Public reaction in parliamentary hearings on the Katz Commission proposals on estate duty and donations tax this week ranged from comments on the detail to an outright rejection of capital transfer tax from the SA Agricultural Union (SAAU).
The Katz proposals on estate duty and donations tax, which were published several months ago, in fact only made two recommendations that deviate significantly from the existing legislation.
These are that the assets of trusts should be valued and taxed every 30 years or so to prevent tax-free build-up and that there should be incentives to encourage donations to socially and economically desirable objectives.
South Africa currently has two distinct taxes which are classified as capital transfer taxes. Estate duty is levied at 25 percent of assets over R1 million in a deceased estate and bequests between spouses are exempt from estate duty. Donations tax is also levied at 25 percent. The first R25 000 a year in donations is exempt from tax. These two taxes are contained in separate pieces of legislation.
Professor Michael Katz told the Portfolio Committee on Finance that the Commission considered a capital transfer tax, as a wealth tax, was appropriate for South Africa; estate duty, levied on the estate, rather than an inheritance tax levied on the heirs, should be retained; the existing two separate pieces of legislation should be kept rather than combined into a single Capital Transfer Tax Act; and the exemption from estate duty of bequests between spouses should be continued.
The rate at which these taxes were levied was the prerogative of government, but when they became too burdensome there was a negative impact on collection.
Spokesmen for the Non-governmental Organisations (NGO) Coalition said they were concerned that the Katz Commission recommended retaining current regulations on donations tax, but not extending incentives to other sections of the law dealing with donations, such as Section 18A of the Income Tax Act, where only a narrow band of donations was tax-deductible.
Tax deductions should be allowed for donors to promote areas defined as priority areas, the NGO urged.
The Life Offices Association (LOA) agreed that a capital transfer tax was the most appropriate form of wealth tax for South Africa. But it recommended that remedial legislation to close loopholes should be in place before capital transfer tax laws were revised.
It said the exemption from tax of bequests between spouses seemed likely to be abolished for constitutional reasons but this should be accompanied by a raising of the rebate to at least R2 million and there should be at least a year's warning. Current complex treatment of life policies in the legislation should also be simplified.
The SA Institute of Chartered Accountants (Saica) agreed it would be unwise to abandon the current system of estate duty and donations tax despite some of its shortcomings.
Saica's spokesman expressed concern about areas that had not been addressed in the report, particularly generation skipping. It was felt that the administrative burden on SA Revenue Services made it an inappropriate time to legislate generation skipping laws.
The SAAU said lack of liquidity was a serious problem in agriculture. The SAAU was opposed to estate duty because it put the heirs to an estate in the position of having to incur further debt to pay taxes. At present the majority of farmers were sole proprietors but the impact of a capital transfer tax could be to increase the move towards farming companies.