The Davis Tax Committee (DTC) recently released its second interim report on 24 August, for public comment. The DTC is advisory in nature, and was established to make taxation recommendations to the Minister of Finance.

The Minister will take into account the report and recommendations and will make any appropriate announcements as part of the normal budget and legislative processes.

As with all tax policy proposals, these proposals will be subject to the normal consultative processes and Parliamentary oversight, once announced by the Minister. We would like to take you through some of the key points from the proposals, as well as the reasoning behind them:

*Please note that at this stage, as highlighted above, these are still just proposals


Estate Duty:

The DTC recommends that the inter-spouse abatement should be withdrawn (see REASONING BEHIND PROPOSALS) and the primary abatement should be substantially increased to R15 million for all taxpayers (currently at R3.5 million), irrespective of marital status. They further recommend that the estate duty rate be increased from 20 per cent to 25 per cent of the dutiable value of an estate exceeding R30 million.

This recommendation would allow SARS to concentrate its resources on the thorough examination of all dutiable estates with a value of greater than R15 million.

The ultimate net result of these amendments would be:

  • Estate duty is applied solely to high net worth individuals, irrespective of marital status
  • Estates with a net value of less than R15 million would be exempt from estate duty.


These proposals are based on providing estate duty exemption sufficient to cover:

  • A home and personal effects to the value of R5 million
  • Investments and cash to the value of R10 million which should be sufficient to provide a sustainable pre-tax income stream of R40 000 to R50 000 per month.


Capital Gains Tax:

The CGT rollover provisions relating to inter-spouse bequests (see REASONING BEHIND PROPOSALS) should be repealed and replaced with a generous death exemption of R1 million (currently R300 000). This exemption, coupled with the primary residence exemption of R2 million and the unlimited CGT exemption applicable to retirement fund benefits, motor vehicles, personal effects, certain boats and aircraft, should be sufficient to address concerns of having both CGT and Estate Duty imposed on death.


Donations Tax

It is proposed that the inter-spouse donations tax exemption be removed, save for providing an exemption for the reasonable maintenance of the taxpayer and family. It is further proposed that these provisions would not apply to:

  • cash below a certain amount (the limit being that such cash donations shall not create an “enduring benefit”, being one which lasts more than a year);
  • motor vehicles; and
  • personal-use assets.

The DTC recommends that a monetary limit be determined to curb excessive inter-spouse transfers of wealth through the donation of motor vehicles, jewellery and other collectables. This means that assets cannot be freely transferred between spouses without incurring tax.


Bare dominium and usufruct arrangements

SARS should establish comprehensive records of all bare dominium and trust arrangements. This process should include, but not be limited to, the requirement that all holders of part interests in property be required to submit tax returns irrespective of income levels.


Income Tax: Discretionary Trusts

Only where a trust deed (regardless of discretionary powers of trustees) confers upon its beneficiaries an indisputable and irrevocable vested right to both the capital and income of a trust, should the income, both capital and revenue, be taxed in the hands of the beneficiary (which would be at the lower individual average rate). In all other cases, revenue income and capital gains must be taxed in the trust.

In other words, it is proposed that the attribution rules and conduit principle (looking through the trust to the beneficiary or donor) will be repealed to avoid trust income and gains being taxed at lower individual rates using the applicable annual allowances.


Trust tax rates and CGT inclusion rates

The flat rate of tax applied to trusts should be retained at its current level and be subject to adjustment in line with changes in the maximum personal income tax rate.


Concluding Thoughts:

These proposals give us an indication of the current thinking behind SARS and National Treasury regarding tax collection, especially the fact that they have a renewed focus on the tax treatment of trusts being formed via interest free loans. We are keeping informed of these developments and can offer tailored advice dependent on your unique needs. Please feel free to contact us if you have any further questions.

Please find some further reading below for those that are interested, which sets out the thinking behind the DTC’s proposed amendments highlighted above, specifically their reasons for removing inter-spouse rollovers in Estate duty, CGT and Donations Tax, as well as their reasoning behind wanting to tax the donor of trusts set up using an interest free loan.


Davis Tax Committee second interim report:


Reasoning behind proposals:

Estate Duty:

The estate duty computation, in its briefest form, is currently as follows:


Free residue of estate

Less: Exempt bequests

Less: inter-spouse bequest

Less: Retirement Funds (excluded from estate)

Less: general abatement

= Dutiable value

Estate Duty = 20% * Dutiable Value


CGT was implemented in South Africa, effective from 1 October 2001. In order to reduce the onerous consequences of both estate duty and CGT being levied on death, the estate duty rate was reduced to 20 per cent from 25%, effective 1 March 2001.

