Tax commentators have welcomed the fact that Malusi Gigaba, the former Minister of Finance, did not implement a recommendation by the Davis Tax Committee on roll-over relief for spouses in his last budget as Minister.
The committee recommended in its final estate duty report in 2016 that the roll-over relief for spouses be scrapped to level the playing field for everyone. In principle the committee said everyone should be taxed similarly – whether married or not, in life or in death. Gigaba did however introduce the committee’s recommendation to increase the current estate duty on estates above R30 million from 20% to 25%.
Hendrik van der Walt, Financial Consultant at Talaria Wealth, refers to the Davis report which estimated that 48 estates will be affected. The expected revenue from the increase, which became effective this month (March), will amount to R150 million. National Treasury also announced measures to limit the staggering of donations to avoid the higher estate duty rate. Any donations above R30 million in one tax year will also be taxed at 25% instead of the current 20% donations tax rate.
Van der Walt says to date they have not seen a lot of donations in that range in one year. “We have no reference for the proposed change to donations tax and expect the legislation to combine cumulative lifetime donations to determine if the donations exceed R30 million.”
Hanneke Farrand, Tax Director at Edward Nathan Sonnenbergs, says although roll-over relief between spouses has not been scrapped, our estate duty rates are quite steep. The Davis report recommended an increase in taxable estates from the current R3,5 million to R15 million for all taxpayers, irrespective of their relationship status. Farrand says this recommendation gained no traction in the budget. She says in countries like the US and the UK the rates are 40%, but the difference is that there are several exemptions which bring the effective rate down. This is not the case in South Africa.
The issue that is never raised is that an effective 18% capital gains tax is levied on the deemed disposal of assets upon death. Farrand says this means that two types of taxes are being charged on the same pot of money. According to the Davis committee, estate duty of between 20% and 25% and a capital gains tax of 18% do not amount to double taxation. “Capital Gains Tax is widely regarded as an income tax on capital income and not a wealth tax. Estate duty and donations tax are wealth taxes,” the committee argued in its final report.
Patricia Williams, Chairperson of the tax administration work group of the South African Institute of Tax Professionals, says if roll-over relief is scrapped, transactions between spouses will start to fall within the tax net, potentially triggering capital gains tax and donations tax. The roll-over relief currently means no estate duty tax, donations tax or capital gains tax if the assets of the deceased are left to the surviving spouse. Taxation is triggered only on the death of the surviving member of the marriage.
South Africans working abroad are still facing a different tax treatment to their foreign income from March 2020. The initial proposal to scrap the exemption on foreign income (if certain criteria were met) has been replaced with a decision to only allow the first R1 million of foreign remuneration to be exempt from tax in South Africa. The individual should still meet the days test – meaning they will have to be outside South Africa for more than 183 days as well 60 consecutive days in a 12-month period.
South Africans will be taxed on the remaining remuneration and will have to claim a tax credit in terms of the amount of tax they have paid in the host country. Williams anticipated that only high-income earners will be affected if they were unable to become tax non-resident in South Africa within the next two years.
