Summary of the recommendations contained in the Davis Tax Committee Second Interim Report on Estate Duty

Chapter 1: Estate Duty

• lntroduction
  • The estate duty regime must be reviewed in order to establish an effective and equitable package of major abatements and rates.

• Retirement fund abatement
  • Following the “capping” of retirement fund contributions the retirement fund abatement should be retained.
  • The maximum threshold for tax-deductible retirement fund contributions (R350 000) should be increased to take account of inflation.

• The inter-spouse abatement
  • The problems inherent in the section 4(q) abatement should not be ignored on pragmatic grounds alone (as suggested by the Katz Commission) as this result in the inconsistent treatment of married and single parent families.
  • The inter-spouse abatement should be withdrawn and replaced with a substantially enhanced primary abatement, thus ensuring the consistent equitable treatment of all taxpayers.

• Primary abatement and rate
  • The DTC recommends that the primary abatement should be substantially increased to R15 million for all taxpayers, irrespective of marital status.
  • SARS should further integrate its revenue and national compliance analyses, to support systemic compliance risk management within the estate duty system.
  • 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
  • The OTC does not concur with the argument that the imposition of estate duty and CGT on death is tantamount to “double taxation”. CGT is widely regarded as an income tax on capital income and not a wealth tax. Estate duty and donations tax are wealth taxes.
  • The CGT rollover provisions of the Eighth Schedule to the Income Tax Act, 1962 (ITA) relating to inter-spouse bequests should be repealed and replaced with a generous exemption death exemption of R1  million.

• Donations Tax
  • If the inter-spouse abatements and allowances are to be removed for estate duty and capital gains tax (CGT) purposes it stands to reason that the inter-spouse exemption within the donations tax system should also be removed, save for providing an exemption for the reasonable maintenance of the taxpayer and family.
  • The taxation concept of an “enduring benefit” should be applied to determine a reasonable level of exemption for cash inter-spouse donations.
  • In order to prevent the diminution of estates in anticipation of death, the section 56 (1)(c) exemption (donation mortis causa) should be removed.
  • 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.

• Bare dominium and usufruct arrangements
  • SARS should establish comprehensive records of all bare dominium and trust arrangements. This process should include, but not be limited to, the requirement that all holders of part interests in property be required to submit tax returns irrespective of income levels.

Chapter 2: Trusts

• Statistical analysis
  • Statistics obtained from SARS are indicative of a very prevalent use of trusts in SA today. The disparity in the number of registered trusts, compared to the number of tax returns received, is cause for concern and warrants substantial further investigation of trusts by SARS.
  • The fact that 87,8 per cent (88 344 out of 100 590) of prima facie compliant trusts are apparently inter vivos trust arrangements reflects the need for a comprehensive analysis of each trust to ensure that the trust is compliant with the ITA and Estate Duty Act, 1955 (EDA).
  • The very fundamentals of the legislation should also be considered.

• Estate duty and trusts
  • NT should consider the possibility of extending the provisions of section 3(3)(d) of the EDA to include deeming provisions that identify “deemed control” of a trust through a loan account between a trust  and a “connected person(s)”, where the loan is  not subject to interest  or is subject to interest at below the official rate. In these circumstances, the loan provides the lender with de facto control over the trust.
  • All trust arrangements should be examined by SARS on registration of trust arrangements and upon transfer of assets into trusts. This should reduce aggressive tax planning and, at the same time, provide a level of assurance to taxpayers that their affairs are indeed in order.

• Capital Transfer Tax
  • Further investigation be conducted into the implementation of wealth taxes in SA. This will be addressed in a separate report of the DTC during 2016.

• Income Tax: Vested trusts
  • Donors and beneficiaries of all vested trust arrangements should be subject to stricter disclosure requirements and enforcement measures.
  • SARS should develop risk-profiling analysis to identify and examine trust arrangements.
  • Estate duty assessment procedures of SARS should concentrate  on  the examination of any trusts in which the deceased may have  enjoyed a vested interest in order to ensure that all  income  and capital has been brought into account for both income tax and estate duty purposes.

• Income Tax: Discretionary Trusts
  • Only where a trust deed confers upon its beneficiaries an indisputable and irrevocable vested right to both the capital and income of a trust, should the income, both capital and revenue, be taxed in the hands of the beneficiary.
  • In all other cases:
    • Revenue income must be taxed in the trust in accordance with the definition of “gross income” contained in section 1 of the ITA.
    • Capital income, generated while assets are held in trust on anything other than a vested basis, must be taxed within the trust up to the time of vesting or disposal as defined in paragraph 11 of the Eighth Schedule to the ITA.

• Trust tax rates and CGT inclusion rates
  • The flat rate of tax applied to trusts should be retained at its current level and be subject to adjustment in line with changes in the maximum personal income tax rate.

• Foreign Discretionary Trusts
  • The comprehensive examination of foreign trust arrangements should not be confined to the application of the ITA when vesting or distribution occurs. SARS should also examine the substance of arrangements prior to vesting or distribution. Information sharing between tax authorities may well be the starting point for such investigations.
  • SARS should establish a separate investigations unit to thoroughly and comprehensively examine foreign trust arrangements.   Where disclosure deficiencies are detected, the penalty provisions of the Tax Administration Act, 2011 (TAA) should be rigidly applied.

• Offshore retirement funds
  • These arrangements should be further investigated by SARS.