In the first part of this series, we explored the foundational concepts surrounding capital gains tax (CGT) and the treatment of deceased estates under South African tax law. This second installment delves deeper into the specific provisions of the Income Tax Act, particularly regarding the deemed disposal of assets to a surviving spouse and the implications for the deceased estate itself. We will examine the definitions of key terms, including "spouse" and "resident," and outline how assets are valued upon transfer. Additionally, we will discuss the legal nature of a deceased estate as an entity for tax purposes, its residency status, and the treatment of income generated during its administration. Understanding these intricacies is vital for estate administrators and beneficiaries alike, ensuring compliance and optimizing tax outcomes during the often complex process of estate settlement.

As defined in section 1(1), the term “spouse” encompasses:

• **(a)** A partner in a marriage or customary union recognized under South African law.
• **(b)** A partner in a religiously recognized union akin to marriage.
• **(c)** A partner in a same-sex or heterosexual union intended to be permanent.

In the absence of contrary evidence, unions recognized under paragraphs (b) or (c) are deemed to be out of community of property.

Deemed Disposal of Assets to a Resident Surviving Spouse [Section 9HA(2)]

Key Provisions

According to section 9HA(2), the deceased is deemed to have disposed of an asset for the benefit of a resident surviving spouse under specific circumstances:

• (a) If the asset is acquired by the spouse through intestate or testamentary succession.
• (b) If it results from a redistribution agreement among heirs and legatees during the liquidation of the deceased estate.
• (c) If it pertains to a settlement claim under the Matrimonial Property Act 88 of 1984.

The term “deemed” indicates that while the asset may not literally be considered disposed of, it is treated as such for tax purposes, as clarified in Commissioner SARS v Kluh Investments (Pty) Ltd.

Definition of Resident

In the context of tax law, a “resident” is defined as a natural person who is ordinarily resident in South Africa or who meets specific physical presence criteria outlined in section 1(1).

Asset Valuation for Surviving Spouse

Under section 9HA(2)(b), the value attributed to assets disposed of to a resident surviving spouse is determined as follows:

• **For trading stock, livestock, or produce**: The amount allowed as a deduction for determining taxable income, prior to including any taxable capital gains, for the year ending on the date of death.li>
• **For other assets**: The base cost of the asset, as per the Eighth Schedule, at the date of death.

Deceased Estate [Section 25]

Nature of a Deceased Estate: Upon a person’s death, their year of assessment concludes, giving rise to a new entity—the deceased estate. This estate, while not a person in the traditional sense, is treated as such under tax law. It consists of the deceased’s assets and liabilities, managed by an executor.

Tax Treatment of the Deceased Estate: According to section 25(5)(a), the deceased estate is treated as a natural person for most purposes, with the following exceptions:

• Primary, secondary, and tertiary rebates (section 6)
• Medical scheme fees tax credit (section 6A)
• Additional medical expenses tax credit (section 6B)
• Solar energy tax credit (section 6C)

However, the estate is subject to annual interest exemption and capital gain annual exclusion as if it were a natural person.

Residency of the Deceased Estate

Section 25(5)(b):

• If the deceased was a **resident** at death, the estate is treated as a resident.
• If the deceased was a **non-resident**, the estate is treated accordingly.

The first tax return for the deceased estate covers the period from the day after death until the end of February or until the liquidation and distribution account is finalized.

Income Considerations

Section 25(1):

• Income received or accrued in the capacity of an executor is considered income of the deceased estate
• This includes amounts that would have constituted income had they been received by the deceased during their lifetime.

Conclusion

This article elaborates on the tax implications associated with the transfer of assets upon death, particularly concerning surviving spouses and the treatment of deceased estates. Understanding these provisions is crucial for both the administrators of estates and the beneficiaries involved, as compliance with tax obligations is essential to the smooth management of deceased estates. Subsequent articles will further explore the implications of capital gains tax and specific case studies illustrating these principles in action.