In the previous sections of this series, we have laid the groundwork for understanding capital gains tax (CGT) in the context of deceased estates and the tax treatment of assets transferred to surviving spouses. In this third installment, we will explore the acquisition and disposal of assets by the deceased estate as defined under sections 25(2) and 25(3) of the Income Tax Act.

We will discuss how a deceased estate is deemed to acquire assets from the deceased, the tax implications of disposing of these assets to heirs and legatees, and the processes involved when the executor sells assets to third parties. Additionally, we will examine the procedural aspects regarding the cessation of the deceased estate, particularly focusing on the importance of the liquidation and distribution account. This comprehensive understanding is crucial for executors, beneficiaries, and anyone involved in the administration of a deceased estate to navigate the complex tax landscape effectively.

Acquisition of Assets by the Deceased Estate [Section 25(2)]

Deemed Acquisition of Assets

Section 25(2)(a) says that, a deceased estate is deemed to acquire assets from the deceased for an amount equal to the market value of the asset at the date of death. This provision ensures that the estate is valued accurately for tax purposes, facilitating a fair assessment of its tax liabilities. In cases where the asset will be transferred to a resident surviving spouse, section 25(2)(b) specifies that the deceased estate acquires the asset at an amount equivalent to the amount outlined in section 9HA(2)(b). This includes:

• For trading stock, livestock, or produce: The deduction amount allowed for determining the deceased’s taxable income before any capital gains tax considerations for the year ending on the date of death.
• For any other asset: The base cost of the asset, as specified in the Eighth Schedule, at the date of death.

This structure of deemed acquisition aligns with the overall intention of creating a tax-neutral environment for the transfer of assets from the deceased estate to heirs and legatees.

Disposal of Assets to Heirs or Legatees [Section 25(3)(a) and (c)]

Treatment of Assets Awarded

According to section 25(3)(a), when an asset is awarded to an heir or legatee, it is treated as being disposed of by the deceased estate for an amount received or accrued that matches the expenditure incurred in relation to that asset. This includes:

• The deemed expenditure under section 25(2) if the asset was acquired from the deceased.
• Actual expenditure under section 11(a) if the executor purchased additional assets after the date of death.

This approach ensures that the deceased estate remains in a tax-neutral position, allowing the amount included in its gross income to reflect the actual expenditure incurred.

Timing of Disposal

Section 25(3)(c) stipulates that if the deceased estate disposes of an asset to an heir or legatee, it is treated as having disposed of that asset on the earlier of the date of disposal or when the liquidation and distribution account becomes final. This provision clarifies the timing of tax liabilities associated with asset disposals.

Disposal of Assets to Third Parties by the Executor

Income Considerations for Executors

As outlined in section 25(1), any income received or accrued by the executor in their capacity as representative of the deceased estate is treated as income of the estate. This also includes amounts that would have constituted income for the deceased had they received it during their lifetime.

Treatment of Livestock and Produce

If the deceased estate disposes of livestock or produce, and the deceased was engaged in farming operations, the proceeds from these sales will be included in the estate's gross income, regardless of whether the estate itself is considered to be actively engaged in farming.

Cessation of the Deceased Estate

Accounting and Finalization

The deceased estate must account for all transactions in its income returns until the liquidation and distribution account is finalized. This account must remain open for at least 21 days, allowing interested parties to inspect it. The executor must advertise this period, providing transparency and the opportunity for objections. Once the stipulated period has passed without objection, or any objections have been resolved, the account becomes final, marking the point at which the estate is distributable. If objections arise and are dismissed by the Master, and further legal action is taken, the finalization will depend on the court’s resolution of those objections.

Understanding Timeframes

The Interpretation Act 33 of 1957 provides guidelines on how to reckon the 21-day period, ensuring clarity in timelines for all parties involved. For example, if the account is advertised on a Friday, the period ends at midnight on the following Friday, allowing for clear scheduling.

Conclusion

In this section, we have examined the mechanisms by which a deceased estate acquires and disposes of assets, highlighting the importance of deemed valuations and tax neutrality in these transactions. Understanding these principles is essential for executors and beneficiaries to ensure compliance and manage the tax implications effectively. In the upcoming part of this series, we will explore the implications of capital gains tax specifically, further enriching your understanding of the financial responsibilities that accompany estate administration.