In February 2013 when he tabled the 2013/14 Budget, the Minister of Finance stated that the government will initiate a tax review “to assess our tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability”. The Committee established to do the review is known as The Davis Tax Committee (DTC) and has been in existence for two years.

The First Interim Report on Estate Duty from the DTC was published on the 15th of July 2015 and covers the following areas:

1. Estate Duty in South Africa
2. Estate duty avoidance
3. Trusts
4. The inter-spouse bequest
5. Donations tax
6. Capital Gains Tax and Duty
7. Retirement funds
8. Abatements and rates

The DTC Report was released in draft and is therefore open to comment before 30 September 2015. The following summarizes the relevant key aspects:

Trusts

The report recommends that all South African resident trusts be taxed as separate taxpayers i.e. that they be taxed on income at a flat rate of 40% and on capital gains at an effective rate of 26.64%. This is as opposed to the current situation whereby “the attribution principle” applies which allows the trust to pass through any taxable income to one or more natural persons for the income to be taxed in their hands. An exception to this rule is the tax on special trusts.

This is probably the recommendation in the report that would cause the single largest disruption to clients. There is some comfort as the report also states that “The repeal of the attribution provisions will have diverse and far-reaching implications … An extensive consultative process will have to follow … to identify and address the many issues involved.” As pointed out by legal firm Edward Nathan Sonnenberg, “it is hoped that during this extensive consultative process, solutions can be found to the issues identified in the DTC Report without adopting the punitive tax measures contained therein.”

Inter-Spouse Bequest, Primary Abatement and Estate Duty Rates

Under the current law individuals have the ability to defer estate duty and capital gains tax until the death of the surviving spouse. This is known as an inter-spouse exemption or roll-over. The report recommends that these are removed, or limited. From a financial planning perspective this raises concern about the amount of liquidity within the first dying estate, not something South African planners have not had to plan for thus far.

A second recommendation is an increase in the primary abatement of R3.5 million to R6 million, to adjust for inflation over the period of time since the abatement was last set.

Retirement Funds

Until now, contributions to retirement funds do not form part of an individual’s estate, thereby not being included in the calculation for estate duty payable. The report recommends that “The practice should be stopped by simply deeming all retirement fund contributions, made on or after 1 March 2015 and disallowed in the determination of taxable income, to be included in the estate duty computation.”

Conclusion

As this report is only in draft format our advice at this stage is simply to wait and see. In the meantime we will keep abreast of developments and in stay touch with our tax and estate planning specialists to understand the changes and the impact they may have on our client’s estate planning arrangements.

Compiled by
Mike Moore, Wealth Manager
WellsFaber (Pty) Ltd