessment. The total allowed contributions made by taxpayers one and two during any year
of assessment is therefore limited to R36 000. Any amount received by or accrued to taxpayer
two in respect of a tax-free investment held by taxpayer one on date of sequestration will be
exempt from normal tax (s 12T(2)).
For all other purposes not specifically covered in s 25C, taxpayers one and two remain separate
entities. This needs to be borne in mind when considering whether the estate is entitled to a
specific exemption. For example, the estate is not entitled to the local interest exemption (s
10(1)(i)) because it is not a natural person. It is, however, entitled to the local dividend
exemption (s 10(1)(k)(i)).
Taxpayer two can claim any deductions for which it qualifies, for example administration
charges, such as the trustee’s remuneration (s 11(a)). It pays normal tax at the rates applicable
 to natural persons. It does not, however, qualify for any of the personal rebates (ss 6, 6A, 6B or
6C).
The deeming provisions of s 25C only apply to deductions, recoupments and capital gains or
losses to which taxpayer two is entitled or which are included in its income. Taxpayer two is
not deemed to be a natural person and is therefore not entitled to a s 11F deduction. Taxpayer
one is therefore entitled to the entire R350 000 (subject to the other limits of the section) in the
final year of assessment, while there is no deduction available to taxpayer two (see 25.3).

Example 25.1. Disposal by the insolvent estate (taxpayer two)

The trustee of Alan’s insolvent estate (taxpayer two) disposes of Alan’s primary residence for
a gain of R750 000.

Explain the capital gains tax consequences for the insolvent estate.

SOLUTION

This amount will be disregarded in the same way as if the residence had been disposed of by
Alan himself (par 83(1) of the Eighth Schedule).

Remember

Any assessed capital loss from taxpayer one’s final tax return may also be carried forward
to taxpayer two and set off against capital gains arising for taxpayer two. However, any
assessed capital loss remaining in taxpayer two at the time it is terminated, is lost and
cannot be carried forward to taxpayer three (par 83(2) of the Eighth Schedule and s
25C(c)).
The 40% inclusion rate applicable to an individual is also applicable to taxpayer two (par
83(1) of the Eighth Schedule).

The trustee of an insolvent estate is the representative taxpayer in respect of the income received by
or accrued to taxpayer two (par (f) of the definition of ‘representative taxpayer’ in s 1, read with s
153(1) of the Tax Administration Act).
The trustee is responsible for the administration and liquidation of an insolvent estate. He/she must
complete a return of the income derived by the insolvent estate and submit the resulting claim for tax
against the assets of the estate. He/she must generally represent the insolvent estate in all matters
relating to taxation (s 154 of the Tax Administration Act).

The trustee could be held personally liable for any tax payable in his/her capacity as representative
taxpayer (of both taxpayer one and taxpayer two), if he/she disposes of any property with which
outstanding taxes could have been paid (s 155 of the Tax Administration Act).

25.5
The insolvent person after sequestration (taxpayer three) (ss 1, 6(4), 10(1)(i),
11F, 20(1)(a)(ii) and 66(13)(a)(ii)(bb); par 5(1) of the Eighth Schedule) (s 25 of
the Tax Administration Act)

As already mentioned, taxpayer three comes into existence from the date of sequestration and exists
separately from taxpayers one and two. An insolvent person who (with the consent of his/her trustee)
enters employment or carries on a profession or business after his/her sequestration, is liable for tax
on that income in his/her own right as taxpayer three, even if the income is paid to the trustee (par
(c)(ii) of the definition of ‘gross income’ in s 1). Taxpayer three is registered as a separate taxpayer
with a new income tax reference number. The first period of assessment of taxpayer three will
commence on the date of sequestration and end on the last day of February that follows thereafter.
The second and subsequent years of assessment will commence on 1 March of a year and end on the
last day of February that follows thereafter.

The primary and secondary rebates for taxpayers one and three are apportioned proportionately
between the periods before and after sequestration (SARS Interpretation Note No. 8). It used to be
unclear whether the limited local interest exemption (s 10(1)(i)) would also be apportioned between
taxpayers one and three. From years of assessment commencing on or after 1 March 2023, the
interest exemption must be apportioned if a person’s year of assessment is less than 12 months
(proviso to s 10(1)(i)). Therefore, taxpayers one and three must apportion (share) the interest
exemption in the year of sequestration, based on the number of days in the relevant taxpayer’s final
(taxpayer one) or first (taxpayer three) period of assessment, relative to 365 or 366 days.

In the year of sequestration, taxpayers one, two and three (in that order) share the R40 000 annual
capital gains tax exclusion. This is according to par 3.8 of SARS Interpretation Note No. 8, which has
been confirmed by the introduction of the proviso to par 5(1) of the Eighth Schedule (for years of
assessment commencing on or after 1 March 2023).

Taxpayer three is a different ‘person’ from taxpayers one and two, and as such the R350 000 limitation
of s 11F is available in full for taxpayer three’s first and subsequent years of assessment.

The first tax period for taxpayer three runs from the date of sequestration to the last day of that year
of assessment (s 66(13)(a)(ii)(bb) read with s 25 of the Tax Administration Act).
An assessed loss of taxpayer one cannot be carried forward to taxpayer three; it may only be carried
forward to taxpayer two. If the order of sequestration has been set aside, the amount to be carried
forward from taxpayer one to taxpayer three is reduced by the amount which was set off against the
income of taxpayer two from the carrying on of a trade (proviso to s 20(1)(a)(ii)). Any assessed loss
and/or assessed capital loss of taxpayer two may not be carried forward to taxpayer three since they
are not deemed to be one and the same person for tax purposes.

25.6
The effect of the setting aside of an order of sequestration (ss 20(1)(a)(ii) and s 98
of the Tax Administration Act)

When an order of sequestration is set aside, the existence of taxpayer two is terminated and cancelled
as if it never existed. Any transactions that took place in taxpayer two while it existed must be
accounted for in the hands of the person who has been released from sequestration. This means that
the Commissioner must withdraw the final assessment issued in respect of taxpayer one as well as all
assessments issued to taxpayer two (s 98(1) of the Tax Administration Act). The tax position of the
person that would have been sequestrated (taxpayer one) therefore continues as if his/her estate had
not been sequestrated (par 3.6 of Interpretation Note No. 8).

New returns must be submitted for taxpayer one as if taxpayer two never existed, and taxpayer one
will be re-assessed accordingly. Taxpayer one will combine all the tax consequences of both taxpayers
one and two, until the date when the order was set aside, in his/her newly rendered return(s).

