The Taxation Laws Amendment Bill that was tabled in Parliament on 2 September contains some welcome changes to the draft that was published in June. In particular The Fiduciary Institute of South Africa (FISA) has welcomed the changes made to certain estate duty proposals as well as the reintroduction of a concession when transferring a residence from a trust or company to a natural person.
FISA is an institute representing fiduciary practitioners with R160 billion under management, which grew out of the Association of Trust Companies.
FISA’s taxation committee head, Niel Raubenheimer, commented on the two aspects of estate duty dealt with in the draft bill. These are the “portable spousal deduction” which allows a first-dying spouse to enjoy a total cumulative tax deduction of up to R7 million for estate duty purposes, and the “usufructuary estate planning scheme” which has come under scrutiny by the authorities for potential estate duty avoidance. Both amendments are effective for any estate of a person who dies on or after 1 January 2010.
Raubenheimer said: “FISA welcomes treasury’s willingness to incorporate industry feedback. The final bill reflects that the R7-million rollover tax deduction will now apply in all cases where a surviving spouse inherits from a pre-deceased spouse. The effective date will be in respect of the estate of the second deceased spouse, not that of the predeceased spouse.
“The draft bill initially proposed that the deduction would only be available if the surviving spouse inherited the entire estate of the first dying. In that form the provision was of little use and could even lead to bad planning in an effort to make use of it. This is because very few people have simple estates with assets solely transferred to the spouse. Also, in the draft bill, the effective date for the cumulative tax deduction was in respect of the estate of the first deceased spouse which FISA believes would have prejudiced a person who might not have used an estate planner in the past,” he said.
FISA furthermore described as “sensible and generous” the concession made in the Act regarding polygamous marriages, to the effect that if the deceased was a spouse in a polygamous marriage, the tax deduction will be made available to all the spouses in that marriage on a proportional basis.
A more technical amendment proposed in the draft bill related to the “usufructuary estate planning scheme.” According to the national treasury’s response document following parliamentary hearings on the bill, “The envisaged aim of the proposal is to close down a scheme whereby testators avoid estate duty by bequeathing a usufruct to a spouse with the remainder first to a one-year trust (or other one-year holder), followed by another shift to the ultimate heir. However, this proposal unfairly penalises all usufructs, many of which have valid non-tax estate planning purposes. For example, a usufruct may be created in favour of a surviving spouse and then transferred to a minor child until such time as the minor reaches majority. … It is accepted that a usufruct created in a will can fulfill an important function in estate planning unrelated to the estate duty. In acceptance of this concern, the amendment is withdrawn for reconsideration. Nevertheless, the one-year schemes remain of concern and still warrant an appropriate remedy.”
Raubenheimer said that while FISA acknowledged treasury’s concern, it welcomed the withdrawal of the proposed measure as it would have the effect of penalising bequests of usufructsthat have been made in order toachieve legitimate and non-fiscal aims.
He said: “This is an issue that would be better dealt with in discussion with interested parties such as FISA in order to achieve a balanced result. At the root of this lies thequestion of estate duty in its present form which is a much wider debate.”
A further concession is the tax-free transfer of a primary residence from a trust or company to the beneficiary or shareholder and/or his or her spouse. Where a primary residence is held in a company or trust and certain requirements are fulfilled, the property may be transferred without incurring transfer duty, secondary tax on companies and capital gains tax. This concession takes effect on 11 February 2009 and ends on 31 December 2010.
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