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DAVIS TAX COMMITTEE

ITS ONLY A PROPOSAL!

CAUTION!The Davis Tax Committee “Estate Duty Report” is exactly that. A report!

This is not the law and no changes should be made to your personal structures until we have absolute certainty as to what changes are going to be implemented. 

LOOKING FOR EXTRA TAX

WHAT THE PRESS SAID

– DTC recommendations may see Trusts receive a full frontal tax lobotomy – Biznews

– Davis Tax Committee – Estate Duty needs modernisation, seeks public comment – Biznews

– Tax committee proposes overhaul of trusts – Business Day

– Estate planning: Tax trouble for trusts – Financial Mail

PANIC!

SYNOPSIS OF REPORT• Trusts ability to shift taxable income be

removed. The trust should be taxed as a separate taxpayer.

• Principle of inter-spouse exemptions and roll-overs should be withdrawn.

• Limits placed on inter-spouse donations.• Contributions made to retirement funds in excess

of the allowed annual deduction be deemed as an asset in calculating estate duty tax.

SYNOPSIS OF REPORT• Both capital gains and estate duty tax be retained

on death of the taxpayer.• The primary estate duty abatement is inflation

adjusted to R6 million.• Estate duty tax remains at 20%.• Donations tax remains at 20%.

SO TELL US THE GOOD NEWS!

GOOD NEWS • No increase in any of the tax rates.• No tax on interest-free loans to local trusts.• No implementation of Capital Transfer Tax

(CTT) and Net Wealth Tax (NWT).• Can continue to write of the annual

R100,000 donation.

DTC ON TRUSTS• The only change that has been proposed

with regards to trusts is the removal of the “attribution principles” as defined in section 7 as well as section 25B. 

• These two sections allowed the trust to pass through any taxable income to one or more natural persons for the income to be taxed in their hands. 

DTC ON TRUSTS• The result is the trust will now be taxed as a

separate taxpayer at its own flat rate.  • It has been proposed that this flat rate

should be maintained at its existing levels i.e. 41%.  

• An exception to this rule is the taxation of “special trusts” as defined.

END OF TRUSTS?

IS IT SO BAD?• Maximum tax rate for an individual –

41%.• Tax rate of a trust – 41%• Maximum CGT rate for an individual –

13.7%.• CGT rate for a trust – 27.4%.

IS IT SO BAD?• In essence you are paying an extra

13.7% CGT in the trust to save; – Executors fees of 3.99% on the growth,

and– Estate duty tax of 20% on the growth.• In your hands death will trigger CGT

whereas in the trust the event will determined by the trustees.

COMPARISON BETWEEN INDIVIDUAL AND TRUST

• Amount invested: R10 million,• Period of investment: 10 years,• Returning an annual compound yield of

10%,• Primary abatement: R6 million• CGT exclusion on death: R300,000• Estate Duty Tax: 20%

INDIVIDUAL• Initial investment: R10 million• Maturity value after 10 years: R25,937,425• Growth: R15,937,425• Deemed CGT on death (@13.7%): R2,134,978• Executors fees (@3.99%): R1,034,903• Estate duty tax (@20%): R3,353,509• Total death duties: R6,523,390• Death duties as a % of Maturity value: 25.15%

TRUST• Initial investment: R10 million• Maturity value after 10 years: R25,937,425• Growth: R15,937,425• Deemed CGT on death: R0• Executors fees (@3.99%): R379,050 • Estate duty tax (@20%): R700,000• Total death duties: R1,079,050• Death duties as a % of Maturity value: 4.16%

TRUST• Contingent CGT within trust (@27.4%): R4,351,873• Total death duties including contingent CGT:

R5,430,923• Death duties as a % of Maturity value: 20.94%

TRUSTDifference between investing in own name vs trust:

R1,092,466 in favour of TRUST.

•Reason is due to the interest-free loan to the trust being static and growth taking place in the trust’s name. •Furthermore, the loan to the trust can be reduced on an annual basis by using the R100,000 donation.