If a taxpayer three was registered, that taxpayer will continue to exist and will be the one which
relates to the individual in future. Taxpayer one will cease to exist from the date of setting aside of the
sequestration order. The balance of any assessed loss of taxpayer one (after reducing that assessed
loss by the amount that was set off against trade income of taxpayer two, which has now been
‘moved’ to taxpayer one) may be carried forward to taxpayer three (proviso to s 20(1)(a)(ii)). The
effect of this is that any assessments raised on taxpayer three will also have to be withdrawn and
re-issued to take into account any assessed losses and assessed capital losses from taxpayer one.

These provisions will only be applicable where the provisional order of sequestration has been set
aside and will not be applicable where an insolvent person has become rehabilitated (in accordance
with the provisions of the Insolvency Act).

25.7
Other tax consequences (s 5(10), par 19(5) of the First Schedule,
s 53 of the VAT Act)

If the estate of a VAT vendor (taxpayer one) is sequestrated and the trustee continues carrying on the
enterprise or makes supplies while terminating the enterprise, then taxpayer two is deemed to be a
vendor (s 53(a) of the VAT Act) . Taxpayers one and two are deemed to be one and the
same person for VAT purposes (s 53(b) of the VAT Act). This means that taxpayer two does not have
to be registered as a vendor under a new registration number, but simply continues using taxpayer
one’s registration number.

If the insolvent’s trading activities are being continued, taxpayers one and two are also deemed to be
the same employer for the purposes of employees’ tax (definition of ‘employer’ in par 1 of the Fourth
Schedule), skills development levies (definition of ‘employer’ in the Skills Development Levies Act) and
unemployment fund contributions (definition of ‘employer’ in the Unemployment Insurance
Contributions Act). This means that taxpayer two does not have to register as an employer under a
new registration number.

The trustee of the insolvent estate may elect that the normal tax chargeable on the taxable income
from farming be determined in accordance with the rating formula (par 19(5) of the First Schedule
and s 5(10) of the Act). This could be done if the farming operations carried on by taxpayer one were
continued by taxpayer two in the period of assessment commencing immediately after insolvency
(that is, commencing on the date of sequestration). The election must be made within three months
after the end of such period of assessment or within such further period as the Commissioner may
approve. Once the election has been made, it is binding on taxpayer two for that period of assessment
and all future periods of assessment, and taxpayer two will be taxed in accordance with the rating
formula. The average taxable income from farming will be calculated having regard to the figures
determined for taxpayer one before the date of sequestration (Interpretation Note No. 8).

27.1
Overview

When a person dies, his/her net estate (assets less liabilities) is distributed according to his/her will
(or if there is no will, according to the rules of intestate succession). The will can provide for certain
assets to be awarded to specific persons. Such specific awards are called legacies and the recipients
thereof are called legatees. Persons who share in the rest of the estate that is not specifically awarded
to anyone, will receive inheritances and they are referred to as heirs. For ease of reference, heirs and
legatees are collectively referred to as ‘beneficiaries’, while the deceased person will be referred to as
‘the deceased’ hereafter. In other words, wealth is transferred from the deceased to beneficiaries.

Although the deceased ceases to be a taxpayer on the date of death, there will be various normal tax
issues that need to be addressed regarding not only the deceased, but also his/her deceased estate.
In addition to normal tax consequences, there could also be estate duty consequences in respect of
the deceased estate.

Normal tax and estate duty are two separate taxes that must be calculated in respect of the death of a
person:
Normal tax consequences arise due to income received or accrued before and after the death
of the deceased up until the date of finalisation of the deceased estate, which is when the
liquidation and distribution account (the account required to be submitted by the executor of the
estate to the Master of the High Court in accordance with s 35 of the Administration of Estates
Act 66 of 1965 (definition of ‘liquidation and distribution account’ in s 1)) becomes final. This
 income can be taxed either in the hands of the deceased, the deceased estate, or even in the
hands of the beneficiaries. During the deceased’s final year of assessment (until the date of
death) he/she may have disposed of assets that could be subject to capital gains tax. Assets
that the deceased owned at the date of death, are deemed to have been disposed of by the
deceased at the date of death, resulting in possible further capital gains tax consequences in the
hands of the deceased. After death the assets are disposed of by the deceased estate, resulting
in capital gains tax consequences for the deceased estate.
Estate duty is calculated on the dutiable value of the estate, of which the starting point is the
actual property and deemed property (net wealth) transferred to the beneficiaries as a result of
death.

This chapter deals firstly with the normal tax (see 27.2–27.4) and then with the estate duty (see
27.5–27.14) consequences of the death of a natural person.

27.2
Normal tax: Change in taxpayers upon death

The following diagram illustrates the different taxpayers involved in the case of death of a person:

27.3
Normal tax : The deceased (s 1) (paras 19 and 21 of the Fourth Schedule) (ss
153(1) and 154 of the Tax Administration Act)

The executor of a deceased estate is the person who deals with the administrative issues of the
deceased as well as the deceased estate. The executor is the representative taxpayer in respect of the
income received by or accrued to the deceased during his/her lifetime (par (e) of the definition of
‘representative taxpayer’ in s 1 read with s 153(1) of the Tax Administration Act). The executor must
generally represent the deceased in all matters relating to taxation (s 154 of the Tax Administration
Act).
A natural person’s final period of assessment will end on the day of death, which is not necessarily on
the last day of February. The person will have a final normal tax calculation for the period from the
first day of the year of assessment until the date of his/her death.

In the event of the deceased being a provisional taxpayer, the executor is exempt from having to
submit an estimate on behalf of the deceased. This is in respect of the provisional tax period during
which the deceased died. It will start on either 1 March or 1 September and end on the date of death
(proviso (ii) to par 19(1)(a) of the Fourth Schedule). If a person dies between 1 March and 31 August,
it means that his/her first provisional tax period is shorter than six months. In such a case, no
provisional tax return or payment is required for the first provisional tax period (par 21(1A) of the
Fourth Schedule). Any tax owing by the deceased for his/her last period of assessment will be
collected on assessment.

The executor must complete the return of taxable income of the deceased to the date of death and
submit the resulting claim for normal tax payable against the assets of the estate. This means that the
final normal tax payable by the deceased will be paid out of cash in the deceased estate. The tax so
paid will qualify as a deduction in the calculation of the dutiable amount of the deceased estate for
estate duty purposes, subject to certain conditions (s 4(b) of the Estate Duty Act).

Regarding the final normal tax calculation of the deceased, special rules apply to income received by
or accrued to the deceased (see 27.3 .1), while specific capital gains tax consequences also arise (see
27.3 .2).

