1271. An estate duty pitfall for farmers
March 2005 – Issue 67
For farm land to be valued for estate duty purposes at its Land Bank value, it is important to ensure that it is not sold "in the course of the liquidation of the estate".
One of the tax benefits available to farmers is that land on which a bona fide farming undertaking is carried on can be valued, for estate duty purposes, at its Land Bank value (see the Estate Duty Act No. 45 of 1955, section 1, definition of "fair market value").
However, where such land is sold "in the course of the liquidation of the estate of the deceased", the amount to be included in the estate for estate duty purposes is the price realised by the sale, in other words, the market value.
Land Bank value is usually lower than market value
Since Land Bank value is substantially lower than market value, estate duty can usually be saved by bequeathing farm land (and having it valued in the estate at Land Bank value) rather than having it sold out of the estate and the proceeds of the sale distributed to heirs and legatees, for in the latter event, the amount included in the estate for estate duty purposes will be the price realised by the sale.
In C:SARS v Estate Late HE Streicher (66 SATC 282), the deceased, who died in 1981, had bequeathed farming land to her sons. The first and final liquidation accounts in the estate were submitted to the Master of the High Court in April 1985, and reflected the land at its Land Bank value. The sons, apparently, did not want to farm the land that had been left to them, and in May 1984 they sold the land for its full market value. When SARS learned that the land had been sold before the liquidation of the estate was complete, an assessment was issued on the basis that estate duty was payable on the market value, not the Land Bank value, of the land.
In the Supreme Court of Appeal, the issue was whether or not the farm land in question had been sold "in the course of the liquidation of the estate". If the answer were affirmative, the selling price (and not the Land Bank value) would be included in the estate for estate duty purposes.
The court ruled that "in the course of" does not mean "during"
The Commissioner argued that the phrase "in the course of" the liquidation of the estate simply meant "during" the liquidation of the estate. In the case at hand, the sale had clearly occurred "during" the liquidation of the estate in the sense that the sale had been concluded before the liquidation of the estate was complete.
The Supreme Court of Appeal rejected the CommissionerÙs argument. In the context of section 5(1) of the Estate Duty Act, (said the court), the phrase "in the course of the liquidation of the estate" is not synonymous with "during" the liquidation of the estate. For a sale to have occurred "in the course of" the liquidation, there has to be a relationship between the sale and the liquidation process; the sale must have occurred in the implementation of the liquidation process, and must have been a sale by or on behalf of the executor.
In the matter at hand, the requisite relationship was not present. It had not been necessary for any estate purpose to sell the farm land in question prior to the finalisation of the estate accounts. Consequently, the farm land fell to be valued, for estate duty purposes, at its Land Bank value.
The tax planning lesson from this decision
This decision authoritatively establishes that heirs can sell farming land before the liquidation of the estate is complete without losing the benefit of having the Land Bank value taken into account for estate duty purposes, provided that they arrange matters so that the sale occurs outside of the liquidation process and is not effected by the executor in the course of his duties.
Estate Duty Act:S 1, definition of "fair market value";
Estate Duty Act:S 5(1)(a)