Capital Gains

Take care when you wish a trust to inherit your loan account with the trust. Capital gains tax Paragraph 125 of the Eighth Schedule to the Income Tax Act deems a capital gain to be where a debt owed by a person to a creditor has been reduced or discharged by that creditor i for no consideration; or ii for a consideration which is less than the amount by which the face value of the debt has been so reduced or discharged. In a recent tax board decision, Tax Board decision number 199, a testatrix had, on 17 October 2000, sold shares to the value of R2 628 340 to a trust and the trust became liable to the testatrix for the value of the shares determined at their market value on 21 June 2000. The transaction was concluded in writing by a deed of sale and an acknowledgement of liability which provided that the purchase price was regarded as a loan recorded in the trusts books as a loan account in favour of the testatrix and interest on this loan was to be determined from time to time and payable on demand, whereas the capital of the loan was repayable also on demand. The testatrix passed away on 15 March 2002 and in her duly drawn and executed last will and testament she bequeathed the aforementioned debt to the trust. The bequest was duly executed by the executor of the testatrixs estate and the executor then approached the South African Revenue Service for a ruling that the provisions of paragraph 125 of the Eighth Schedule to the Income Tax Act 58 of 1962 did not apply to this bequest. The Commissioner for SARS regarded the bequest as a discharge of a debt for no consideration and took the view that this had created a capital gain in the hands of the trust. The Commissioner for SARS included the capital gain in appellants taxable income as provided for in s 26A of the Income Tax Act 58 of 1962 in his assessment issued on 18 December 2003 on the basis that paragraph 125 of the Eighth Schedule did in fact apply and therefore included as capital gain half the value of the bequest in appellants taxable income for the 2003 year of assessment. The tax board agreed and held that it was not setoff which rendered the result taxable in the hands of the taxpayer trust but the act which amounted to a discharge of the debt, that is, the drawing up of the last will and testament and its coming into operation at the date of death. The tax board held that the provision in testatrixs will discharging the taxpayers debt constituted a deemed disposal in terms of paragraph 125 of the Eighth Schedule and consequently capital gains tax was payable by the taxpayer on the amount of the discharged debt. The transaction in issue fell squarely within the provisions of paragraph 125 of the Eighth Schedule to the Income Tax Act 58 of 1962. Recommend this article...

 

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