Monday 10 October 2016

Davis Tax Committee: Final Report on Estate Duty

On 24 August 2016, with the consent of the Minister of Finance, the Davis Tax Committee (“DTC”) published its final report on macro analysis of the tax system, small and medium enterprises and estate duty.

The committee advised that it would conduct a further investigation into wealth taxes and that this would be dealt with in a separate report.

The estate duty report dealt with estate duty and trusts, and contains a number of recommendations which need to be evaluated by the National Treasury with a view to amending the tax laws.

The DTC recommends that the estate duty regime should be reviewed in order to establish an effective and equitable package of major abatements and rates of duty.

The retirement fund abatement currently available should be retained,  while the maximum threshold for tax deductible retirement fund contributions should be increased from the current cap of R350 000.00 per year to take account of inflation.

The DTC recommends that the inter-spousal estate duty deduction under section 4(q) of the Estate Duty Act should be withdrawn and replaced with a substantial increased primary abatement thus ensuring consistent and equitable treatment for all taxpayers regardless of marital status.

The report recommended that the primary abatement for estate duty should be increased to R15 000 000 for all taxpayers. Furthermore, it has been proposed that the rate of estate duty be increased from 20% - 25% of the dutiable value of an estate exceeding R30 000 000.

Final Davis Tax Committee report tackles marital status discrimination and
primary abatements in estate duty tax law

Image purchased from ©"Senior couple checking their accounts at home" by  

Troels Graugaard 

There has been some discussion regarding the imposition of estate duty and capital gains tax on death and whether that amounts to double taxation. The DTC indicated that Capital Gains Tax (“CGT ”) is regarded as an income tax on capital and not a wealth tax and that estate duty and donations tax are wealth taxes and therefore the DTC does not agree with the contention that estate duty and CGT amounts to double taxation and does therefore not support the call for estate duty to be removed.

It has also been recommended that the current roll-over provisions available relating to inter-spousal bequests under the CGT rules should be repealed and replaced with a generous exemption available on death of R 1 000 000.

Whilst proposing the removal of  the inter-spousal exemption for estate duty and CGT the DTC recommends that the inter-spousal exemption within the donations tax system should also be removed. It proposes  an exemption from donations tax that should be provided for the reasonable maintenance of the taxpayer and their family.

It has been suggested that the transfer of assets in accordance with a divorce order should be subject to exemption similar to the death benefit for estate duty and CGT such that the taxpayer’s death benefit reductions would be reduced by the quantum of any allowances available or utilised during the taxpayer’s lifetime.

National Treasury has been urged to consider the possibility of extending the deeming provisions of section 3(3)(d) of the Estate duty Act to contain deeming provisions such that where an interest-free loan is made available by a person to a trust, the assets attributable to that loan should be included in the deceased’s estate for estate duty purposes. This is in addition to the recent proposal that where a funder makes an interest-free loan available to a trust, the funder be subject to donations tax thereon using the official rate of interest, currently 8% per year.

SARS has been urged to examine all trusts on registration and to investigate the transfer of assets into trusts to ensure the reduction of aggressive tax planning and to provide a level of assurance to taxpayers that their affairs are in order. The DTC proposed that donors and beneficiaries of all vested trusts should be subject to strict disclosure requirements and enforcement measures.

The DTC also recommended that SARS should concentrate on the examination of any trusts in which a deceased person may have enjoyed a vested interest thereby ensuring that all income and capital has been brought to account for both income tax estate and estate duty purposes.

Insofar as the taxation of discretionary trusts is concerned the DTC has recommended that the revenue income must be taxed in the trust in accordance with the definition of the gross income definition contained in section 1 of the Income Tax Act and  that capital gains realised by the discretionary trust should be taxed in the hands of the trust itself prior to those assets or gains vesting in the beneficiary. The DTC agreed that the current flat rate of tax applicable to trusts should be retained and subject to adjustment in line with any changes made in the maximum personal income tax rate.

The DTC recommended that SARS should establish a separate investigations unit to thoroughly comprehensively examine foreign trust arrangements.

The DTC recommended that the estates with a net value of less that R15 000 000 should be exempt from estate duty and that the estates with a value exceeding R15 000 000 should be subject to estate duty at a progressive rate. The report proposes that SARS should establish comprehensive records of all bare dominium and trust arrangements utilised for estate duty purposes and that all holders of a part interests in property should be required to submit tax returns regardless of their income derived.

As indicated above the DTC proposes that where an interest- free loan is made available to a trust the deeming provisions of section 3(3)(d) of the Estate Duty Act should be amended to include deeming provisions such that the asset acquired by the trust as a result of an interest-free loan should be added to the estate when the funder passes away. This would ensure that the interest-free loan no longer confers an estate duty advantage on the funder as a result of the deeming provisions set out in section 3(3)(d) of the Estate Duty Act.

The DTC 

  • considers that the inclusion of a general anti-avoidance rule in the Estate Duty Act has little prospect of success and therefore does not propose such a measure
  • has advised that it will conduct a further investigation into the implementation of wealth taxes in South Africa and that this will be dealt with in a separate report to be compiled by the DTC.
  • did not agree with proposals that trusts should be regarded as corporates for tax purposes as that would mean that trusts would be liable to tax 28% without being subject to dividends tax as is the case with a company. 
  • therefore recommended that the flat rate of tax applicable to trusts be retained at the current level but subject to adjustment from time to time in accordance with any changes made in the personal income tax rate.
  • identified various issues relating to the treatment of foreign trusts and particularly the consequences of paragraph 80 of the Eighth Schedule and section 25B of the Income Tax Act. 
  • recommended that SARS and National Treasury review the legislation applicable to foreign trusts to address the deficiencies noted in the DTC’ s report.

Furthermore, the DTC points out that many  foreign trust arrangements may in fact be managed from South Africa and as a consequence constitute South African resident taxpayers. Thus, taxpayers with foreign trust arrangements need to ensure that those are properly managed abroad and cannot be said to be tax resident in South Africa.

The DTC recommended that offshore retirement funds be further investigated by SARS to establish the nature of those funds and whether the South African resident contributing to such funds has made a donation to that fund. 

The concerns raised by the DTC in this regard relate to the non-payment of donations tax and investments made into the offshore retirement fund and that upon the taxpayer’s death the accumulated investment would not appear to be required to be included in the South African taxpayer’s estate on the basis that no vested right exists in respect of the trust’s accumulated capital income of the foreign trust.

In conclusion, it must be noted that the DTC makes recommendations to the Minister of Finance who will take into account the DTC’s report and will make any appropriate announcements in the course of the normal budget and legislative process. 

Thus, as is the case with all tax policy proposals they will be subject to the normal consultative processes and parliamentary oversight once announced by the Minister but that does not mean that the DTC is entitled to make firm policy proposals which must be accepted by government.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, October 2016. Image purchased ©"Senior couple checking their accounts at home" by Troels Graugaard