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Budget fails to address estate duty

04 March 2013   (0 Comments)
Posted by: SAIT Technical
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By Prof Matthew Lester (Tax Talk)

TAX practitioners have expressed concern that the master of the high court seems reluctant to grant the estate duty exemption applicable to bequests to life partners.

Does this mean that one has to get married to escape capital gains tax and estate duty? I hope not.

Bequests made to spouses are exempt from estate duty and also qualify for the capital gains tax rollover or deferment.

A spouse is defined in the estate duty and income tax acts to include "a same-sex or heterosexual union which the commissioner is satisfied is intended to be permanent”.

The problem is how to convince the commissioner of the existence of a permanent relationship. Evidence could include joint ownership of assets, joint bank accounts and even the testimony of friends and relatives. But what happens if you do not have any?

The number of marriages and divorces is on the decline. Many people simply prefer not to pool their assets or disclose their personal circumstances.

Including a clause in a last will identifying the beneficiary should be sufficient. Who is the commissioner to say otherwise? And, with same-sex unions included in the spouse definition, it is unlikely that a substantial bequest would be made outside of such a union.

Why should marital status determine tax? It is why South Africa abandoned the joint taxation of husband and wife years ago - it was considered unconstitutional.

But it remains an issue for estate duty and capital gains tax. Surely the time has come to abandon estate duty and donations tax. Both only contribute R1-billion a year. But we spend billions in time and money trying to avoid them using trusts, usufructs and more.

Now the 2013-14 budget review states that there will be a new tax regime for trusts implemented from 2014. Estate duty rates were dropped from 25% to 20% when capital gains tax was implemented in 2001. When the capital gains tax rate was increased from March 1 2012, they forgot to drop the estate duty rate. And the oversight was not corrected in the 2013-14 national budget speech. The logical answer would be to increase the individual’s capital gains tax inclusion rate to 50% and abolish estate duty and donations tax. But, sadly, the matter was not even addressed in the budget speech.

TEN years ago this month, then-finance minister Trevor Manuel announced the offshore tax and exchange control amnesty. More than 40,000 taxpayers came clean on billions illegally concealed offshore.

One wonders how much tax has been paid on the declared capital. Yes, all were winners. On October 1 2012, the Tax Administration Act came into effect. It contains tough provisions dealing with tax evasion.

Fair enough. But even an "honest mistake” can leave the errant taxpayer subject to enormous fines with little scope for clemency.

Reading legislation is one thing, but lecture on the subject and you learn a lot more. Over the past month, I have been lecturing on the act to chartered accountants. Every time I take to the podium, I discover more frightening practical implications in the act.

Heaven knows how the delegates feel. Many are already experiencing huge problems that they are not skilled to cope with. The bottom line is taxpayers and the tax profession are not ready for the act. And there are going to be some expensive mistakes.

The Treasury and the South African Revenue Service (SARS) would rebut that there are plenty of counterbalances in the act to protect the taxpayer. That is true. If taxpayers can afford specialists, they can use the act to jerk SARS around. And many will.

But this is of little comfort to taxpayers and advisers who can only afford a call to the SARS national call centre. Furthermore, the act contains no transitional provisions dealing with disputes arising before its implementation. And SARS is not hesitant in adopting the line that its hands are tied by the act and it cannot help the errant taxpayer.

Asking for tax breaks from Pravin Gordhan in next week’s budget speech is futile in the current economy.

Good luck to him in balancing his words to have the fairest impact on all South Africans. But imposing huge fines on errant taxpayers is not going to balance the budget.

We must hope he looks at softening the full impact of the act for another year while we get to grips with it. Otherwise, there will be much gnashing of teeth. Past cooperation between SARS and taxpayers has worked far better than the heavy-handed approach



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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