Since 2008 it has been possible for the diligent estate planner to avoid estate duty by transferring their assets into a retirement annuity fund before death. This is because legislation was changed such that pension moneys are no longer included in a deceased person’s dutiable estate, while lump sum contributions equal to the amount exceeding the allowable deduction (non-deductible contributions) are no longer subject to the lump sum tax table.
In his budget speech last week, however, Finance Minister Nhlanhla Nene proposed that an amount equal to the non-deductible contributions to retirement funds should be included in the dutiable estate when a retirement fund member passes away. This came as a surprise. For one, amounts that are payable to the surviving spouse would in any event qualify for an estate duty deduction in terms of section 4Q of the Pension Funds Act and would likely account for the largest part of these funds. Secondly, section 10C – which makes the scheme possible – only became effective on March 1, 2014, while the most recent amendments will only become effective on March 1, 2016.
It is also rather short sighted. I believe that National Treasury would best achieve its objective not by including such non-deductible contributions in the deceased’s dutiable estate, but by changing legislation to prevent the deceased person’s heirs from withdrawing these amounts as a lump sum on their death.
People contributing to retirement funds receive a number of tax benefits over and above the deductibility of their contributions. These include tax-free growth within the fund, the beneficial treatment of withdrawal lump sums on retirement and also the duty-free nature of these amounts in their estates. In exchange for these benefits it is not unreasonable that the heirs should be precluded from withdrawing such amounts as a lump sum, nor that they should be compelled either to transfer such an amount to an existing retirement annuity or to purchase an annuity income with such funds. In this way the funds will fall into the income tax net in respect of the annuity received, while also ensuring that the funds remain available for maintenance of the deceased’s heirs, thereby reducing the potential drag on the fiscus in respect of social grants at a later stage. In any event, it is likely that only funds which have been moved to living annuities pose any significant problem in regard to estate duty avoidance.
While other pension moneys are governed by section 37C of the Pension Funds Act, where the trustees have discretion as how to allocate such funds to the benefit of specific dependents of the deceased, in the case of living annuities the deceased can prescribe to whom the funds have to be divided. Those with sufficient cash and assets who contribute to a retirement annuity only to effect an estate duty saving, would likely do so only if the funds would still be available to their descendants in the form of a lump sum and if they retained the right to prescribe how the funds are to be allocated. I do not see the “diligent” estate planner risking loss of control of his capital to the vagaries of the trustees of a retirement annuity fund to achieve an estate duty saving.
I believe it is time to abolish estate duty and instead of levying capital gains tax on only 33.3% of an individual’s capital gains the South African Revenue Service should rather levy capital gains tax (CGT) on 50% or even 66.6% (as is the case with juristic persons) of the individual’s capital gains when a property is disposed. The abolition of estate duty has long been expected, especially since the advent of CGT in 2001. This was also hinted at by Trevor Manuel while he still acted as Minister of Finance. However, since then Pravin Gordhan and now also Nene have at various times complained about schemes aimed at avoiding estate duty and suggested that ways will be found to prevent this erosion of the tax base. Considering that estate duty brought in only about 0.146% of the gross tax revenue in the 2014/2015 tax year this obsession is hard to explain and it remains a surprise every time a budget passes and estate duty has not been abolished.
*Franscois van Gijsen is a member of FISA and director: legal services at Finlac Risk and Legal Management.