Will you be paying more for Nkandla than you have to – even after death?
27 October 2015
Posted by: Author: Braam Matthee
Author: Braam Matthee (On Your Side)
Braam Mathee discusses the amount of tax payable on the estate
of a deceased.
It may be that death and taxes are the only two certain things
in this life, as Benjamin Franklin claimed. But the amount of tax we must pay
when we die is by no means certain.
Even though the legislated estate duty rate is 20 per cent,
the effective tax rate that is applied by SARS, in most instances, is 25 per
cent. By effective tax rate, I mean the actual tax, reflected as a percentage
of the actual cash received by beneficiaries (not taking into account the
non-dutiable portion of the estate).
I recently became aware of a ground-breaking tax judgment
delivered in the year 2000, C:SARS v Estate Late W E Frith, that outlawed this
excessive estate duty calculation method for estates where the residue is left
to the surviving spouse. The same principles would apply to estates where the
residue is left to a tax-deductible charity. Essentially, as long as the
residue is left to a tax-deductible person such as the surviving spouse or an
approved charity, the estate duty would only be the 20 per cent rate instead of
25 per cent, saving a quarter of the amount that one would otherwise pay in
But, you might think, I don’t have a surviving spouse and I
don’t want to leave my money to a charity; I want to leave everything to my
loved ones. The thing is, your loved ones will not get any less if you do it in this way. The only "beneficiary” of your
estate that will get less is the state (in estate duty), with that amount going
instead to your surviving spouse or the charity that you have nominated. Let me
explain this by way of an example.
Sue has an estate with a net asset value of R4,5 million. The
estate can devolve to Sue’s beneficiaries as follows: either she bequeaths R3,5
million to her children and the residue to her brother, or alternatively she
bequeaths R3,5 million to her children, R800 000 to her brother and the residue
to a charity. These scenarios are explained below.
Bequests in terms of the will:
Based on the above example, both Sue’s children and her
brother will receive exactly the same amount in will 1 and will 2. The only
difference is your contribution to Nkandla will be R40 000 (or 20 per cent)
less and the charity (or your surviving spouse) will get that portion instead.
Of course, the bigger your estate, the bigger the difference. This difference
is R40 000 for every million Rand of value in the estate.
It is even possible for some of this extra value to accrue to
the heirs other than the surviving spouse or charity, which you can see in the
example of will 3.
If your assets, including
your life insurance proceeds, exceed R3.5 million, this is something you
need to think about. Are you just going to sit there and think, "Hmm,
interesting”, or are you going to phone your advisor today and make some
changes to your will? Everybody that reads this article is probably already
contributing to Nkandla, against their will. Let’s not do so more than is necessary.
This article first appeared on the September/October 2015 edition on Tax Talk.