On 11 December 2020 the Johannesburg tax court had to decide whether an asset had been disposed of “in the course of the liquidation of the estate of the deceased”, as contemplated the Estate Duty Act, 1955 or rather “during” the liquidation of the estate. For the reasons discussed in this article, the distinction can have an impact on the estate duty liability. In addition to failing in her contention that the latter interpretation applied, the unfortunate executrix also found that, for legal precedent to assist a litigant, the facts of the precedent case must be closer than merely similar to that of the litigant. Although the case reference is Mr X v CSARS,[1] , the appellant was the deceased estate of Mr X.
Ms B was the sole heir and executrix in the estate of her deceased father, who died intestate on 18 August 2015. The asset in question consisted of 1673 Kruger Rands (Coins), and the question was whether they should be valued for estate duty purposes in terms of section 5(1)(a) of the Estate Duty Act, as SARS contended, or of section 5(1)(g), as asserted by Ms B. Before the estate had been finalised, Ms B had sold the Coins in several tranches between 27 May and 25 November 2016.
Section 5(1)(a) would apply if the Coins had been sold in the course of the liquidation of the estate, while section 5(1)(g) would apply if they had accrued to Ms B on the death of her father and she had sold them in her capacity as owner consequential upon inheriting them. At date of death of the father, the value of the Coins was about R26,6 million, while the total proceeds of the sales were about R31,2 million.
Section 5(1)(a) provides that, for purposes of its inclusion in the estate, the value of any property disposed of in the course of the liquidation of the estate is the price realised, namely R31,2 million in the view of SARS in the present matter. Section 5(1)(g) prescribes that the value of any other property (that is, in effect, property not sold but awarded to the heir) is the value at the date of death of the deceased person. This would be R26,6 million if Ms B had her way.
The crisp question was whether Ms B had disposed of the Coins in her capacity as the only heir, and not as executrix “in the course of the liquidation of the estate”; or whether she had sold them as executrix. Alternatively, if she had sold them in her capacity as executrix, whether she had done so “during liquidation”. The appellant cited three judgments in arguing for section 5(1)(g):
CSARS v Estate late HE Kelly[2], where the court stated: “The norm is that estate duty is based on the value of the estate assets as at the date of the deceased’s death”;
De Leef Family Trust and Others v CIR[3]. Here the court stated: “Besides, according to our modern system of administration of deceased estates, the heir or legatee of an unconditional bequest obtains a vested right (dies cedit) to be entitled to the bequest on the death of the testator (a morte testatoris)”; and
Harris v Assumed Administrator, Estate Late Macgregor[4], [1987]. Although this case was about an intestate estate, the statement relied on by the appellant in the present matter was that the estate vests on the date of death when the heirs have been determined.
The facts of Kelly, on which the appellant mainly relied, were that Mrs Kelly at the time of her death in 1981 was married out of community of property to Mr D Kelly, who was the executor of her estate. The estate assets included ten units of Karoo land on which bona fide farming operations were carried on. Mr Kelly owned an undivided half shares of five of these units. Mrs Kelly bequeathed her own farms to her son J Kelly (including the five units she owned outright) and the five half shares to her son F Kelly, in both instances subject to a usufruct in favour of her husband.
In 1983, while the estate was still being wound up, Mr Kelly and J Kelly entered into a redistribution agreement in terms of which Mr Kelly became the sole owner of the five half shares bequeathed to J Kelly, subject to a bequest price. For estate duty purposes the total value of all ten units was determined at R289 177,50, being the Land Bank value as was permitted at that time.
In 1984, Mr Kelly, in both his personal capacity and as usufructuary, and F Kelly as bare dominium holder, sold the ten units to one P for R1 750 000.
In 1985 the executor filed the liquidation and distribution account, in which the ten units were reflected at the R289 177,50 Land Bank value in terms of section 5(1)(g).
In 1997 SARS became aware of the 1984 sale and revised the estate duty calculation to reflect the selling price, on the grounds that the sale had taken place in the course of the liquidation and that section 5(1)(a) applied. The estate objected and appealed on the grounds that the sale had taken place during and not in the course of the liquidation. The matter ended up in the then Appeal Court, where the learned judge held: “I conclude that a sale ‘in the course of the liquidation of the estate’ in s 5(1)(a) of the Estate Duty Act means a sale between which and the liquidation process there is some relationship. Put another way, it means a sale effected in the exercise of the functions involved in the liquidation. In short, the sale must be one in implementation of the liquidation process. It must therefore be by the executor or on behalf of the executor, in the latter’s capacity as executor, not in the latter’s personal capacity as beneficiary.” And further: “Quite apart from the consideration that in selling to P the respondent did not purport to act as executor but only in his personal capacity as usufructuary, and as his son, F Kelly’s, representative, the following further facts demonstrate that the sale was not in the course of the liquidation:
[1] All the units of land were sold together as one. The merx included the respondent’s undivided half share in five of the units. This property was not an estate asset, it was not part of the liquidation process to sell it. [2] It was not necessary for any estate purpose to sell any of the immovable estate assets prior to finalisation of the account. [3] The sale was consequent upon the decision by the respondent and F Kelly to sell, pursuant to the redistribution agreement, in advance of their receiving transfer from the estate.”Fortified by this decision as precedent, Ms B contended for the same result. Perhaps made aware of the Kelly decision by her agent, who had experience as an executor, Ms B in emails with her financial advisor treated the sales as being concluded in her personal capacity as sole heir. Significantly, as it turned out, the estate did not have sufficient cash to meet the liquidation and estate duty costs. Ms B had to provide these from the proceeds of the Coins. She claimed to have done so following her undertaking to pay the liabilities of the estate, and admitted that part of the reason for the sale had been to pay the liabilities and cover the administration costs of the estate.
The court found that the management of the liabilities and administration of the estate is inherently the function of the executor and not the heir. Ms B’s reliance on Kelly “falls at the first hurdle of the legal requirement, as the sales in question were fundamentally in the function of the executor and could not have been undertaken in the personal capacity of the beneficiary”. Moreover, it had been necessary to sell some of the Coins for estate purposes, in contrast with the Kelly position.
In conclusion, the court found that:
“[69] In the absence of any legal or factual congruence between the appellant’s case and the authority, there is no basis on which the appellant can rely on Kelly.
[70] The case of Kelly confirms that SARS’ opinion that the sale was in course of the liquidation of the estate is correct, in that: [70.1] The sale could only have been undertaken by an executor; [70.2] The sale only involved estate assets which the heir had no ownership over; and; [70.3] The sale was necessary to cover the debts of the estate.”Executors and heirs therefore need to be wary of uncritically relying on Kelly unless the facts, and especially point [2] above from Kelly, are in their favour.
[1] [2020] Case no 24863
[2] [2004] JOL 12754 (SCA)
[3] [1993] 55 SATC 207 (A)
[4] 1987 (3) SA 563 (AD)
