Expect Significant Impact Once Estate Duty Recommendations Come Into Force

by Ian Scott, Managing Partner at Grant Thornton

The initial proposals from the Davis Tax Committee on estate duty and trusts released in mid-July have caused a bit of a stir among taxpayers and practitioners alike. The committee was tasked with assessing South Africa’s tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability.

The main suggestions that touch on the overall estate duty discussion relate mainly to the use of trusts. The committee notes the current system’s “many deficiencies” can be addressed through some simple amendments.

“These amendments may be simple, but they are potentially significant,” says Eugene du Plessis, Partner and head of tax at Grant Thornton Johannesburg. “Despite the concerns from various quarters about the content of the Estate Duty Report there is no reason to panic just yet. It’s unclear at this stage to what extent all of the proposals from the Committee will be adopted, and passed by Parliament.

“That being said, the intent of these proposals will have far-reaching effects.”

The magnitude of the potential impact is evident in the Committee stating that it aims to improve collections from estate duty by between R10 billion and R15 billion from the current R1.49 billion.

Achieving such a huge jump indicates that few people will be left unscarred by these changes.

Du Plessis says one way this gap could be breached is in the proposals that seek to eliminate mechanisms currently used to pass taxable income onto an individual or entity that enjoys a lower tax rate than trusts are subject to.

“The flat rate tax on trusts, except for special trusts, is 41% whereas individuals enjoy a sliding scale from between 18% and 41%. So it’s possible to minimise tax obligations by allowing income and capital gains to flow to trust beneficiaries who are then subject to a lower tax rate.”

He explains that by allowing income to be passed onto the individual through trusts, a lower rate of tax can be achieved because the individual might then fall within a lower tax bracket / rate.

The committee states its intention is not to halt the use of trusts but to ensure they are not used as tax avoidance vehicles.

Du Plessis says the broader implication of these proposed changes is where and how they may impact commercial trusts, especially those that have been commonly used to facilitate black empowerment deals.

“These types of trusts have generally been created not for their potential tax upside, but because they are effective instruments through which to make such transactions feasible,” he says. “Should the proposals be passed, financiers may have to review their expected payback period because income into the trusts from share deals would be adversely affected.”

The report’s proposals on estate duty per se are less onerous with no change in the 20% tax rate. Du Plessis says the proposed increase to the primary abatement rate – effectively the tax-free limit – to be increased from R3,5 million to R6 million is “quite a generous concession”.

The areas where the committee aims to directly increase revenue from estate duties is in its amendments to the inter-spouse bequests and regarding donations tax.

The report proposes that the former either be withdrawn or be subjected to a specific limit, while donations tax exemptions remain in place except for fixed property or companies.

“These changes may change how individuals plan their estates although it is still too early to draw firm conclusions. We may end up with a hybrid of the changes suggested and I would be surprised if they were implemented in their current format.

“The deadline for public comment on these recommendations is 30 September this year, which means the earliest they may be formalised is possibly in next year’s national budget in February 2016. So, while this will give individuals and advisors some time to make the necessary adjustments it is clear that quite significant changes are in the pipeline,” du Plessis concludes.

Ian Scott - Managing Partner - Pam Golding Hospitality Partners
Ian Scott

Managing Partner at Grant Thornton