27.3.1
Final normal tax calculation of the deceased (ss 1, 6(2), 6(4), 6A(3), 6B(1),
6B(4)(a), 7B, 8(4)(a), 8B, 8C, 9HA, 10(1)(i), 11F, 12T, 22(8)(b)(iv), 24A and
25) (paras 3, 3A and 4 of the Second Schedule)

The final normal tax calculation of the deceased will usually have a proportional period of assessment
that will be less than a year. The following issues are relevant for this final normal tax calculation:
The deceased is deemed to have disposed of his/her assets (subject to certain exclusions and
roll-overs – see 27.3.2) at the date of death at the market value of those assets at that date (s
9HA(1)). An effect of these deemed disposals is, for example, that capital allowances claimed in
respect of an allowance asset may be recouped and included in the gross income of the
deceased (s 8(4)(a)). Another effect is the inclusion of deemed consideration equal to market
value in respect of trading stock held at date of death as a sole proprietor (s 22(8)(b)(iv)).
There could also be capital gains tax consequences as a result of the deemed disposals (see
27.3.2).
 Example 27.1. Recoupment: Deceased person

Lutendo has been claiming allowances (s 11(e)) on an asset used in his trade as a sole
proprietor. The cost of the asset was R10 000 when originally purchased, while the tax value
and market value of the asset at the date of his death were R7 000 and R9 000 respectively.
Explain the income tax consequences on death relating to the above asset.

SOLUTION

At the date of death there is a deemed disposal of the asset, resulting in a recoupment of R2
000 (R9 000 less R7 000) which the executor will include in Lutendo’s gross income in his
final income tax return.

For the purposes of the medical scheme fees tax credit, any fees paid to a medical scheme by
the deceased estate are deemed to have been paid by the deceased on the day before his/her
death (s 6A(3)).
For the purposes of the additional medical expenses tax credit, fees paid by the deceased estate
to a medical scheme, as well as ‘qualifying medical expenses’ paid by the deceased estate, are
deemed to have been paid by the deceased on the day before his/her death (s 6B(4)(a)).
When a taxpayer dies during the year of assessment, the date used to determine the ages of
children for the purposes of the additional medical tax credit is the date of death, not the last
day of February (definition of ‘child’ in s 6B(1)). This means that the ages of the deceased’s
children are determined at the date of death to establish, for each child, whether the definition
of ‘child’ is met. This is because the deceased’s ‘year of assessment’ (as defined in s 1) ends on
the date of his/her death and we should determine whether each of the children of the deceased
meets the definition of ‘child’ at that date.
If the deceased’s period of assessment is less than a full year, the normal tax rebates to which
he/she is entitled are proportionately reduced (s 6(4)). If the deceased would have been 65
years old or older at the end of the year of assessment during which he/she died, he/she will
also be entitled to the secondary rebate in his/her final income tax period, reduced
proportionally for the period during which he/she was alive (s 6(2)(b)). In addition, if the
deceased would have been 75 years old or older at the end of the year of assessment during
which he/she died, he/she will also be entitled to the tertiary rebate in his/her final income tax
period, reduced proportionally (s 6(2)(c)). This means that the age the deceased would have
been on 28/29 February had he/she still lived, is used to determine which of the personal
rebate(s) apply. According to the wording of the Act, the apportionment of the rebate(s) is done
based on the number of months in the final period of assessment relative to 12, but, in practice,
the calculation is done based on days in the final period of assessment relative to 365 or 366.
The local interest exemption must also be apportioned if a taxpayer’s year of assessment is
shorter than 12 months (proviso to s 10(1)(i)). In the case of the death of a taxpayer, the
taxpayer’s final period of assessment is usually shorter than 12 months (if the taxpayer did not
 die on 28/29 February). The local interest exemption (either R23 800 or R34 500) must
therefore be apportioned, in the same ratio as the ratio of the number of days that the taxpayer
was alive, bears to 365 or 366.
An employee must include in income, any amounts received or accrued from the sale of
qualifying equity shares derived from broad-based employee share plans if the shares are sold
within five years of receiving the shares (s 8B). If the employee dies within five years of
receiving such shares, there is no income tax liability on the value of the shares (s 8B(4)). The
effect is that the amount will only be subject to capital gains tax in the hands of the deceased.
The deceased estate is deemed to be a natural person in terms of s 25(5)(a) (see 27.3.2) and
therefore would be subject to the provisions of s 12T. For the purposes of the annual and
lifetime contributions to tax-free investments, the deceased and the deceased estate are
deemed to be one and the same person (s 12T(1)(b)). The annual contribution limitation is
therefore shared between the deceased and the deceased estate and the total of allowed
contributions made by the deceased and the deceased estate during any year of assessment is
limited to R36 000.
The limitation of R350 000 applicable to contributions to retirement funds (s 11F) is not
apportioned for a proportional year of assessment. In the deceased’s final year of assessment,
the deduction for qualifying contributions is therefore subject to the usual limitations (see
chapter 7.4.1), with no apportionment of the R350 000 amount. Please note that there is an
amendment (applicable to years of assessment commencing on or after 1 March 2024) to the
provisions of s 11F which has the effect that the amount of R350 000 is only available once
during any year of assessment for a specific natural person. For example, if a person emigrates
during a year of assessment, that person is still the same natural person, but will have two
periods of assessment during the year of their emigration. Prior to the amendment, the
emigrating person would be entitled to the full R350 000 for each of those two periods of
assessment. The effect of the amendment is that the R350 000 limit applies to the entire year of
assessment (from 1 March of a year of assessment until 28/29 February of the following year of
assessment). However, in the case of death, the deceased and the deceased estate are separate
taxpayers (although the deceased estate is regarded as a natural person as discussed above).
This means that the deceased and deceased estate are both entitled to their own R350 000
limitation.
The first requirement of the physical presence test, requiring physical presence exceeding 91
days in the current year of assessment, is applied in the normal way. Therefore, even though
the deceased’s final year of assessment may be shorter than 365/366 days, the 91 days
requirement is not apportioned. As a part of a day is counted as a full day, the day of death is
included in counting the number of days that the deceased may have been present in South
Africa (proviso (A) to the definition of ‘resident’ in s 1(1)).

Although certain amounts may be received by or accrue to the executor of a deceased estate only
after the date of death, they are deemed to accrue to the deceased immediately prior to his/her
death. The following are examples of such deemed accruals:
Equity instruments acquired by directors and employees of a company are taxed when they vest
in the director or employee (s 8C). The vesting date depends on the type of equity instrument.
In the case of a restricted-equity instrument, vesting is deemed to occur immediately before the
date of death of a director or employee if all the restrictions are or may be lifted on or after
death (s 8C(3)(b)(iv)). Whether or not restrictions fall away at death depends on the terms of
the award of the equity instrument by the employer to the employee or director.