The primary estate duty abatement of R1,5 million was increased to R2,5 million, effective 1 March 2006 and then to R3,5 million, effective 1 March 2007. Thus the primary estate duty abatement has not been increased for 9 years. This has allowed a substantial element of fiscal drag to enter the estate duty system.

Inter-spouse bequests are currently completely exempt from estate duty. In the presence of such an unlimited exemption, the extent of the general abatement and, for that matter, estate duty in general, is of little consequence to married taxpayers. Estate duty is simply and effectively postponed until the death of the surviving spouse(s) by means of an inter-spouse bequest.

The DTC’s view is that gender discrimination is probably unconstitutional and that discrimination on the basis of marital status is no longer appropriate.

The definition of “spouse” contained in section 1 of the Income Tax Act is, in effect, “the driver” of the estate duty inter-spouse abatement. This inevitably results in a widespread and liberal interpretation of what exactly constitutes a “permanent relationship”, which is included therein. Simply put, the diversity of families in South Africa today makes it all but impossible to determine a one-size-fits-all definition. This leaves an unlimited abatement open to interpretation and may privilege certain forms of cohabitation over others. It also creates a tax incentive for bequests to be determined on the grounds of estate duty liability as opposed to what may be the taxpayer’s preferred desire or intention.

Similar exemptions enjoyed by married taxpayers are contained in the donations tax and CGT legislation.


Capital Gains Tax

If the inter-spouse abatements and allowances are to be removed for estate duty purposes, it stands to reason that the inter-spouse exemption within the CGT system should also be removed.

The DTC does not concur with the argument that the imposition of estate duty and CGT on death is tantamount to “double taxation”. CGT is widely regarded as an income tax on capital income and not a wealth tax. Estate duty and donations tax are wealth taxes.


Donations Tax

If the inter-spouse abatements and allowances are to be removed for estate duty and capital gains tax (CGT) purposes it stands to reason that the inter-spouse exemption within the donations tax system should also be removed, save for providing an exemption for the reasonable maintenance of the taxpayer and family. By removing the inter-spouse exemption for CGT purposes, the inter-spouse disposal of most assets would become a CGT leviable event. However CGT exemptions would apply (personal effects, motor vehicles, certain boats and aircraft and, importantly, cash.) A pragmatic solution would simply be to carry these exemptions into the donations tax system by making inter-spouse donations subject to donations tax if they comprise CGT leviable transactions.


Interest-Free Loans to Trusts: Observations


This represents an opportunity for taxpayers to shed substantial value from their estates without the payment of donations tax or CGT.

The cost of registering a trust is usually inconsequential to the main purpose of a trust. Assets cannot simply be donated to a trust without incurring donations tax liability. However, donations tax implications can be easily avoided by disposing of assets to the trust at market value on an interest-free loan account. This has every possibility of creating the following immediate tax benefits:

  • Donations tax exposure on the formation of the trust is eliminated since an interest-free loan account is recognised as a settlement or disposition and not a “donation” as defined
  • The estate of the holder of the interest-free loan account is effectively frozen at the transfer value of the asset. In many instances the loan account dissipates over time through repayments or on-going annual donations (annual waivers of loan accounts). Even if the loan account balance does not diminish, the effective level of exposure to estate duty of the holder gradually dissipates over time through the effects of inflation.


However, while the loan remains in place the holder of the loan is de facto in control of the trust, irrespective of the content of the trust deed or the actions of the trustees. In short, the holder is in a position to liquidate the trust at any time by simply calling for repayment of the loan.

The DTC recommends that National Treasury should consider the possibility of extending the Income Tax Act provisions to include deeming provisions that identify “deemed control” of a trust, along the following lines:

  • Where a loan account exists between a trust and a “connected person(s)” and
  • The loan is not subject to interest, or is subject to interest at below the official rate of interest as prescribed by the Income Tax Act and
  • The holder of the loan can demand repayment within a specified period,
  • The holder of the loan will be deemed to be in effective control of the trust and section 3(3)(d) will be deemed to apply.


The effect would be as follows:

  • The holder of the loan account would be subject to annual taxation on interest paid on the loan account (at least the official rate of interest) and
  • The trust arrangement would be devoid of any estate duty advantage owing to the application of section 3(3)(d).