South Africa: To Bequeath Or Not

Last Updated: 21 February 2012
Article by Lesley Maman

Without Prejudice December 2011

Intention is the key

In the case ITC 1835  the Tax Court in Kimberley deliberated on whether a debt due to a deceased estate had been discharged for no financial consideration and was therefore subject to Capital Gains Tax (CGT) on the full value of the claim in terms of paragraph 12(5) of the Eighth Schedule to the Income Tax Act.  

Paragraph 12(5) was introduced to deal with the situation where a creditor reduces or discharges a debt owed by a debtor to the creditor for no consideration, or for an amount less than the face value amount of the debt. In such instances the debtor is liable for CGT on an amount equal to the relief received. The debtor acquires a claim against the creditor equal to the debt and is deemed to have disposed of the claim for a sum equal to the debt.

In 1992 the testatrix (the deceased) and her husband executed a joint will with a provision that the first-dying spouse bequeathed various household possessions to the survivor and the residue of their estate to an inter vivos trust, as the sole heir, subject to a life-long usufruct in favour of the survivor and after the death of the last-dying to their son for one year. On the death of the testatrix the trust, through a loan account, owed her the sum of R539 189 (the debt) as part of the residue of the estate. The deceased died in June 2003 and was survived by her spouse and son.

When winding up the deceased's estate the executor neither demanded nor received payment of the debt from the trust but merely reflected it in the Liquidation and Distribution Account. The debt as a claim was awarded to the trust as sole heir of the residue of the estate. The estate was wound up on these facts. However, SARS issued a notice of assessment to the trust imposing CGT on it calculated on the amount of the debt, in terms of paragraph 12(5) read with s26A  of the Act. s26A provides for inclusion of the capital gain in the taxable income of a person for a year of assessment, as determined in terms of the Eighth Schedule to the Act.

SARS indicated that, in terms of the joint will, the debt owed by the trust to the deceased had been discharged free of consideration and the trust had acquired such debt for no consideration. The trust was, he contended, therefore liable to pay Capital Gains Tax on the full value of the debt. The Commissioner conceded that if the executor had demanded and received payment of the debt due by the trust to the estate, Capital Gains Tax would not have been payable on the amount of the debt inherited by the trust. Payment of the amount of the debt would then have been discharged of a liability and not a debt discharged free of consideration.

SARS referred to the judgment of Bertelsmann J in ITC 1793  where he found that a trust was liable for payment of tax on a bequest made by a testatrix in her will. In that case, the testatrix sold shares to a family trust on loan and subsequently bequeathed the debt to the trust. The court held that "the situation through which set-off could occur was created by an act on the part of the testatrix, namely the discharge of the Trust (debtor). The testatrix (creditor) disposed of an asset by discharging the Trust's debt for no consideration. This created the situation where the claim against the Trust was extinguished by operation of law, by way of set-off between the estate and the Trust." It is not the set-off but the act (a discharge of the debt) which becomes taxable in the hands of the debtor. (The drawing of the will, which rendered the result of the set-off taxable in the hands of the debtor and it coming into operation at the date of death, is the act resulting in the discharge of the debt.)

The trust opposed SARS in ITC 1835, indicating that the wording of the will differed in principle from the wording of the will in ITC 1793. The trust argued that the solution could be found in the wording of the will, not in the method employed by the executor in winding up the estate.

Lacock J stated that in construing a will, he had to ascertain the intention of the testator from the words used in the will. The judge found the intention of the testator to be clear, namely that the residue of the estate was bequeathed to the trust as the sole heir thereof, subject to the usufruct in favour of the surviving spouse and thereafter the son. "Residue", when used in this framework, is that part of an estate remaining after bequests, legacies and the payment of estate liabilities and administration costs.

It was clear in the will that it was the intention of the testatrix that her claim (the debt), was to form part of the residue in the estate and it was not separately bequeathed to the trust as a legacy. The financial statements of the trust reflected the loan as payable to the deceased on demand and the trust was always financially able to repay the loan on demand before her death. The will was a joint will and the debt was due by the trust to the deceased and not to her husband.

The deceased and the testator had jointly disposed of the residue of their estates in the joint will which was an indication that, other than those household possessions specifically referred to in the will, they had no bequests in mind to either the trust or any other person. It was not the intention of the deceased to specifically bequeath the debt to the trust and therefore the claim of the deceased of her loan account simply formed part of the residue of the estate. It was not her intention to dispose of this claim in favour of the trust for no consideration.

The court held that the judgment in ITC 1793  found no application to the facts in case ITC 1835. It had to be considered whether the method employed by the executor in the winding up of the estate (where the claim was not recovered from the trust but merely awarded to it as the sole residuary heir to the estate), brought this "award" within the parameters of paragraph 12(5) of the Eighth Schedule.

The true question which arose for purposes of paragraph 12(5) of the Eighth Schedule was whether the creditor intended to discharge a debt for no consideration. The court held that the determining factor was the intention of the creditor, whereby she disposed of a debt, and not the subsequent manner in which that creditor's estate was administered. It was clear that the intention of the deceased was not to discharge the debt for no consideration. The appeal was accordingly allowed and the Commissioner's assessment for payment of CGT on the full amount of the debt was set aside.

Ultimately the difference between the two cases was is that in ITC 1793 the deceased's provision in her will discharging the trust's debt constituted a deemed disposal and, therefore, a CGT event, but in ITC 1835 it was not the intention of the deceased to discharge the trust's debt for no consideration.

The lesson to testators is not to waive payment of a debt in your will when in fact it is intended to fall into the free residue. A waiver would amount to a donation and have an unwanted tax implication for the debtor. Testators need to use terminology correctly and wills should be drawn or revised by an expert.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions