Rory McFarlane, of Durban attorneys Shepstone and Wylie, looks at the Katz commission proposals for taxation of estates and trusts in this the last part of his series on Estate Planning.
The taxation of deceased estates and trusts is in a state of flux. There has been uncertainty about capital transfer tax for many years and no estate plan should be undertaken without considering the effects of the proposed tax changes.
It is clear from the Katz Commission's fourth interim report that the much rumoured wealth tax or capital tax will not be imposed just yet. The commission has indicated that it favours capital transfer tax to replace estate duty and donations tax. Despite this, it would appear that for the foreseeable future, estate duty and donations tax are here to stay.
The present primary rebate of R1 million applicable to deceased estates was introduced in 1988 and the equivalent in today's terms would probably be about R4 million. It is probably for this reason that the commission has left the rebate at the present value. As inflation eats away at the value of the R1 million, more and more estates will become dutiable. The commission proposed the retention of the current 25 percent estate duty as well as the major concession of not levying estate duty on any amounts left to a surviving spouse.
The report has also singled out trusts. It is expected that the proposed capital transfer tax will contain generation-skipping provisions which would tax assets that have escaped the tax net by virtue of successful estate planning, usually by the establishment of trusts. It has been recommended that a tax be imposed on the value of the assets in a trust at regular intervals, say every 25 years.
It is this component of the commission's recommendations, together with a proposed tax on capital distributions from a trust, which have caused uncertainty for the planner. These recommendations have been widely criticised for a host of reasons, including:
* They amount to a double taxation of the same assets;
* It is difficult to determine the value of assets such as unlisted shares, partnership interests, vacant land and patents and trademarks, all of which may be owned by a trust;
* They would be unfair on the beneficiaries of trusts set up to benefit people unable to care for themselves;
* They would be a wealth tax targeting individuals. Companies would remain unaffected, exacerbating the increasing focus on individuals as a source of state revenue; and
* Apart from the difficulty of administering these proposals, the cost of administering such new provisions would prove prohibitive.
There is no easy solution for effective taxation on capital transfers. These and other objections will need to be carefully considered before the legislation is finally formulated.
There is no doubt that the introduction of these changes would have a significant impact on estate planning. Trusts will continue to play an integral part in estate planning and, as experience in foreign jurisdictions suggests, even so-called generation-skipping taxes may be avoided with proper planning. It is therefore imperative that you get sound legal advice on all aspects of any estate plan.