1. Section 9HA of the Income Tax Act, 58 of 1962, came into effect for persons who die on or after 1st March 2016.
2. Section 9HA(1) deems a person to have disposed of all his/her assets as at the date of death for an amount received or accrued equal to the market value of those assets as defined in paragraph 31 of the 8th Schedule to the Income Tax Act. This includes capital assets and revenue assets, i.e., trading stock.
3. This Section has significant consequences for persons who conducts a business in his/her own name. It has, especially for Farmers, disastrous consequences, in that, firstly Farmers can write down for tax purposes most of their equipment such as tractors, ploughs, etc, over a 3 year period in terms of Section 12B to the Income Tax Act, namely:
- 3.1 50% of cost during the 1st year;
- 3.2 30% during the 2nd year; and
- 3.3 20% during the 3rd year.
4. Consequently, most of Farmers’ equipment are usually totally written down at death, and the value of such equipment then constitutes a recoupment for Income Tax purposes in the Farmer’s final Tax Return.
5. Secondly, more devastating is the consequences in respect of revenue assets, such as stock, especially livestock, where the livestock appears in the books of the Farmer at standard values, which is a fraction of the real value of the animal.
6. For instance, the standard value of a sheep ram and a sheep ewe is R6.00 each. The value of a good ewe is in the region of R1 000.00, which means that upon death, the Farmer has a taxable income of R994.00 on that sheep. With a stock of 500 ewes, it means that the deceased will have a taxable income of R497 000.00.
7. With cattle it is even worse, where the standard value of a cow is R40.00 and that of a bull R50.00. Depending on what type of cow it is, the value for a milk cow on average is in the region of R22 000.00, and a slaughter cow is on average of R20 000.00.
8. With 100 milk cows, the taxable income is (R22 000.00-R40.00) x 100, which is R2 196 000.00.
9. To solve the problem, the Farmer would enter into an Asset for Share transaction in terms of Section 42 of the Income Tax Act, which has the effect that the income is converted to capital, which is subject to Capital Gains Tax. As the base cost of the shares is equal to the cost of the assets transferred to the company, the Capital Gain is normally a fraction of the income consequences.
10. In terms of Section 42(2)(a)(ii), the person who acquire the shares for the assets, is deemed to have acquired the share for Capital Gains Tax purposes at a base cost equal to the original cost of the asset. Hence, at the death of such a person, only the Capital Gain will be taken into account for the purposes of Section 9HA. In other words, if the ewe has been purchased for R1 000.00 and the Farmer, in terms of Section 42, transfer the ewe to a company and receive a share therefor, the base cost of the share will be R1 000.00 for Capital Gains Tax purposes.
11. The disposal of assets in terms of Section 42 has no tax consequences, subject to certain provisions.
Anville Van Wyk