JOHANNESBURG – The committee tasked with a comprehensive review of South Africa’s tax system has recommended that the ‘primary abatement’ – the portion of a net estate free from estate duty – be increased to R15 million.
This should be done irrespective of the individual’s marital status and the inter-spousal exemption should be withdrawn, the Davis Tax Committee proposed in its Second Interim Report on Estate Duty. Currently, amounts inherited by a spouse are free from estate duty.
Its first report on the issue, published for public comment in July last year, recommended that the primary abatement should be increased to R6 million per taxpayer from the current R3.5 million.
Should the committee’s proposal find its way into law, only high net worth individuals will essentially be liable for estate duty in future.
It also proposed that the estate duty rate should be increased from 20% to 25% where the dutiable value of the estate exceeds R30 million.
While the committee makes recommendations around tax policy changes to the minister, it does not necessarily mean that these recommendations will find their way into law.
“It must be recognised that the beneficiaries of an estate are largely dependent on passive income. Interest rates have effectively halved since the general abatement was last increased [in 2007], thus reducing interest income and/or accelerating the diminution of capital. Thus there is an urgent need for a generous increase of the general abatement,” the committee indicated on Wednesday.
It said a taxpayer’s house and personal effects could easily exceed R3 million, and even if the abatement was increased to R7.5 million, the remaining R4.5 million would not be sufficient to cover the needs of a middle class family should the breadwinner pass away.
Around 90% of the estates reported to the South African Revenue Service (Sars) during the 2014/15 fiscal year had a value of less than R15 million (see table below).
Source: Davis Tax Committee
“However, their actual estate duty liability, R556 million, comprises 40% of the total estate duty collection of R1.406 billion. It can thus be concluded that the loss of estate duty associated with dramatically increasing the primary abatement is no cause for alarm,” the Committee said.
It estimated that the loss of estate duty collections (R556 million) would be recovered by the removal of the inter-spousal bequest exemption.
“This recommendation would have the added benefit of allowing Sars to concentrate its resources on the thorough examination of all dutiable estates with a value greater than R15 million. Based on 2015 statistics this would reduce the number of dutiable estates from 1 445 to a mere 135.”
Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa (Fisa), says it is clear that the intention is to tax the estates of high net worth individuals rather than those of the middle class.
Finance Minister Pravin Gordhan appointed the Davis Tax Committee during his previous tenure in 2013, to assess South Africa’s “tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability”.
The committee said further investigation would be conducted into the implementation of wealth taxes. This will be addressed in a separate report later this year.
The committee also published its final reports on macro analysis and small and medium enterprises (SMEs) on Wednesday.