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Treasury cracks down on estate duty

03 August 2015   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (BDlive)

The proposed closing of a loophole that allows people to avoid estate duty through retirement contributions is unfair, will create taxpayer distrust, and may even fuel an exit by wealthy South Africans, estate and financial planners warn.

National Treasury is proposing that contributions to a retirement fund must be included in deceased estates for estate duty purposes, effective from January.

This will trap people who have made large contributions beyond the monetary thresholds of 7.5% of their pensionable income or 15% of their taxable income.

Contributions that exceed the thresholds will now be included in their estates for estate duty purposes. Estate duty is charged at 20% after a primary rebate of R3.5m has been deducted.

The amendment flows from proposals made by the Davis Tax Committee to improve collections of estate duty and donations tax, regarded by the committee as a crucial ingredient to reduce disparity between the rich and poor, says South African Institute of Tax Professionals deputy CEO Keith Engel.

Ironically, this "loophole" was created by the government with the amended 2008 Estate Duty Act, which excluded lump-sum retirement assets from estate duty.

The Treasury’s chief director of economic tax analysis, Cecil Morden, says it does happen that well-intentioned tax legislation results in unintended consequences. "It is clear that the legislative intent has always been to provide tax relief for contributions to retirement savings — up to a limit," he says.

"It was never the intention that individuals should use these measures to bypass estate duty on the scale that it is happening now."

TLA Wealth Advisory director Tenk Loubser says people became "quite aggressive" in their use of the concession in recent years. Some cashed in their estates and contributed the total income to a pension fund or retirement annuity to avoid estate duty altogether. "One can appreciate that the revenue service was not happy with this practice."

The Davis committee expressed concern about the small contribution to the fiscus from estate duty and donations tax — less than R2bn. The committee believes it should be closer to R15bn.

"The law will now be amended in an effort to collect more estate duty and it is also intended to send out a clear message that wealthy people are indeed contributing to the state’s coffers," Loubser says.

But he warns that this may fuel a "silent exit" of South Africans looking for ways to legally move their money offshore. "Once their money moves, their focus moves to where their money is. Without the concession, there is now a greater incentive to invest offshore rather than to save in SA," Loubser says.

PSG legal technical adviser Annemie Nieman says the legislature allowed people to use the 2008 amendment in their estate planning for more than six years. The advantages of the amendment were widely promoted by tax experts, financial and estate planners. "It was not a scheme that was done quietly under the table," she says.

In 2009 Treasury said the intention of the amendment to the Estate Duty Act was to "alleviate financial difficulties that a family may face upon the death of the family’s income provider", and was in line with the government’s efforts "to promote long-term retirement savings".

However, in the Draft Taxation Laws Amendment Bill that was published on July 22 this year, it stated that the amendment had "opened up" an opportunity for individuals to use retirement annuity contributions to avoid estate duty.

Nieman says privileges have been taken away under circumstances where people are unable to plan for their retirement in a tax-efficient manner because they are trapped in retirement funds.

She says that if it were never the intention to allow people to contribute large lump sums to retirement funds, the legislation should be corrected.

Engel suggests that some relief should be given to those people who can demonstrate good faith contributions so that the anti-avoidance amendment is not perceived as unfairly retroactive.

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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.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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