If the restrictions are lifted, the gain or loss (market value of the equity instruments at death
less the consideration paid by the deceased for the instrument) is included in or deducted from
the deceased’s income. The capital gains tax consequences of such an instrument also need to
be considered, but the deemed disposal on death will result in no capital gain or loss as the
market value at death will be equal to market value at vesting (see 27.3.2). As the equity
instrument became the property of the deceased immediately before death (and is included as
such for estate duty purposes), it is to be dealt with in terms of the stipulations of the
deceased’s will or the provisions of intestate succession if the deceased had no will. If the
restrictions are NOT lifted on or after death (for example if the shares must be sold back to the
company upon death of the employee or director), vesting takes place after death and the
provisions of s 25(1) apply (see 27.4). However, the deceased director or employee did own the
shares at death, and it will therefore be included as property in the estate for the purposes of
estate duty. The gain or loss upon vesting with the sale of the instrument will be included in or
deducted from the deceased estate’s income.
Shares received under certain circumstances before 1 October 2001, in exchange for fixed
property or other shares are deemed to have been disposed of by the deceased on the day
before his/her death (s 24A). This disposal is deemed to be for an amount equal to the lesser of
the market value on that day and the market value on the date of the original exchange (s
24A(5)).
Variable remuneration received by the executor after the death of an employee, is deemed to
accrue to the deceased on the day before the date of death (proviso to s 7B(2)). For example,
an employer decides to award a performance bonus to a person after his death; the bonus is
neither provided for in the employment contract of the employee, nor is it usual practice for the
employer to award such bonuses. Even though the bonus will only be payable to the executor of
the employee’s deceased estate after his death, it is the employee who is entitled to the bonus,
and it will therefore be included in the deceased’s final income. Another example of variable
remuneration that could be collected by the executor, is leave pay due to the deceased in terms
of his/her service contract.
Lump sum awards from retirement funds payable to the member or any other person on the
death of the member of the fund are deemed to accrue to the member immediately before
his/her death (paras 3, 3A and 4 of the Second Schedule). Please refer to chapter 9 for a full
discussion of the taxation of benefits from retirement funds and employers upon death.
A lump sum payable in consequence of a person’s death in respect of compensation for the loss
of office or employment is deemed to have accrued to the person immediately before his/her
death (proviso (ii) to par (d) of the definition of ‘gross income’ in s 1). This also applies to any
lump sum received as a severance benefit from an employer (proviso to the definition of
‘severance benefit’ in s 1).

Example 27.2. Income received by deceased person

Priya died on 1 August 2023 at the age of 55 years. Her income from a business to the date
of her death was R131 500, while her interest income received from a source within South
Africa until date of death was R24 300.

Calculate the taxes payable by Priya for the 2024 year of assessment.

SOLUTION

Taxes payable by Priya

Period of assessment 1 March 2023 to 1 August 2023 (154 days)

Business income R131

500

Interest R24
300

Less: Limited interest exemption (R23 800 × 154/366) (10

(note) 014)

14 286

Taxable income R145

786

Tax on R145 786:

R145 786 × 18% R26

241

Less: Primary rebate (R17 235 × 154/366) (note) (7 252)

Normal tax R18

989

Note

Both the primary rebate and interest exemption are apportioned, as the year of assessment is
shorter than twelve months.
 27.3.2
Capital gains tax consequences for the deceased (ss 1, 8C, 9HA, 9HB, 9J and 25)
(paras 2(1)(b), 20, 31, 54, 55, 57 and 62 of the Eighth Schedule)

The deceased could have disposed of certain assets during his/her final period of assessment resulting
in capital gains or losses. At the date of death certain assets will, however, still be in his/her
possession. These assets are physically transferred to beneficiaries in terms of the deceased’s will or,
where there is no will, in terms of the rules of intestate succession. For tax purposes, the deceased’s
assets are theoretically first transferred to the deceased estate and from the estate on to the
beneficiaries or sold by the estate to third parties.

The deceased is deemed to have disposed of his/her assets to the deceased estate at the date of
his/her death for an amount equal to the market value (s 9HA(1) and par 31 of the Eighth Schedule).
This rule does not apply for the following assets:
assets awarded to a South African resident surviving spouse (s 1 definition of ‘spouse’ and s
9HA(1)(a); the roll-over treatment under s 9HA(2) read with s 25(4) will then apply). Assets
may be awarded to a surviving spouse in terms of the will (or intestate succession rules if
there is no will), as a result of a redistribution agreement or in settlement of an accrual claim
under s 3 of the Matrimonial Property Act (s 9HA(2)(a)). This includes assets awarded to a trust
in which a spouse has a vested right but excludes assets that are sold by the executor and the
proceeds awarded to the spouse. It also excludes assets that are transferred to the spouse as
part of a claim for maintenance instituted against the estate
a long-term insurance policy in respect of which the capital gain or loss would have
been disregarded (par 55 of the Eighth Schedule and s 9HA(1)(b) (see 17.10.2)), and
an interest of the deceased in a retirement fund if the capital gain or loss in respect of that fund
interest would have been disregarded (par 54 of the Eighth Schedule and s 9HA(1)(c) (see
17.10.2)).

Although assets that are bequeathed to the government, public benefit organisations and certain
exempt institutions are not excluded from the above deemed disposal rule, the deceased must
disregard any capital gain or capital loss on such assets (par 62 of the Eighth Schedule).

Assets awarded to a surviving spouse (who is a resident) are also deemed to be disposed of by the
deceased, but not at market value. This deemed disposal is at either the amount of the current year’s
expenditure (trading stock, livestock or produce) or at the base cost of the assets on the date of death
(ss 9HA(2)(b), 9HB(1) and 9HB(3)). As a result, any potential capital gain or capital loss in respect of
a capital asset is rolled over from the deceased to the surviving resident spouse. There is in fact a
history roll-over to the surviving resident spouse (s 25(4)).

If the surviving spouse is a non-resident, the roll-over relief does not apply as this would have
resulted in a capital gain being rolled over from a taxable person to a non-taxable person. Therefore,
the normal deemed disposal at market value applies to all assets awarded to a non-resident surviving
spouse. Note that s 9HA does not provide for any exceptions to this rule, as is the case with donations
between living spouses (s 9HB(5)). Therefore, not even South African immovable property or assets of
a permanent establishment in South Africa (whether held as fixed assets or as trading stock) will
qualify for the roll-over relief. According to the Comprehensive Guide to Capital Gains Tax issued by
SARS, this is due to the fact that the s 9HB(5) exclusions only apply where there is a disposal of
assets between spouses who are alive at the time of the disposal.

Example 27.3. Capital gain: Deceased person

An asset with a base cost of R100 and a market value of R300 on date of death is bequeathed
to a beneficiary.
Calculate the capital gain/loss in the final tax period of the deceased if the asset is transferred
directly to a

(1)
beneficiary that is not a surviving resident spouse, or
(2)
surviving resident spouse.

