Budget fails to address estate duty

Tax practitioners have expressed concern that the master of the high court seems reluctant to grant the estate duty exemption applicable to bequests to life partners.

Does this mean that one has to get married to escape capital gains tax and estate duty? I hope not.

Bequests made to spouses are exempt from estate duty and also qualify for the capital gains tax rollover or deferment.

A spouse is defined in the estate duty and income tax acts to include “a same-sex or heterosexual union which the commissioner is satisfied is intended to be permanent”.

The problem is how to convince the commissioner of the existence of a permanent relationship. Evidence could include joint ownership of assets, joint bank accounts and even the testimony of friends and relatives. But what happens if you do not have any?

The number of marriages and divorces is on the decline. Many people simply prefer not to pool their assets or disclose their personal circumstances.

Including a clause in a last will identifying the beneficiary should be sufficient. Who is the commissioner to say otherwise? And, with same-sex unions included in the spouse definition, it is unlikely that a substantial bequest would be made outside of such a union.

Why should marital status determine tax? It is why South Africa abandoned the joint taxation of husband and wife years ago – it was considered unconstitutional.

But it remains an issue for estate duty and capital gains tax. Surely the time has come to abandon estate duty and donations tax. Both only contribute R1-billion a year. But we spend billions in time and money trying to avoid them using trusts, usufructs and more.

Now the 2013-14 budget review states that there will be a new tax regime for trusts implemented from 2014. Estate duty rates were dropped from 25% to 20% when capital gains tax was implemented in 2001. When the capital gains tax rate was increased from March 1 2012, they forgot to drop the estate duty rate. And the oversight was not corrected in the 2013-14 national budget speech. The logical answer would be to increase the individual’s capital gains tax inclusion rate to 50% and abolish estate duty and donations tax. But, sadly, the matter was not even addressed in the budget speech.

Originally published in the Sunday Times: Money & Careers Tax Talk column.


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