FOREIGN TRUSTS

FOREIGN TRUSTSRecommended that;• Attribution principles remain in place.• All distributions of foreign trusts be taxed as

income.• Inclusion of separate criminal charges in the Tax

Administration Act that can be brought against taxpayers who fail to disclose direct or indirect interests in foreign trust arrangements.

LOVE and MARRIAGE (and tax)

CURRENT POSITION

• NO donations tax on assets donated to your spouse.

• NO estate duty tax on assets bequeathed to your spouse.

• NO capital gains tax on assets transferred to your spouse.

PROPOSED• Spouses may still freely donate to each

other without triggering donations tax. Excluded from this though is shares and fixed property.

• Bequests to spouses should no longer be exempt from estate duty tax or capital gains tax.

PROPOSED• It is proposed that the “portable spouse”

abatement be reframed.  • Currently the deceased estate (second dying) is

permitted to increase the basic abatement by the unutilised portion of the primary abatement of any pre-deceased spouse (first dying).  In other words, if the surviving spouse inherited some or all of the first dying spouse’s abatement then this amount can be added to his / her primary abatement. 

PROPOSED• If the inter-spouse abatement is withdrawn (currently

known as section 4(q)) then it may be possible to advance the primary abatement of the surviving spouse(s) to be offset in the estate duty computation of the first deceased spouse. The estate of the surviving spouse would ultimately forfeit some or all of the primary abatement in the future.  The surviving spouse can elect to ‘pass’ his/her primary abatement. 

• In essence this is almost a reversal of what is practised today.

CONTRIBUTION TO RETIREMENT FUNDS

CONTRIBUTION TO RETIREMENT FUNDS

• Current position:• All contributions to retirement funds are

exempt from estate duty tax.• Proposed:• All retirement fund contributions which are

disallowed in the determination of taxable income will be deemed to be included in the estate duty computation.

ITS NOW LAW!

TAXATION LAWS AMENDMENT ACT 25 OF 2015: AMENDMENT MADE TO THE ESTATE DUTY ACT

(2)bA) so much of the amount of any contribution made by the deceased in consequence of membership or past membership of any pension fund, provident fund, or retirement annuity fund, as was not allowed as a deduction in terms of section 11(k) or (n) of the Income Tax Act, 1962 (Act No. 58 of 1962), or paragraph 2 of the Second Schedule to that Act or, as was not exempt in terms of section 10C of that Act in determining the taxable income as defined in section 1 of that Act, of the deceased;

WHAT DOES THIS MEAN?

• Paragraph (bA) will come into effect from the 1st January 2016 and is applicable to the estate of a person who dies on or after that date. The value that will be included as a deemed asset in the estate of the deceased is all non-deductible contributions made to retirement funds on or after 1 March 2015.

BUT WAIT! THERE IS MORE!

DTC WEBINAR DECEMBER 2015• Trusts were not dealt with correctly in the first

report and the conduit principle will probably remain in respect of distributions from local trusts made in the year of assessment.

• The estate duty abatement may increase to a flat R15 million per individual. The DTC are sticking to their initial recommendations that there be no spousal exemption and no roll over.

DTC WEBINAR DECEMBER 2015• It was incorrect to suggest taxing all distributions

from offshore trusts as revenue and the DTC is going to suggest focussing on neatening up paragraph 80 of the Eighth Schedule of the Act to deal with the double tax issues.

• The estate duty rate might be staggered, i.e estate duty may be levied at a rate of 20% up to a certain point above R15 million and at 25% thereafter. (This is a new recommendation as in the first interim report the DTC proposed that the estate duty rate remains at a flat 20%).

DTC WEBINAR DECEMBER 2015• They are very concerned about undisclosed offshore trusts and

the fact that the South African Revenue Service Voluntary Disclosure Programme is not working to the extent that it should, especially in light of the global tax transparency implementation in terms of the CRS (Common Reporting Standard).

• Judge Davis confirmed that the second interim report on estate duty should be released by the end of January 2016, after approval by the Minister of Finance, which will hopefully clarify his verbal feedback. In addition the Judge indicated that any possible legislative changes will be announced in the 2016 budget, if not the following one.

QUESTIONSGORDON STUART

gordons@sentineltrust.co.zawww.sentineltrust.co.za

083 650 8613011 656 2722