SOLUTION

(1)
A capital gain of R200 (proceeds of R300 less base cost of R100) must be accounted for
in the deceased’s last income tax return. The beneficiary is deemed to have acquired
the asset at R300. This will also be the case if the asset is transferred to a non-resident
surviving spouse.
(2)
If this asset is transferred to the surviving resident spouse, a capital gain of Rnil must
be accounted for in the deceased’s last income tax return and the base cost of R100 is
rolled over to the surviving resident spouse.

When a couple is married out of community of property with the accrual system applicable to their
marriage (see par 27.7.3), an accrual claim is calculated at date of death. The spouse with the smaller
accrual has a claim against the other spouse at that date. From the point of view of a deceased
spouse, an amount can therefore either be owed to the surviving spouse by the deceased’s estate or
an amount can be owed by that surviving spouse to the deceased estate. As part of settling this claim
an asset may be transferred from one spouse to the other. However, this transfer will only be done
after some time has passed, as a claim must be instituted by or against the executor of the deceased
estate. If the deceased estate must transfer an asset to a surviving spouse, the disposal is at the date
of death. It will be at base cost if the surviving spouse is a resident (s 9HA(2)(b)) and at market value
if a non-resident (s 9HA(1)). If the surviving spouse transfers an asset to the deceased estate, the
disposal is deemed to take place to the deceased spouse immediately before death (s 9HB(2)(a)),
subject to roll-over relief if applicable. At death, a deemed disposal to the estate will be accounted for
in the deceased’s hands.
It may also happen that an asset is transferred directly to a non-spouse beneficiary of the deceased
and not to the estate first and then to the beneficiary. The disposal by the deceased is then deemed to
be to the beneficiary and not to the estate, but still at market value. That beneficiary is deemed to
have acquired the asset at market value at the date of death (s 9HA(3)).

In the calculation of the deceased’s final taxable capital gain, he/she will be entitled to
an annual exclusion of R300 000 in the year of death (instead of the usual R40 000) which is
never apportioned (par 5(2))
the personal-use asset exclusion (see 17.10.2)
a primary residence exclusion (see 17.10.1), and
a potential small business asset exclusion in terms of par 57 (see 17.10.2) (where any portion
of the R1,8 million exclusion is not used by the deceased, it will not be available to his/her
deceased estate).

If the deceased was the holder of a restricted equity instrument (s 8C) and the restrictions are lifted
on or after death, the instrument is deemed to vest in the deceased immediately before death (see
27.3.1). In addition to the gain or loss on vesting that will be included in, or deducted from, the
deceased’s income, the following capital gains tax consequences arise:
The base cost of the equity instrument is equal to the market value thereof at date of death (par
20(1)(h)(i) of the Eighth Schedule).
There is a deemed disposal of the equity instrument at date of death at market value (s
9HA(2)(b)(ii) if the instrument is acquired by a surviving resident spouse or s 9HA(1) in all other
cases). This means that the capital gain on deemed disposal of the equity instrument is always
nil.
If the equity instrument is acquired by a surviving resident spouse or an heir or legatee of the
deceased, that spouse or heir or legatee is deemed to have acquired the instrument at the
market value at date of death (ss 25(4) and 9HA(3) respectively).

If the restrictions on the equity instrument do NOT fall away at or after death (for example if the
instrument must be sold back to the company upon the death of the employee or director), vesting
will not take place before death, but only once the shares have been sold by the executor. As the
instrument has not vested in the deceased at date of death yet, there is no deemed disposal for the
purposes of s 9HA.

27.4
Normal tax : The deceased estate (ss 1, 6, 6A, 6B, 6C, 10(1)(i), 12T, 20 and 25)
(par 9 of the Eighth Schedule) (s 153(1) of the Tax Administration Act)

A person ceases to be a taxpayer on the date of his/her death. After that date a new taxpayer, the
deceased estate, is created. The estate of the deceased is a person separate from the deceased for
normal tax purposes (definition of ‘person’ in s 1 of the Act). The executor generally represents the
deceased estate in all matters relating to taxation. The executor must register the deceased estate as
a taxpayer, complete the return of income derived by the deceased estate and submit the resulting
claim for normal tax payable against the assets of the estate. This means that the final normal tax
payable by the deceased estate will be paid out of cash in the deceased estate and will qualify as a
deduction in the calculation of the dutiable value of the deceased estate for estate duty purposes (s
4(b) of the Estate Duty Act).

The deceased estate must be treated as a natural person (s 25(5)(a)) for normal tax purposes, except
that it will not qualify for the personal rebates (s 6), the medical tax credits (ss 6A and 6B), or the
solar energy tax credit (s 6C). Because the interest exemption (s 10(1)(i)) is not expressly excluded,
it is submitted that the deceased estate qualifies for this exemption, which is available to natural
persons only. The interest exemption must be apportioned if a taxpayer’s year of assessment is
shorter than 12 months (proviso to s 10(1)(i)). Therefore, in the deceased estate’s first year of
assessment the interest exemption will be apportioned if the deceased did not die on 28/29 February.
The apportionment will be in the same ratio as the ratio of the number of days in the deceased
estate’s first year of assessment to 365/366. This apportionment will also be done in the deceased
estate’s final year of assessment, which will start on 1 March and end on the date of finalisation of the
deceased estate’s liquidation and distribution account.

If the deceased was a resident at the time of his/her death, the deceased estate is also deemed to be
a resident and if the deceased was a non-resident at the time of death, the deceased estate is deemed
to be a non-resident (s 25(5)(b)).

The deceased estate’s year of assessment will end on 28/29 February, unless the liquidation and
distribution account is finalised before that date, in which case the period of assessment for the
deceased estate will end on the date that the liquidation and distribution account is finalised.

The deceased estate is never a provisional taxpayer (par (ff) of the definition of ‘provisional taxpayer’
in the Fourth Schedule).

For the purposes of determining the annual and lifetime contributions in respect of tax -free
investments, the deceased and his/her deceased estate must be deemed to be one and the same
person (s 12T(1)(b)). Any amount received by or that accrued to the deceased estate in respect of a
tax -free investment held by the deceased at date of death, will be exempt from normal tax (s
12T(2)). Any amount in a tax -free investment that was owned by the deceased (or his/her estate)
and transferred to another individual (a beneficiary) will be deemed to be a contribution and will be
subject to the annual and lifetime contribution limits of the recipient beneficiary.

Expenditure incurred in the production of income in the deceased estate, such as administration
charges and commission payable to the executor, could be deductible for normal tax purposes.
Executor’s fees relating to selling the assets of the deceased are not deductible for normal tax
purposes, as these relate to the winding up of the asset and not the production of income.

