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Major shake-up of estate plans likely

Published Jul 28, 2015


Recently released recommendations by the Davis Tax Committee could radically shake up estate planning, particularly for couples, if they are implemented in their current form.

The committee was appointed in 2013 by then finance minister Pravin Gordhan to investigate whether the tax system is promoting economic growth and job creation, and is providing a sustainable base for revenue collection. The committee is chaired by Judge Dennis Davis.

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The committee released, for public comment, its first interim report on estate duty in July.

The recommendations include the following:

Estate duty abatement

Estate duty is levied at a flat rate of 20 percent on the dutiable amount of an estate that exceeds R3.5 million.

The committee says the abatement of R3.5 million has not been increased since March 2007, which has allowed “a substantial element of fiscal drag to enter the estate duty system”. The committee has therefore recommended that the abatement should be increased to R6 million per taxpayer.

Inter-spousal bequests

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The committee has recommended that bequests made to a spouse should not be exempt from estate duty, as is currently the case.

In terms of the Income Tax Act, a “spouse” includes all forms of marriage and customary union, as well as any relationship, same-sex or heterosexual, that the Commissioner of the South African Revenue Service (SARS) is satisfied is intended to be permanent.

The committee says the exemption on inter-spousal bequests is unconstitutional, because it discriminates against people on the basis of marital status.

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Estate duty roll-over

The committee has proposed that surviving spouses should not be permitted to increase their estate duty abatement by any portion not used by the first-dying spouse. Instead, the surviving spouse should have the option of using some or all of his or her abatement to reduce the estate duty of the first-dying spouse. In other words, the first-dying spouse could enjoy an abatement of up to R12 million, assuming that the committee’s recommendation to increase the primary estate duty abatement to R6 million is accepted.

Currently, any portion of the primary abatement of R3.5 million not used by first-dying spouse can be rolled over and added to the primary abatement of the surviving spouse. It is therefore possible for the estate of a surviving spouse not to pay estate duty on an estate with a value of up to R7 million.

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The committee has effectively recommended that the roll-over be reversed: the surviving spouse will have the option of applying his or her estate duty abatement to the estate of the first-dying spouse. However, if the surviving spouse does use some or all of his abatement to offset the calculation on the first-dying’s estate duty, his or her estate will forfeit some or all of the abatement in future.

Ronel Williams, the national chairperson of the Fiduciary Institute of Southern Africa, says the recommendation to give the surviving spouse the option of applying the abatement to the estate of the first-dying spouse could be advantageous if the first-dying spouse has the larger estate.

However, Williams says the removal of the estate duty exemption on inter-spousal bequests could create liquidity problems in the case of first-dying estates with assets that exceed R12 million. In other words, an estate with a value of more than R12 million would need enough cash to pay the estate duty.

Donations tax

Spouses can donate assets to each other without incurring donations tax of 20 percent. The committee says the exemption should not apply to donations of fixed property and shares in companies.

The committee says the donations tax system is “open to manipulation and wide interpretation”, because the definition of “spouse” includes all forms of marriage and permanent relationships. It says it would be impossible to determine a reasonable level of exemption for inter-spouse donations, and therefore the current exemption should be retained. However, it recommends that the exemption excludes the donation of immovable property and shares in companies.

Williams says the proposal to exclude fixed property and shares donated between spouses from donations tax is problematic, because there may be legitimate reasons for spouses to donate fixed property, and shares other than saving tax.

For example, a person may buy a house and take out a mortgage bond on the house. After he or she gets married, his or her spouse contributes to the repayments, and the owner-spouse may want to donate a share of ownership to his or her spouse. Similarly, a person may own a business that his or her spouse helps to build up. As a result, the owner may want to transfer a share of the business to the spouse.

The committee says it is concerned about the practice of donating substantial amounts of cash in anticipation of death in order to reduce the value of an estate. These donations, which are called “donatio mortis causa” in the Income Tax Act, take effect only on the death of the donor and are free of donations tax.

The committee recommends that the “donatio mortis causa” exemption be removed, and that the exemption on donations made between spouses specifically excludes “donatio mortis causa”.

Williams says that, as a “donatio mortis causa” is included as an asset for estate duty purposes, the scrapping of the donations tax exemption seems to indicate that it will in future be subject to both donations tax and estate duty.

Donations tax is not payable if a property was donated by a person before he or she became a South African resident, or if a property is inherited by or donated to a South African resident by a non-resident. The committee says that these exemptions should be re-examined in the light of the country changing to a residence-based taxation system in 2001.

A donation that is a bona fide contribution made by the donor towards the reasonable maintenance of any person is exempt from donations tax. “This remains an open and obvious loophole for the taxpayer to diminish an estate, which cannot be contained by SARS without the deployment of substantial resources,” the committee says. It says the “reasonable maintenance” exemption should be made subject to various categories of expenditure – for example, food, clothing, health care and education. The donation of assets, such as fixed property and financial instruments, should be specifically excluded.

* The public has until September 30 to comment on the committee’s recommendations. The report can be downloaded from the committee’s website,

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