Section 9HA of the Income Tax Act is a deemed disposal rule for deceased persons is effective from 1 March 2016 and is applicable in respect of a person who dies on or after that date
Section 9HA of the Income Tax Act and the rewritten section 25 relocate some of the capital gains tax implications in the Eighth Schedule to the main body of the Act. Section 9HA deals with the deceased person, while section 25 deals with the deceased estate and heirs or legatees, including a surviving spouse.
In terms of section 9HA, a person is deemed to have disposed of all assets at market value at date of death, except:
- Assets left to the surviving resident spouse
- Long-term (SA policies) of the deceased, or
- Deceased interest in retirement funds (SA and non-SA funds)
When a person disposes an allowance asset, this triggers a possible recoupment or scrapping loss and capital gains tax under the Eighth Schedule. Prior to 1 March 2016, an allowance asset was deemed to be disposed of at market value under paragraph 40(1) on the date of death, but this disposal applied only for purposes of the Eighth Schedule. Under this rule, only the capital gain or loss was therefore taken into account. From 1 March 2016, the deemed disposal takes place under section 9HA. This triggers a possible recoupment or scrapping loss, and capital gains tax under the Eighth Schedule.
The Eighth Schedule applies to both capital assets and trading stock but prevents double deductions and taxation. Trading stock is accounted for under the main body of the Income Tax Act, and it therefore holds no further capital gains tax implications at the date of sale. Prior to 1 March 2016 the market value of trading stock held and not disposed of on the date of death which exceeded its closing stock value was dealt with as a capital gain/loss. Trading stock was regarded as held by the deceased on the date of death for the purposes of section 22(1), whereas for capital gains tax purposes it was disposed. From 1 March 2016, section 9HA deems trading stock to be disposed of at market value on the date of death. The deemed disposal is included under gross income and holds no further capital gains tax implications.
The inter-spouse roll-over relief under paragraph 67 of the Eighth Schedule continues under section 9HA for the deceased person and under section
25 for the surviving spouse, but now includes trading stock.
When a person, donates an asset during his/her lifetime, subject to the exemptions, this triggers donations tax at 20% plus capital gains tax as a donation is a disposal for the purposes of the Eighth Schedule. Should a person hold onto the asset until the date of death, at the date of death, subject to the deductions and abatement, estate duty is levied at 20% plus capital gains tax as a person is deemed to have disposed of all his/her assets at the date of death. Therefore, both events result in potentially 20% donations tax or estate duty plus capital gains tax.
Muneer Hassan CA(SA) is a Tax Consultant, Senior Lecturer in Taxation at UJ and lecturer on the Gauteng Board Course