While the deceased estate is treated as a natural person (s 25(5)(a)), it is not deemed to be the same
natural person as the deceased. Thus, any assessed loss (s 20) or assessed capital loss (par 9 of the
Eighth Schedule) of the deceased at the time of death cannot be carried over to the deceased estate;
it merely falls away.
After assets are transferred to the deceased estate, they could be producing income in the deceased
estate before the assets are distributed to the beneficiaries. This income is generally taxed in the
hands of the deceased estate for the period before the assets are transferred to the beneficiaries (see
27.4.1). When assets are sold to third parties, capital gains or losses could be realised by the
deceased estate (see 27.4.4).

27.4.1
Income of the deceased estate (ss 1, 11(j), 24 and 25) (s 153(1) of the Tax
Administration Act)

The executor of the deceased estate is a representative taxpayer in respect of the income received by
or accrued to the deceased estate (par (e) of the definition of ‘representative taxpayer’ in s 1 read
with s 153(1) of the Tax Administration Act). Income received by or accrued to the executor of a
deceased estate in his/her capacity as executor, is included in the income of the deceased estate (s
25(1)(a)). This relates to income received or accrued after the deceased’s death up to the date on
which the executor is no longer entitled to the income . Once the executor has handed over or
transferred an asset to, or permitted the use of an asset by, a beneficiary, and that person has an
enforceable right to claim the income flowing from the asset, the income is taxable in that
beneficiary’s hands. The income will no longer be received by or accrue to the executor. The deceased
estate is deemed to have disposed of that asset at the earlier of the date on which the asset is
disposed of or the date on which the liquidation and distribution account becomes final (s 25(3)(c)).

For example, if a deceased person owned a farm, the income from the farm until the date of death is
included in the income of the deceased in his/her final period of assessment. The income generated by
the farm after death and until the farm is transferred to a beneficiary or sold to a third party, is
included in the income of the deceased estate. Income generated by the farm after it has been
transferred to the beneficiary or third party, will be included in the income of the beneficiary or third
party.

Income received by or accrued to the executor that would have been included in the income of the
deceased had he/she been alive, will also be included in the income of the deceased estate (certain
amounts received by or accrued to the executor are deemed to accrue to the deceased on the day
before the date of death – see 27.3.1). For example, interest earned after death on a fixed deposit in
the name of the deceased, would be received by the executor when the investment is liquidated as
part of the estate administration process. This interest would have been included in the income of the
deceased had he/she been alive and, therefore, the interest will be taxed in the deceased estate. This
does not apply to lump sums awarded to a person as a result of death, which will be included in the
deceased’s gross income (par (d) of the definition of ‘gross income’ in s 1).

It will also be necessary to determine the capital or non-capital nature of the proceeds on disposal of
assets by the deceased estate, as s 25(1)(b) refers to ‘income’.
The provisions of s 25(1) do not apply to allowances granted to the deceased in the year of
assessment preceding his/her death (for example, the allowances for doubtful debts (s 11(j)) or for
credit agreements (s 24). These allowances are usually included in the income of the taxpayer in the
following year of assessment. The deceased estate and the deceased are two separate taxpayers, and
an allowance granted to one taxpayer may not be included in the income of another in a subsequent
year. Therefore, the allowances granted to the deceased in the year of assessment preceding his/her
death, are included in the income of the deceased’s final period of assessment and not in the income
of the deceased estate. The deceased will not be entitled to any of these allowances in respect of the
final period of assessment.

Example 27.4. Deceased estate

Wally (55 years old) died on 30 November 2023. He was married out of community of
property. He owned the following assets at the time of his death:

A general dealer’s business. Wally was not a VAT vendor. The executors carried on the
business, and for the period 1 December 2023 to the end of February 2024 the gross
income amounted to R8 000, and the deductible expenditure was R4 500.

An interest-bearing investment of R60 000 (not a tax-free investment). The interest is

due and payable at the end of each month. From 1 December 2023 up to the end of
February 2024 the executors received interest totalling R2 200.

A farm. The executors carried on farming, and for the period 1 December 2023 to the
end of February 2024 derived gross income of R2 000 and incurred deductible
expenditure amounting to R4 000.

Shares in companies. The dividends accruing for the period 1 December 2023 to the end
of February 2024 amounted to R12 000. These dividends are those that qualify for the
exemption from normal tax in terms of s 10(1)(k)(i).

Cash in the bank. No interest was received on this asset.

Wally’s will contains the following provisions:

The assets should not be sold, but the liabilities should be paid out of the cash in the
bank. Any surplus cash is bequeathed to his widow, Cathy.

His sister, Ann, should receive the interest-bearing investment.

50% of the remaining assets are bequeathed in equal shares to his son, Bart (unmarried
with no children), and his widow, Cathy.

The remaining 50% of the assets are bequeathed to the future children of Bart and
should be placed in a trust.

The estate was finally wound up on 29 February 2024 on which day all assets were
transferred to the beneficiaries (including the testamentary trust).
Calculate the taxable income of Wally’s deceased estate for the 2024 year of assessment.

SOLUTION

Deceased estate of Wally:

Gross income

General dealer’s business (s 25(1)) R8 000

Interest accrued on interest-bearing investment (s 25(1)) 2 200

Farming income (s 25(1)) 2 000

Dividends received (s 25(1)) 12 000

R24 200

Less: Exempt income

Interest exemption (s 10(1)(i)) (R23 800 × 91/366 = R5 917, (2 200)

limited to actual)

Dividend exemption (s 10(1)(k)(i)) (12 000)

R10 000

Less: Expenses

General dealer’s expenses (s 11) (4 500)

Farming expenses (s 11) (4 000)

Taxable income of estate R1 500

Note

Although income of the estate will ultimately be paid to the beneficiaries entitled thereto, it is
the estate and not the beneficiaries, who is taxed on the income of the estate until the date
that the estate’s assets are disposed of to the beneficiaries. The normal tax payable by the
estate is paid to SARS out of cash in the deceased estate and is an allowable deduction in
the calculation of estate duty.
 27.4.2
In community-of-property marriages (ss 25(1) and 25A)

The South African system of administration of estates determines that when a person who was
married in community of property, dies, the executor of the deceased estate administers the assets of
the joint estate. He/she pays the liabilities of the joint estate, collects the income derived from the
joint assets and ultimately distributes the deceased person’s half of the net joint estate to the
beneficiaries in terms of the couple’s joint will. The remaining half accrues to the surviving spouse by
virtue of his/her equal share in the joint estate.

The income accruing from half of the joint assets up until the date of death is taxed in the hands of
the deceased spouse. The other half of the income is taxed in the hands of the surviving spouse.

The surviving spouse will be liable for normal tax on his/her own one-half of the income accruing from
the joint assets after the date of death of the deceased spouse. This half of the income, even though it
is received by the executor in the joint estate, is received on behalf of the surviving spouse and is not
taxed in the deceased estate. Only the deceased’s half of the income accruing after death on assets
forming part of the joint estate is taxed in the deceased estate (s 25(1)).

