The Davis Tax Committee released its final interim report on estate duty on 24 August 2016. Many of the recommendations affect the existing tax exemptions applicable to transfers of assets between spouses.  The Committee believes that the estate duty regime in South Africa must be reviewed in order to establish an effective and equitable package of major abatements and rates.

In terms of trusts, the report, quoting SARS’ statistics, stated that the use of trusts is prevalent in South Africa, yet the disparity in the number of registered trusts compared to the number of tax returns received, is cause for concern.  The report went on to say that 87,8% (88 344 out of 100 590) of prima facie compliant trusts are apparently inter vivos trusts – living trust where duration is determined at the trust’s creation and can entail the distribution of assets to the beneficiary during or after the trustor’s lifetime. The Committee feels that, for this reason, there is a need for a comprehensive analysis of each trust to ensure that they are compliant with the Income Tax Act and the Estate Duty Act.

Please see noteworthy recommendations from the report below.  Keep in mind that this, the second report, took into account the public’s comments that were submitted in respect of the first interim report.

Estate duty

The Report notes that:

• The primary abatement has not been increased since 1 March 2007, allowing a huge amount of fiscal drag into the estate duty system. For this reason, there is an urgent need for a generous increase in this abatement.

The Report recommends that:

• The primary abatement should be substantially increased from ZAR3.5-million to R15 million for all taxpayers, irrespective of marital status.
• Inter-spouse abatement in the Estate Duty Act should be withdrawn and replaced with a substantially enhanced primary abatement, thus ensuring the consistent equitable treatment of all taxpayers.

The estate duty rate be increased from 20 per cent to 25 per cent of the dutiable value of an estate exceeding R30 million.

Capital Gains Tax (CGT)

The Report points out that Estate duty and donations tax are wealth taxes, and CGT is widely regarded as an income tax on capital income and not a wealth tax.  One of the recommendations that the report thus makes is:

• The CGT rollover provisions relating to inter-spouse bequests should be repealed and replaced with a generous exemption on death of R1 million (currently ZAR300 000).

Donations tax

The Report recommends that:

• If the inter-spouse abatements and exemptions are removed for estate duty and capital gains tax purposes, the inter-spouse exemption within the donations tax system should also be removed, except for an exemption for the reasonable maintenance of the taxpayer and his/her family.
• 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, however, the taxpayer’s death benefit abatements or subsequent divorce abatements would be reduced by the quantum of any allowances claimed during the taxpayer’s lifetime.