The heydays of estate duties may be numbered
The Davis Tax Committee has been established to look at the South African tax system and how it could be improved to benefit both government and the general public.
The Committee has released some of its interim findings regarding VAT, but one of the major areas the public has been concerned about is the Committee’s thoughts on trusts and estate duties.
Painting the picture
Speaking at the Fiduciary Institute of Southern Africa Conference, Judge Dennis Davis, convenor of the Davis Tax Committee, spoke about the first interim report on estate duty and gave every indication that it would be increased.
Fiscal policy fundamentally has to achieve a balance between the lower financial end of the population by way of an effective tax and transfer system, and the higher end to allow the rich to invest and to have some certainty. Judge Davis explained that, although an amended estate duty scheme was unlikely to add vast amounts of money to government coffers, it would bring added legitimacy to the system.
“Will an increase in estate duty bring significant amounts into the tax system? No, in all likelihood it will only collect an additional R2 billion or R3 billion. However, we can’t continue to do nothing and give people a free pass.”
“It is about legitimacy. An increase in estate duty tax won’t bring in lots of money; but when I talk to people and they ask me what I am doing about rich people, I will be able to give them an answer,” said Davis.
Entrepreneurial spirit
We work hard during our working lives to leave a legacy for our children. The majority of this is done through trusts and estates so that the next generation of entrepreneurs (who are not entering into the family business) will have the necessary funds to start their own business.
This is a contentious issue. Will raising estate duty tax affect the entrepreneurial spirit that we so desperately need in this country? “Is it a crime to tax the next generation on estates that are over a certain amount? This is a debateable issue. If money is being passed down to children, we are assuming they have a decent education and will have their own entrepreneurial spirit,” said Davis.
He added that the poor pay tax; there is no getting away from this. Higher income earners are being taxed on a personal level, but Davis feels that their estates and trusts may not be taxed enough. He said that you cannot expect the poor to be taxed even more when there are millions who are largely being untaxed. If there was ever an indication that an increase in the VAT rates is off the cards for the foreseeable future, this statement may be it.
The issue of trusts
Hanneke Farrand, a Director at ENSafrica, also spoke at the conference and said that the common assumption about trusts is that they are some kind of tax panacea (a cure for tax burden). Then, conversely, from a South African Revenue Services (SARS) perspective, trusts are viewed with a degree of suspicion and mistrust. That being said, nobody should unnecessarily be seen as a criminal in their own country.
Over the years, trusts have become popular because it is an effective vehicle through which to conduct business activities as the business is not interrupted by death/insolvency of a donor. It can also be used as a generation skipping vehicle for estate planning purposes as it is a vehicle which holds complex assets such as farms and shares in a family business.
The main advantage of trusts can be seen in the conduit principle which states that income flowing through trusts retains its identity; the trust is merely a conduit and not a separate entity. This may change however as the Committee suggests the removal of the conduit principle and the taxation of a trust as a separate entity.
Farrrand cautioned that, if the conduit principle is to be removed, careful consideration has to be given to the interaction with the jurisdiction where the beneficiary resides, as it could lead to double taxation.
She illustrated this point by using Israel as example. “A beneficiary residing in Israel would be taxed on the distribution from the trust, but would not be able to claim any relief under the double taxation agreement between South Africa and Israel as the tax levied in South Africa would be on the trust and not on the beneficiary,” said Farrand. She added that the flat taxation rate of 41% for trusts would be maintained.
The effects on society
It must be pointed out that all of the information from the Davis Committee are only assumptions at the moment as this is an interim report and has not gone through government. It will also be open to the public for discussion.
But what can we see from the noise Davis made at the conference? Davis points out that the R2 billion or R3 billion of additional income will go a long way towards working to a magical number of R8 billion.
According to Davis, if we can collect R8 billion in extra income through taxes, we won’t have to raise the petrol price and we won’t have to raise the marginal rate.
Editor’s Thoughts:
This is a sensitive subject which will strike a number of different cords with your clients. The best we can do now is to comment on the paper and hope that Davis does not make recommendations to government which would cause unintended consequences when they are passed into law. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