If the deceased person was married in community of property but was permanently separated from
his/her spouse, the taxable income of the deceased person could be calculated as if the marriage were
out of community of property (s 25A).

27.4.3
Beneficiaries: Distribution or disposal of assets by the deceased estate (ss 1, s
10(1)(k) and 10(2)(b))

Inheritances or legacies consisting of assets distributed from the estate, represent receipts of a capital
nature in the hands of the beneficiaries and might therefore have capital gains tax consequences for
the beneficiaries when they dispose of such assets at a later stage. The income produced by these
assets will be income in nature in the hands of the beneficiaries. A legacy in the form of an annuity,
however, is taxable in the hands of the beneficiary (par (a) of the definition of ‘gross income’ in s 1).

If the annuity is paid out of dividends that may normally be exempt (s 10(1)(k)), the dividend
exemption will not be available (s 10(2)(b)).

27.4.4
Capital gains tax consequences for the deceased estate (ss 6, 6A, 6B, 6C, 9HA
and 25) (paras 2, 5(1), 10(1), 20, 35, 40(3), 48(d), 53 and 57 of the Eighth
Schedule) (s 4 of the Estate Duty Act)

For tax purposes, the deceased’s assets are theoretically first transferred to the deceased estate and
from the deceased estate on to the beneficiaries. The deceased estate is deemed to acquire assets
from the deceased. The assets are then transferred to either the spouse or to other beneficiaries or
sold to third parties.
 27.4.4 .1
Capital gains tax: Deceased estate

Apart from the rebates (s 6), medical tax credits (ss 6A and 6B), and the solar energy tax credit (s
6C), a deceased estate is treated as a natural person (s 25(5)(a)). If the deceased was a resident at
the time of his death, the deceased estate is also deemed to be a resident (s 25(5)(b) and par 40(3)
of the Eighth Schedule). If the deceased was a non-resident, the deceased estate is also deemed to be
a non-resident. This means that if the deceased person was a non-resident, only certain assets will be
subject to capital gains tax consequences in the deceased estate (par 2(1)(b) of the Eighth Schedule).

Any disposal by the deceased estate is treated for capital gains tax purposes as if it were made by the
deceased (par 40(3) of the Eighth Schedule). Note that this does not mean that the deceased and
his/her estate are deemed to be one and the same person. A primary residence held by a deceased
estate is, for example, treated as being ordinarily resided in by the deceased for a maximum period of
two years after his/her death (par 48(d) of the Eighth Schedule). Should the executor dispose of the
residence after two years, the R2 million primary residence exclusion may be set off only against the
portion of the gain applicable to the first two years following the date of death (CGT Guide (Issue 9)
par 16.3.4). This means that both the deceased and the deceased estate could qualify for the primary
residence exclusion. The deceased estate is not entitled to any unused portion of the deceased’s small
business asset exclusion of R1,8 million (par 57 of the Eighth Schedule) but is entitled to disregard
any capital gain or loss on the disposal of any personal-use assets (par 53 of the Eighth Schedule).

An annual exclusion of R40 000 applies to the net capital gain or assessed capital loss within the
deceased estate (par 5(1) of the Eighth Schedule). Even though the disposals of assets are treated in
the same manner as if the disposals had been done by the deceased, the deceased and the deceased
estate are not deemed to be one and the same person and therefore the deceased estate is only
entitled to R40 000 as an annual exclusion and not the increased amount of R300 000. The annual
exclusion is available to the estate in the year of death and in each year thereafter, until the estate is
wound up. This annual exclusion is not apportioned in the year of death or in the last year of
assessment of the estate, even if that period is shorter than 12 months. The deceased estate uses the
same inclusion rate as an individual, namely 40% (par 10(1) of the Eighth Schedule). It is taxed using
the progressive tax tables applicable to individuals.

In the deceased estate we can distinguish between assets transferred to a surviving spouse and assets
transferred to other beneficiaries or sold to third parties.

Assets transferred to a resident surviving spouse

Where an asset is awarded to a resident surviving spouse, the deceased estate is treated as having
acquired the asset from the deceased at a cost equal to the deceased’s base cost (s 25(2)(b)). This
amount, plus any further qualifying costs, constitutes the base cost of the asset to the deceased
estate (par 20 of the Eighth Schedule). The deceased estate is deemed to have disposed of those
assets to the resident surviving spouse at its base cost (s 25(3)(a)). No capital gain or loss therefore
arises on these assets in the deceased estate. Note that if the surviving spouse is a non-resident, the
transfer of the asset is treated as a transfer to ‘other beneficiaries’ (see below).
Assets transferred to other beneficiaries (including a non-resident surviving spouse) or sold
to third parties

No capital gain or loss will arise in respect of assets transferred from the deceased estate to other
beneficiaries of the deceased. The deceased estate is treated as having acquired the assets from the
deceased at a cost equal to their market value at the date of death of the deceased (s 25(2)(a)). The
deceased estate is then deemed to have disposed of those assets at this amount, together with any
further expenditure the deceased estate may incur, to the beneficiary (s 25(3)(a)). No capital gain or
loss therefore arises in the deceased estate. Please note that this only applies to assets that are
transferred to beneficiaries of the deceased (heirs and legatees). For all assets that are sold to third
parties, the proceeds on disposal by the deceased estate will be the selling price received by the
executor of the estate (par 35 of the Eighth Schedule). The base cost of assets so sold to third parties
will be the market value at the date of death of the deceased plus any further expenditure incurred by
the estate (s 25(2)(a)). Therefore, a capital gain or loss may arise in the deceased estate in respect of
assets sold to third parties.

Remember

Any assessed capital loss from the deceased’s final tax return may not be carried forward to the
deceased estate.

27.4.4 .2
Capital gains tax: Beneficiaries of the deceased person (including a surviving
spouse)

For the beneficiaries of the deceased, we should again distinguish between assets transferred to a
resident surviving spouse and assets transferred to other beneficiaries.

Assets transferred to a resident surviving spouse

Assets transferred to a resident surviving spouse are merely ‘rolled over’ from the deceased to the
surviving spouse, through the deceased estate. Therefore, the base cost of the asset to the surviving
spouse will be equal to the base cost of the asset to the deceased spouse at date of death.
Furthermore, the resident surviving spouse is treated as having
acquired that asset on the date that the deceased acquired the asset (s 25(4)(a))
incurred expenditure in respect of that asset of an amount equal to the expenditure incurred by
the deceased (as contemplated in s 9HA(2)(b)) as well as any expenditure incurred in respect of
that asset by the deceased estate (s 25(4)(b)). The expenditure is deemed to have been
incurred by the surviving spouse on the same date and in the same currency in which it was
incurred by the deceased or the deceased estate, as the case may be, and
used that asset in the same manner as that in which the asset had been used by the deceased
and the deceased estate (s 25(4)(b)(iv)).

