Donations Tax: Estate Duty

lots of paperwork, a computer mouse, a coffee cup and a penWhat is Estate Duty?

Estate Duty is payable on the estate of every person who dies and whose nett estate is in excess of R3.5 million. It is charged at the rate of 20%. Estate duty is levied on the property of residents and South African property of nonresidents less allowable deductions. The duty is levied on the dutiable value of an estate at a rate of 20% on the first R30 million and at a rate of 25% above R30 million. A basic deduction of R3.5 million is allowed in the determination of an estate’s liability for estate duty as well as deductions for liabilities, bequests to public benefit organisations and property accruing to surviving spouses.

Donations Tax

Donations tax at a rate of 20% is payable on the value of any property disposed of under any donation by a South African ‘resident’ as defined in the Act. The first R100 000 of property donated in each year by a natural person is exempt from donations tax.

Section 56(1) of the Act exempts, inter alia, the following donations from donations tax:

  • A donation to or for the benefit of a spouse of the donor not separated from the donor.
  • A donation of property or a right in property situated outside South Africa if such property was acquired by the donor prior to becoming a South African resident; if the property was inherited or donated to a South African resident by a person not ordinarily resident in South Africa; or out of funds from the disposal of the aforementioned property.

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Recommendations in the DTC Report

The DTC recommends, inter alia, that the following amendments be made to the existing tax legislation:

  • The repeal of the exemption in terms of section 4(q) in respect of assets devolving on a surviving spouse should be considered.
  • The repeal of the portable abatement should be considered. The primary abatement of the surviving spouse may then be offset in the estate duty computation of the first-dying spouse. The estate of the surviving spouse would, as a consequence, forfeit some or all of the primary abatement in the future. The DTC acknowledges that double taxation may occur if a dutiable bequest is received by a surviving spouse who subsequently dies. This could be prevented by the development of a table excluding certain dutiable inheritances from the estate duty computation of a surviving spouse over a period of up to 10 years.
  • The primary abatement should be increased to R6 million per taxpayer. The surviving spouse will then be in a position to increase the total abatement to R12 million by electing to use the primary abatement in the computation of the estate duty of the first-dying spouse.
  • The exemption of donations between spouses should be amended to exclude all interests in immovable property or companies from its application.
  • The exemption in respect of donations of offshore assets acquired prior to becoming tax resident in South Africa must be revisited in the light of South Africa’s change to a residence basis of taxation in 2001.

Property Left to Surviving Spouse

Section 4(q) was originally put in place to alleviate the hardship faced by spouses who may rely on the assets held in the name of the first-dying spouse for support. In the event that those assets fell within the first-dying spouse’s estate, estate duty was leviable at the death of the first-dying spouse. This created liquidity problems in the first-dying’s estate and, as a result, certain assets had to be realised in order to cover the estate duty liability in the event that the surviving spouse was not in a position to pay that liability out of his or her own funds.

The removal of the exemption in relation to property left to a surviving spouse could, effectively, result in estate duty being payable by the first-dying’s estate in the event that the portable abatement is elected and the deceased’s estate exceeds R12 million. As mentioned above, this could create liquidity problems in the case of the first-dying’s estate in the event that such estate consists mainly of illiquid assets. Accordingly, the withdrawal of this exemption could give rise to the hardship that such exemption served to avoid in the first instance.

This recommendation also does not seem to be in line with the CGT exemptions relating to disposals of assets between spouses.

The estate duty payable is, in our view, in any event, leviable on the surviving spouse’s estate. Taking into account that the recommendation merely accelerates the timing of the payment of estate duty, such a recommendation could create unnecessary complications for spouses.

Portable Abatement

In our view, in the event that the first-dying spouse has the larger estate, electing to use the total abatement in the amount of R12 million in the estate of the first-dying, could be advantageous for such first-dying’s estate. However, as acknowledged by the DTC, the estate of the surviving spouse could, as a consequence, forfeit a portion of his or her entire primary abatement.

Donations Between Spouses

Donations between spouses of interests in immovable property or companies could be for reasons other than saving tax. For example, where a spouse has contributed to the repayments on a mortgage bond over immovable property, the other spouse may ‘donate’ a portion of the ownership in such property to that spouse.

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