Davis Tax Committee offers some welcome news
It is coming close to crunch time, the time of the year when the South African public gets insight into the country’s financial wellbeing as well as how much money will be spent on certain parts of the economy.
It will be interesting to see what government will be doing to decrease debt levels. The fact that South Africa has a significant current account deficit is no secret, and efforts to decrease this in recent history have been largely ineffective.
Predictably, government looks towards tax income as a major source of revenue; but South Africans and South African companies are largely taxed to the limit. The Davis Tax Committee (DTC) recently released an interim report on estate duty tax, and we could be in for a few welcome surprises.
Domestic Trusts and the Conduit Principle
Trusts have become an effective mechanism to preserve the wealth of a family that it has built up over a number of years. In the past, trusts were seen as a vehicle and a mechanism of money transfer, and could not be taxed as a person.
However, there were some concerns that certain individuals were being less than honest with their use of trusts and calls regarding the use of trusts as a means of tax evasion were growing louder by the minute.
Because of this, the committee looked to abolish the conduit principle which would have resulted in all gains and income paid or arising in domestic South African trusts being taxed at the highest rate of tax.
However, following consultation, it seems likely that this principal will be repealed.
Offshore trusts and double tax worries
According to a report by Overseas Trust & Pension (OTAP), the DTC report recommended taxing any distribution from an offshore trust to income tax when received by a South African tax resident individual.
However, this would have resulted in the possible double taxation of dividends and importantly seen the distribution of capital taxed to income. Where capital was originally settled into trust from tax paid funds, it would have created a significant double tax position with no possibility of relief.
The expectation, following feedback, is that this approach will be modified. The 8th Schedule of the Income Tax Act could be amended to deal with the taxation of capitalised income and gains and the tax thereon.
Non-disclosure of foreign assets
A matter of concern for the South African Revenue Service (SARS) is that there are some foreign assets that are not being declared.
OTAP adds that The DTC has raised its concerns over the lack of disclosure by South African residents that hold undisclosed offshore assets, or are beneficiaries of offshore trusts where income or other taxable distributions are being made but not disclosed.
The SARS Voluntary Disclosure Programme is available to those that want to regularise their affairs. The Automatic Exchange of Information act under the Common Reporting Standard global initiative on tax evasion will potentially flush out those who are not disclosing.
It is expected that these individuals will be dealt with harshly as every opportunity has been provided to regularise one’s affairs with minimal penalty.
Estate duty abatement
OTAP points out that the initial report looked at increasing the abatement level to R5.7 million with the surviving spouse being able to use the deceased’s unused portion of his/her money (abatement).
The expectation is that this will be amended and that each individual will get an capital consideration of R15 million but with no roll over and no spousal exemption.
A point to note
It must be stated that these points are merely suggestions put forward by the DTC who is trying to show the public its thinking behind the final stance it will take. This stance will only be known towards the end of the year when the DTC releases its final paper.
What is important to note is that Judge Dennis Davis, the head of the DTC, has expressed his concerns about the current levels of government expenditure.
It is believed that by changing the stance on estate duties and trusts that government may get an additional revenue stream of between R10 billion to R15 billion a year. This is all very well, if the additional revenue is filtered into the right direction.
However if additional income is not the same as government expenditure, what is the point? Why should the public fund excessive expenditure when there are no visible efforts to reduce it? This is where the opposition to increased taxes comes from.
Editor’s Thoughts:
It will be interesting to see the final stance of the DTC and the opposition it generates. This may perhaps be the jump start that government needs to take active steps to reduce expenditure. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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