Navigating the Herd: Avoid negative tax implications of livestock in your estate

19 March 2024 ,  André van Niekerk 606
Many farmers still conduct their farming operations with livestock owned in their personal capacities. Although such ownership may have certain advantages, it can pose significant complications for a farmer in the event of his passing. It is therefore crucial for farmers to do a comprehensive tax and estate planning assessment to look into the potentially complex issues which must be addressed to ensure liquidity in the deceased estate and to avoid unnecessary financial burdens on the estate or loved ones after death. 

Upon death, an individual's estate may be subjected to various taxes, adding an additional financial burden to the estate. Section 9HA of the Income Tax Act 58 of 1962 (“Income Tax Act”) is one of the examples that can especially burden the estate of a farmer upon death. Before the implementation of section 9HA of the Income Tax Act, livestock held by a farmer in his name upon his date of death was regarded as a deemed disposal to his estate of a capital asset and therefore subject to capital gains tax. However, after the implementation of section 9HA of the Income Tax Act, a farmer owning livestock in his name at the date of death, will now be deemed to have disposed of the livestock to his estate at market value. This could have repercussions for the estate and its liquidity and would need to be factored into the farmer’s estate planning.

The deemed disposal upon death in terms of section 9HA of the Income Tax Act, will result in an inclusion in the farmer’s gross income in the final year of assessment (calculated up to the date of death) equal to the market value of the livestock, giving rise to income tax (which can be at a rate of up to 45%). The effect of section 9HA of the Income Tax Act is therefore clear: the deemed disposal of the livestock to the farmer’s estate will bear similar effects as if the livestock were disposed of by the farmer in the ordinary course of farming operations. 

Livestock can often be high in value and form a significant part of a deceased estate. Because these assets are deemed to have been disposed of at market value, it can result in a significant increase in the value of the estate of the farmer for estate duty purposes and income tax liabilities, which may also affect the liquidity of the estate.

The term “livestock” is not defined in the Income Tax Act, but refers to animals kept or raised for use or pleasure and would include farm animals kept for use and profit. Consequently, livestock will include animals whether held for breeding purposes which is generally referred to as fixed capital assets or animals held for resale which is referred to as floating capital assets. This does not mean that the livestock will be considered as being capital in nature, as all livestock and produce used by a farmer is revenue in nature. 

Fortunately, there are various solutions available to address the mentioned income tax implications upon death. One such solution could be an asset-for-share transaction as depicted in section 42 of the Income Tax Act, which deals with assets-for-share transactions and defines same as a transaction in terms of which a natural person disposes of an asset to a company in exchange for shares in the company. Section 41 of the Income Tax Act specifically stipulates that where the asset transferred is livestock, the company assumes the cost price and date of acquisition together with the standard values for livestock from the farmer. After the completion of the asset-for-shares transaction the company will own the livestock.

Importantly. The above example illustrates the importance for farmers to have a proper strategic, multi-generational estate plan and strategy in place that is regularly re-assessed and updated to ensure that your wealth and family’s well-being is taken care of and not affected by unforeseen consequences. 

Contact our Estate Planning Team for assistance. 

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s). 

Related Sectors: Wealth Management