Assets transferred to other beneficiaries (including a non-resident surviving spouse)

The beneficiary is treated as having acquired an asset from the deceased estate for an amount of
expenditure incurred equal to the expenditure incurred by the deceased estate. The base cost of the
asset for the beneficiary will therefore be the market value of the asset at date of death plus further
qualifying costs incurred by the estate (s 25(3)(b)). If the asset is transferred directly from the
deceased to the beneficiary, the base cost will be the market value on date of death of the deceased (s
9HA(3)).

The executor of a deceased estate normally only transfers assets out of the deceased estate to
beneficiaries after the liquidation and distribution account has been approved by the Master of the
High Court. However, in certain cases (as and when allowed by the Administration of Estates Act) the
executor may transfer assets to beneficiaries prior to the liquidation and distribution account being
approved and becoming final. Where an asset is disposed of by the deceased estate to a beneficiary of
the deceased, the disposal is deemed to take place at the earlier of the date on which that asset is
disposed of or the date on which the liquidation and distribution account becomes final (s 25(3)(c)).

If an asset is not transferred to a beneficiary but sold to a third party, the third party’s base cost is the
amount paid to the executor of the estate for the asset (par 20 of the Eighth Schedule).

Example 27.5. Capital gains tax: Asset transferred to non-spouse beneficiary

An asset with a base cost of R100 and a market value of R300 on date of death is transferred
to the estate of the deceased before being awarded to the beneficiary (not a resident
spouse). Assume that no further expenditure is incurred in respect of this asset and the asset
is later transferred to the beneficiary at a date when the market value is R350.

Explain the capital gains tax (CGT) consequences of the asset in the deceased estate.

SOLUTION

The deceased estate is treated as having acquired the asset from the deceased at a deemed
base cost of R300 plus further expenditure incurred by the deceased estate (Rnil). The estate
will be treated as having disposed of the assets for proceeds equal to the deemed base cost
of R300, resulting in a capital gain of Rnil (proceeds of R300 less base cost of R300) (s
25(3)(a)). The R350 market value will have no CGT effect for the deceased estate.
The base cost of the asset to the beneficiary is R300 (s 25(3)(b)) and the beneficiary is
deemed to have acquired the asset at the earlier of the actual transfer of the asset or the
date that the liquidation and distribution account becomes final (s 25(3)(c)).

It may happen that the executor of an estate has to sell an asset of the estate to obtain cash for
purposes of paying the capital gains tax owing by the deceased, which arose solely as a result of the
deemed disposals at death contained in s 9HA(1). This means that the asset cannot be distributed to
the beneficiary in terms of the deceased’s will anymore. The beneficiary can elect to still receive that
asset if certain requirements are met (s 25(6)). This will apply where the capital gains tax that results
from these deemed disposals exceeds 50% of the net value of the estate of the deceased, as
determined in terms of s 4 of the Estate Duty Act, but before taking into account the amount of capital
gains tax due to the deemed disposals upon death.

Furthermore, the beneficiary must pay the amount of tax that exceeds 50% of that net value to SARS
within three years after the date that the estate has become distributable in terms of s 35(12) of the
Administration of Estates Act.

Any amount of tax so payable by a beneficiary becomes a debt due to the state and must be treated
as an amount of tax chargeable in terms of the Income Tax Act due by that person (s 25(7)).

Example 27.6. Capital gains tax consequences for deceased person

and deceased estate

Mr Ready died on 1 April 2023. He was married out of community of

property.

His only assets (at market value on date of death)

were

Primary residence (base cost: R1 800 000) R4 000 000

Cash R400 000

Shares in listed companies (base cost: R100 000) R280 000

Holiday house (base cost: R1 000 000) R2 000 000

Note

Mr Ready left the holiday house to his wife. He left the primary residence to his
daughter. According to the will, the executor of the deceased estate must use the
cash to pay all the costs and liabilities of the deceased estate and if there is a
shortfall, he must sell the shares to pay the costs and the liabilities. Any residue
must be split equally between the deceased’s wife and daughter.

After paying estate costs of R55 000 and settling the outstanding balances on the
bonds of R20 000 on the holiday house and R50 000 on the primary residence, the
executor realised that it was not necessary to sell the shares. He therefore distributed
half of the shares to the deceased’s wife and half to the daughter. The shares had a
value of R350 000 on the date that they were distributed to the beneficiaries. The
balance of the cash was also split and each of the beneficiaries received 50%. Assume
that none of the assets were awarded directly to the beneficiaries, but that the assets
were first transferred to the estate and then awarded to the beneficiaries.
Calculate the taxable capital gain for both the deceased and the deceased estate.
Assume that all taxpayers are residents of South Africa.

SOLUTION

Taxable capital gain – deceased (Mr Ready)

Primary residence:

Proceeds (s 9HA(1) – market value upon death) R4 000

000

Less: Base cost (1 800

000)

R2 200
000

Less: Primary residence exclusion (2 000

000)

Capital gain R200 000

Cash (not an ‘asset’ in terms of the Eighth Schedule) Rnil

Shares in listed companies:

Proceeds (half to spouse at base cost of R50 000 (R100 000/2) (s

9HA(2)) plus half to daughter at market value upon death of R140 000
(R280 000/2) (s 9HA(1)) R190 000

Less: Base cost (100 000)

Capital gain R90 000

Holiday home:

Proceeds (to spouse at base cost of R1 000 000) (s 9HA(2)) R1 000 000

Less: Base cost (1 000 000)

Capital gain Rnil

Net capital gain R290 000

Less: Annual exclusion (limited to R300 000) (290 000)

Taxable capital gain (included in taxable income) @ 40% Rnil

Taxable capital gain – Deceased estate

Primary residence:

Proceeds (s 25(3)(a)) R4 000 000

Less: Base cost (s 25(2)(a)) (4 000 000)

Rnil

Cash (not an ‘asset’ in terms of the Eighth Schedule) Rnil

Shares in listed companies: transferred to spouse

Proceeds ((s 25(3)(a))) R50 000

Less: Base cost (s 25(2)(b)) (50 000)

Capital gain Rnil

Shares in listed companies: transferred to daughter

Proceeds (s 25(3)(a)) R140 000

Less: Base cost (s 25(2)(a)) (140 000)

Capital gain Rnil

Holiday home:

Proceeds ((s 25(3)(a))) R1 000 000

Less: Base cost (s 25(2)(b)) (1 000 000)

Capital gain Rnil

Total capital gain Rnil

Annual exclusion of R40 000 Rnil

Net capital gain Rnil

Taxable capital gain (include in taxable income) @ 40% Rnil

Note

The liabilities (estate costs and outstanding bonds) have no effect on the capital gains tax
calculations.