The taxpayer passed away - The taxpayer inherited taxpayer inherited the farm from her husband - but because she could not farm she rented out the farm to her Sons and they paid her a rental. The farm is now bequeathed to her Sons.
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
The surviving spouse will be entitled to paragraph 5(2), of the Eighth Schedule, exclusion – currently, where a person dies during a year of assessment, that person's annual exclusion for that year is R300 000.
The fact that the farm was rented out to the sons, after the finalisation of the estate of the first-dying is only relevant when paragraph 57 of the Eighth Schedule is considered.
For purposes of paragraph 57, ‘active business asset' means an asset which constitutes immovable property, to the extent that it is used for business purposes.
Your concern is the “and was substantially involved in the operations of the business of that small business during that period” requirement. SARS, in their CGT guide, states that “spouse that was not substantially involved in the operations of the small business will not be entitled to the exclusion by reason of para 57(2).” That would however be relevant to the period before death.
Section 25(4) of the Act deals with the period before death and reads as follows:
(a) This subsection must be applied in respect of an asset acquired by a surviving spouse of a deceased person as contemplated in section 9HA(2) for purposes of determining the amount of any—
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allowance or deduction to which that spouse may be entitled or that is to be recovered or recouped by or included in the income of that spouse in respect of that asset; or
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the amount of any capital gain or capital loss in respect of a disposal of that asset by that spouse.
(b) The surviving spouse contemplated in paragraph (a) must be treated as one and the same person as the deceased person and deceased estate with respect to—
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the date of acquisition of that asset by that deceased person;
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any valuation of that asset effected by that deceased person as contemplated in paragraph 29(4) of the Eighth Schedule;
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the amount of any expenditure and the date on which and the currency in which that expenditure was incurred in respect of that asset—
(aa) by that deceased person as contemplated in section 9HA(2)(b); and
(bb) by that deceased estate, other than the expenditure contemplated in section 9HA(2)(b);
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the manner in which that asset had been used by the deceased person and the deceased estate; and
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any allowance or deduction allowable in respect of that asset to the deceased person and the deceased estate.
Item (iv) above is relevant to your request.
Note however that the definition of ‘active business asset’ excludes an asset held in the course of carrying on a business mainly to derive any income in the form of … rental income, …