CGT and the award of a loan account
Taxgram (LexisNexis)
The Kimberley Tax Court (see ITC 1835, reported in Vol 71 Part 3 of the South African Tax Cases Reports) recently had to consider whether a debt owed to a deceased estate had been discharged for no consideration and hence subject to capital gains tax on the value of such claim in terms of para 12(5) of the Eighth Schedule to the Income Tax Act 58 of 1962.

The court also considered the relevance to this case, if any, of the decision in ITC 1793 (2005) 67 SATC 256.

Facts

The facts of the case were that the taxpayer, being the XXX inter vivos trust, had been the sole heir of the residue of the estate of the testatrix and her husband who had executed a joint will on 16 March 1992, the residue being subject to a usufruct in favour of the survivor of them for life and thereafter their son for a year. The testatrix died on 10 June 2003 and her surviving spouse was still alive.

The joint will also provided that the first-dying would bequeath various assets, such as household possessions, to the survivor of them and the residue of the estate of the first-dying was left to the XXX trust subject to the usufruct.

The taxpayer, at the time of the testatrix’s death, was indebted to her on a loan account in the sum of R539 189 which fell into the residue of the estate. It was common cause that the executor in the estate did not demand and/or receive payment of the aforementioned claim from the taxpayer for purposes of the winding up of the estate of the testatrix but, rather, in the Liquidation and Distribution Account this debt had been reflected as a ‘vordering toegeken’ (claim awarded/allocated) to the taxpayer as the sole heir to the residue of the estate.

The Liquidation and Distribution Account was finalised on 16 February 2004 and the estate was wound up in terms thereof shortly thereafter. The respondent, being the Commissioner for SARS, subsequently issued a notice of assessment on the taxpayer imposing capital gains tax on the trust in terms of para 12(5) of the Eighth Schedule to the Income Tax Act and s 26A thereof in respect of the aforesaid amount of R539 189.

The respondent contended that, in terms of the joint will, the debt owed by the taxpayer to the testatrix had been discharged for no consideration and that the taxpayer had acquired that claim for no consideration as contemplated in para 12(5) of the Eighth Schedule and therefore it was liable for payment of capital gains tax on the value of such claim.

The respondent further relied heavily on the decision of Bertelsman J in ITC 1793 (2005) 67 SATC 256 in which it was found that a trust was liable for payment of capital gains tax on a bequest made to it by a testatrix in her will.

The taxpayer contended that the wording of the will in casu differed fundamentally from the wording of the will in ITC 1793 supra and that that case was therefore to be distinguished from the present matter and that the solution to the issue at hand was to be found in the wording of the will and not in the method employed by the executor in winding up the estate. The respondent conceded that, had the executor demanded and received payment of the debt due by the taxpayer to the estate, capital gains tax would not have been payable on the amount of R539 189 inherited by the taxpayer as part of the residue of the estate.

The respondent submitted, however, that in terms of the wording of the will, the executor correctly elected not to collect the debt from the taxpayer but to award the loan account to it, thereby rendering it liable for payment of capital gains tax on the value thereof.

The parties were ad idem that the intention of the testatrix as expressed in the will was to be regarded as the decisive factor for the solution to the issue under consideration.

Paragraph 12(5) provided that where a debt owed by a person to a creditor had been reduced or discharged by that creditor for no consideration or for a consideration which is less than the amount by which the face value of the debt has been so reduced or discharged, then a deemed capital gain would arise.

Section 26A of the Act provided that there shall be included in the taxable income of a person for a year of assessment the taxable capital gain of that person for that year of assessment as determined in terms of the Eighth Schedule.


Held

The President of the Tax Court, Lacock J, stated that there could be no doubt that a court in construing a will had to ascertain the intention of the testator/testatrix from the words used in the will and, furthermore, a court is not to consider the wording of a will in vacuo but is to consider the wording thereof whilst placing itself as far as possible in the position of the testator/testatrix at the time of the execution thereof.

The learned judge added that the intention of the testators was clear, viz that the residue of the estate was bequeathed to the taxpayer as the sole heir thereof, subject to the usufruct in favour of the surviving spouse and the son and the meaning of the word ‘residue’ (‘restant’) was well known when used in the context of a testamentary disposition in that it generally connoted that portion of an estate that remained after provision had been made for direct bequests and legacies, as well as the payment of estate liabilities and administration costs.

It was therefore clear from the wording of the will that it was the intention of the testatrix that her claim against the taxpayer (ie her loan account) was to form part of the residue in the estate and this claim was not separately bequeathed to the taxpayer as a legacy.

Further, as reflected in the taxpayer’s financial statements, the loan in question was payable to the testatrix on demand and the taxpayer was at all times financially able and in a liquid position to repay the loan had the testatrix demanded payment thereof before her death; moreover, the testatrix was therefore, before her death, entitled to demand payment of the loan or a portion thereof and there was nothing indicative thereof that the indebtedness of the taxpayer was to remain a definite or fixed sum of money or could not be recovered, it could have varied from time to time or could even have been settled.

The court continued that the will was a joint will of the testatrix and her husband and the relevant debt had been due by the taxpayer to the testatrix and not to her husband and the testators had jointly disposed of the residue of their estates in the joint will and this was indicative of the fact that they had no bequests in mind of any of their individual or separate assets to either the taxpayer or any other person, other than those household possessions specifically referred to in the will.

Moreover, if it was the intention of the testatrix to relinquish her claim in favour of the taxpayer, she could easily have expressed that intention in the will but this she had failed to do.

Therefore it was not the intention of the testatrix to specially bequeath the claim in issue to the taxpayer and thus the claim of the testatrix under her loan account formed part of the residue of the estate, and that it was not her intention to dispose of this claim in favour of the taxpayer for no consideration as contemplated in para 12(5) of the Eighth Schedule to the Act. The court was of the view that the judgment in ITC 1793 (2005) 67 SATC 256 therefore found no application to the facts in this matter.

It remained to be considered whether the method employed by the executor in the winding up of the estate whereby the relevant claim was not recovered from the taxpayer but merely awarded to it as the sole residuary heir to the estate, brought this ‘award’ within the purview of para 12(5) of the Eighth Schedule to the Act and the answer to this question had to be found in the wording of para 12(5) of the Eighth Schedule itself.

What was required in terms of para 12(5) was an act by a creditor whereby he/she consciously intended to discharge a debt for no consideration and the determining factor was the intention of the creditor whereby he/she disposed of a debt or an asset, and not the subsequent manner in which that creditor’s estate may be administered and it was clear that the intention of the testatrix was not to discharge the debt for no consideration.

Finally, as to costs, this was not an instance where the respondent should be ordered to pay the taxpayer’s costs as its opposition to the appeal was not unreasonable and unwarranted – the matter was not a clear cut one and the opposition thereto was not unreasonable and the distinction between this matter and the case of ITC 1793, supra, was marginal with the result that the respondent could not be regarded as unreasonable in its approach to rely on that case.

In the result the appeal was allowed and the respondent’s assessment for payment of capital gains tax on the amount of R539 189 was set aside.