Estate duty and trust taxation:

what you need to know

The second report contains recommendations to the Minister of Finance and will be subject to normal consultative and legislative processes.

THE DAVIS TAX COMMITTEE’S PROPOSALS IN A NUTSHELL:

ESTATE DUTY RECOMMENDATIONS

Retirement fund abatement:

• It is recommended that the maximum threshold for tax-deductible retirement fund contributions (currently R350 000) be increased to take inflation into account.

Inter-spouse abatement:

• Inter-spouse abatement should be withdrawn and replaced with a substantially enhanced primary abatement (see below), thus ensuring the consistent equitable treatment of all taxpayers.

Primary abatement and rate:

• It is recommended that the primary abatement be increased to R15 million for all taxpayers, irrespective of marital status, and that the estate duty rate be increased from 20% to 25% of the dutiable value of an estate exceeding R30 million.

Capital gains tax (CGT):

• CGT rollover provisions of the 8th Schedule to the Income Tax Act, relating to inter-spouse bequests, should be repealed and replaced with a more generous death exemption of R1 million.

Donations tax

• It is recommended that the inter-spouse exemption within the donation tax system should also be removed, save for providing an exemption for the reasonable maintenance of the taxpayer and his or her family.
• To prevent the diminution of estates in anticipation of death, it is recommended that the Section 56 1(c) exemption, which relates to donations made in anticipation of death, should be removed.
• Transfer of assets in terms of a divorce order should be subject to the exemptions similar to a death benefit for estate duty and CGT. It is also recommended that the taxpayer’s death benefit abatement or subsequent abatements be reduced by the quantum of any allowances claimed during the taxpayer’s lifetime.

Bare dominium and usufruct arrangements

• It is recommended that SARS establish comprehensive records of all bare dominium and usufruct arrangements, and part of the requirements should be that all holders of part interests in property be required to submit tax returns irrespective of income levels.

TRUST RECOMMENDATIONS

Estate duty and trusts

• It is recommended that all trust arrangements be examined by SARS on registration of a trust arrangement and upon transfer of assets into a trust.
• Section 3(3)(d) of the Estate Duty Act should extend to include deeming provisions that identify ‘deemed control’ of a trust, through loan accounts between a trust and ‘connected person(s)’ where the loan is interest free or below the official rate of interest.

Capital transfer tax

• Further investigation to be conducted into the implementation of wealth taxes in South Africa.

Income tax: vested trusts

• Stricter disclosure requirements to be enforced on donors and beneficiaries of vested trust arrangements.
• It is recommended that SARS concentrate on any trust whereby the deceased may have enjoyed a vested interest, to ensure that all income and capital has been brought into account for both income tax and estate duty purposes.

Income tax: discretionary trusts

• It is recommended that only where the trust deed confers on beneficiaries an indisputable and irrevocable vested right to both the capital and income of a trust, should the income (capital and revenue) be taxed in the hands of the beneficiary.
• In all other cases, revenue income must be taxed in the trust, and capital income generated while assets are held in a trust on anything other than a vested basis must be taxed within the trust.

Trust tax rates and CGT inclusion rates

• The current flat tax rate should be retained and be subject to adjustment in line with changes in the maximum individual marginal income tax rate.

Foreign discretionary trusts

• It is recommended that SARS examine the substance of offshore trust arrangements before vesting and distribution. Information sharing (CRS & FATCA) will be the starting point for such investigations.
• SARS should establish a separate investigation unit to thoroughly and comprehensively examine foreign trust arrangements. Where disclosure deficiencies are detected, it is recommended that the penalty provisions of the Tax Administration Act, 2011 (TAA) be applied rigidly.

It’s important to keep in mind that these are only proposals – although it does give an idea of what changes to expect in the future. Until certainty has been reached with the above changes it is recommended that individuals don’t make any hasty changes to their current structures, as any changes made prematurely might have unintended consequences.

Should you have any questions, do not hesitate to contact one of the fiduciary and tax specialists at Sanlam Private Wealth.