Government wants more taxes after your death
Some South Africans’ estates could soon be subject to paying more estate duty tax if a recommendation by the Davis Tax Committee (DTC) is upheld and passed by government. The first interim report on estate duty has been released for public comment. The report examines estate duty in South Africa and considers what changes should be made to the current tax system.
With South Africa struggling to find ways of addressing its national debt problems estate duty tax on all estates and even increasing the current estate duty on the wealthy is a point being explored. Currently, estate duty collections have declined, accounting for only 0.1% of total tax collections. The DTC said that increasing the targeted tax contribution for estate and donations tax to one or 1.5 percent, could assist in reducing the country’s national debt level.
Not all estates are subject to estate duty tax. According to the South African Revenue Service (SARS): “Estate Duty is payable on the estate of every person who dies and whose net estate is in excess of R3.5 million. It is charged at the rate of 20%.”
Rather than increase the estate duty rate or increasing other types of taxes, such as Capital Gains Tax, the DTC has suggested that amendments be made to the current estate duty system in order to help generate more tax.
Marc Sevitz a director at online tax calculator TaxTim, said: “I think that it (the report) has generally hit the right mark, in [saying] that they’ve given the wealth disparity in South Africa [attention, and] that everyone wants to get rid of estate duties because it doesn’t bring in that much money.”
However, Sevitz highlighted that the wealthy in society do need to “pay tax in a certain way” but that this needs to be streamlined and made simpler. “If we are going to have a wealth estate tax then it must be very simple.”
Cecilia Stassen, tax consultant at Mazars, added: “The tax is funded from the estate assets and is usually payable within one year of the date of death.”
However, even though there is an abatement for estates below R3.5 million (in other words you don’t pay estate duty), Sevitz revealed that it is still necessary to file a tax return for the estate.
“When someone passes away the executor of the person’s estate will have to file a final tax return for that person, as an individual, and then that executive does have a duty to file a tax return for the estate as well.
“In a lot of cases, I would imagine there are people where the estate is less than R3.5 million in value they don’t file because there’s no tax on that and it’s more complicated to go through the process. But essentially every estate needs to file a return,” explained Sevitz.
The DTC has suggested making changes to the abatement, increasing it to R6 million per taxpayer (resulting in R12 million for the surviving spouse), “followed by a progressive estate duty rate.”
It added: “The DTC is of the view that far more can be achieved by increasing the estate duty threshold than lowering the overall rate.”
Furthermore, the DTC has recommended that “the current flat rate of 20% [estate duty] should not be increased, particularly in the light of the retention of both CGT (Capital Gains Tax) and estate duty/donations tax being levied on capital transfers.”
It was highlighted that some do make use of exemptions to donations tax in order to avoid paying estate duty in the anticipation of death. For example, if a person is dying and they transfer a sum of money to their child to avoid the payment of estate duty after their death.
The current exemption of donations tax is R100 000 per individual for a single year. As with estate duty, donations tax is levied at 20% of the donation amount, according to SARS.
However, Sevitz highlighted that due to the low value of the untaxable amount (R100 000), it might not be an effective means to avoid paying estate duty, where the abatement is R3.5 million.
He explained: “Each taxpayer can donate a total of R100 000 overall per tax year before paying tax. [This] does not really leave much to donate to children or other relatives each year in order to reduce the value of the estate.
“The big issue is that Donations Tax is not very well monitored or rather many taxpayers either are ignorant of this or just don’t submit a Donations Tax return. When an estate’s value is determined it will never know about donations made prior to this without there being an audit of the previous 12 months or so of the deceased’s accounts. The reason for the 20% Donations Tax already takes this into account. I think a more effective control of this would be better. Ideally anyone receiving a donation needs to include this in their tax return, but most people do not.”
Sevitz added: “In some cases it is actually worse to donate money prior to death because the large R3.5 million abatement totally dwarfs the R100 000 donation threshold so it really depends on the number (value) of the estate.”
Capital Transfer Tax
The DTC said an alternative to estate duty that could help generate more tax is Capital Transfer Tax (CTT). However, it said that CTT is prone to be extremely complex, which results in “problems of administration and high costs of collection.”
Furthermore, this could also reduce people’s drive to generate or accumulate wealth, in order to avoid paying CTT.
“With some modification, the estate duty system could achieve many of the objectives outlined (efficiency, equity, simplicity, transparency and certainty) without resorting to the drastic measure of implementing Capital Transfer Tax,” revealed the DTC.
Stassen concurred, stating that introducing a new tax would require additional training and infrastructure.
Sevitz explained that unlike estate duty which is taxed once after the death of an individual, CTT is a recurring wealth tax. It can be carried out yearly, or at every few years, requiring people to pay a tax on a certain percentage of their overall capital wealth.
Stassen elaborated: “Currently, the assets of a trust are not subject to estate duty. Taxpayers are able to structure their affairs with some succession planning in mind. The growth of the asset is only taxed when the trust disposes of asset, thus deferring the tax revenues for some time.
“CTT will limit the deferral of such revenues, but poses a rather large additional administrative burden to taxpayers in the costs associated with the valuation of assets and compliance with the legislation.”
While the report highlights the need to generate more tax through estate duty, it does not recommend increasing the tax rate. The focus is rather on finding ways to adjust the current system to make is more effective.
“Estate duty is something that has been kicked around for quite a while and it’s nice to see that there is a report out. I think that there are some good suggestions, and I really hope that they do streamline it. If estate duty is going to stay around [it should be] done effectively, I think that is the best way of trying to raise as much money as possible, is to have an effective regime and collection of it,” said Sevitz.
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