Davis Tax Committee proposals will impact Estate planning 

2017/18 South African National Budget Expectations

We all know that the only certainty in life is death and taxes. But even in death you can’t escape your tax obligations, as the liability is then transferred to your estate.

Minister of Finance Pravin Gordhan set up the Davis Tax Committee in 2013, in order to assess our tax policy framework and its role in supporting objectives of inclusive growth, employment, development and fiscal sustainability.

The committee’s Second Interim Report on Estate Duty aims to address the inconsistent treatment of married and single parent families. The proposals include:

  • Abolishing the abatement in respect of bequests between spouses and the exemption from donations tax for donations between spouses.
  • To compensate, the committee recommends that the primary abatement should be substantially increased to R15 million for all taxpayers, irrespective of marital status.

A variable estate duty rate was also previously mooted, and the Davis committee proposal is that the estate duty rate should be increased from 20% to 25% if the dutiable value of an estate exceeds R30 million.

Should these proposals be accepted, ensuring sufficient liquidity to settle the estate duty for a first dying spouse will become a much more important part of estate planning. This is particularly important, as otherwise the surviving spouse may have to liquidate assets at an inopportune time to settle estate duty liabilities, possibly having to sell shares during a market downturn or accept a property offer that is lower than market price. This is also true of assets with a small or contained market, such as private companies or family-owned businesses.

The Davis Tax Committee has also proposed that National Treasury consider extending section 3(3)(d) of the Estate Duty Act (EDA) to include deeming provisions that identify “deemed control” of a trust through a loan account between a trust and a “connected person(s)”, where the loan is not subject to interest. It is not clear how it is envisaged that this proposal will work, i.e.:

  • Would all trust assets be ‘tainted’ (and thus fall in the lender’s estate) or only the assets directly acquired with that loan?
  • What about reinvested returns?
  • What if the no/low interest arrangement was only applicable during the period of the loan?
  • How would this proposal fit together with the anti-avoidance provisions contained in the new section 7C and amended section 56 promulgated in the Taxation Laws Amendment Act 15 of 2016 on 19 January 2017? The new section 7C provides for donations tax to be payable on low interest or interest free loans by connected parties to a trust. The amount subject to donations tax is the difference between the official rate of interest and the actual interest charged.

    Finally, a proposal, which is likely to have far reaching consequences on the amounts that will ultimately be available to beneficiaries of trusts, is that:

  • Revenue income must be taxed in the trust in accordance with the definition of “gross income” contained in section 1 of the Income Tax Act; and
  • Capital income, generated while assets are held in trust on anything other than a vested basis, must be taxed within the trust up to the time of vesting or disposal as defined in paragraph 11 of the Eighth Schedule to the Income Tax Act.

In other words, instead of being able to vest income in beneficiaries and then taxing the said income at the individual marginal tax whereby the tax is paid directly to the individual’s instead of the trusts, refered to as the conduit principle, and utilising the individual exemptions (eg. on interest), a direct flat 41% tax cost would be incurred. The income of beneficiaries would be impacted. As such, trustees of trusts would need to carefully re-evaluate the composition of investment portfolios and any liquidation of assets that would be required in order to minimise the impact should these proposals become law.

Apart from the proposals contained in the report, the press release notes that, as agreed with the Minister of Finance, the Davis Tax Committee will submit a further report on a possible wealth tax for South Africa in conjunction with the estate duty report. This creates further uncertainty for persons who are building wealth and who are concerned about support of spouses or the next generation.

For now the only proposal incorporated in our legislation is the donations tax on the low interest/no interest loan. All the other proposals discussed above remain as recommendations to National Treasury.

How can Deloitte help:

As companies grow and become more global in scope, employment issues become more complex. Among the most serious challenges businesses face today is compliance with multifaceted tax laws and labor regulations. Deloitte offers well-rounded plans and program development strategies that can help transform global employment programs in a tax- and cost-efficient manner.

For more information regarding our services click here   


Did you find this useful?