Finance Minister Tito Mboweni announced in his Special Adjustments Budget Speech on 24 June 2020 that tax measures to add R40 billion to tax revenues over the next four years will be announced in February 2021, and that renewed focus will be placed on tax compliance.
In February 2020, it was clear from the Finance Minister’s Budget Speech then, before the impact of Covid-19, that tax revenue collections were already less than expected. He announced at the time that a high net worth tax unit will be reintroduced and that the Davis Tax Committee will be reinstated.
The Davis Tax Committee has made recommendations with regard to wealth and other taxes, which included the following:
Estate duty and donations tax:
- a capital transfer tax to not necessarily be implemented in South Africa at present, but that the estate duty system be retained, and some changes be made to it. The estate duty rate for dutiable values in a deceased estate above R30 million was increased to 25%, with a rate of 20% still being applicable to values up to R30 million, and with the primary abatement amount set at R3.5 million with a rollover of the unused portion hereof available between spouses;
- estate duty exemptions and rollovers on bequests to spouses to be withdrawn or to be allowed only within certain limits – this recommendation has not been implemented;
- certain donations to spouses being excluded from the exemption for donations tax of donations between spouses – this recommendation has not been implemented.
SA trusts:
- the flat rate of tax on income in SA trusts to be retained, which is now at 45%;
- the deeming provisions in section 7 and section 25B of the Income Tax Act to be repealed as applicable to SA trusts – this recommendation has not been implemented;
- the transfer of growth assets from an individual to a SA trust to be allowed for economic reasons, with a higher tax burden when a SA trust sells such an asset – the inclusion rate for capital gains tax purposes on disposals by a SA trust has been increased to 80%;
- the transfer of assets from an individual to a SA trust to be discouraged when done for estate planning purposes – section 7C has been introduced to the Income Tax Act in terms whereof the gratuitous element of such a transfer, such as by way of an interest free loan or interest bearing loan at an interest rate below the SARS official rate, be subject to donations tax.
Offshore trusts:
- all distributions from offshore trusts (albeit from corpus capital, previous years’ income, or present year’s income) to be taxed as income in the hands of the recipient SA resident trust beneficiary – this recommendation has not been implemented, as distributions from corpus capital in an offshore trust are not yet taxed as income in the hands of the trust beneficiary;
- the deeming provisions of section 7 and section 25B to remain applicable as far as offshore trusts are concerned – a Draft Interpretation Note has recently been issued by SARS to clarify that, when applying section 7(8) of the Income Tax Act (income from a non-resident trust deemed to be that of a resident trust beneficiary), the words “subject to the provisions of section 7” in section 25B(1) must be interpreted to mean that to the extent that both of these sections potentially apply, section 7(8) must firstly be applied and section 25B(1) must then be applied only to the balance of the income not derived in consequence of a gratuitous transfer to the non-resident trust. This means that even if all income is distributed to a resident beneficiary, all such income will not necessarily be taxed in his/her hands, where there was a gratuitous disposal to the non-resident trust by another resident.
All the recommendations by the Davis Tax Committee have not been implemented. The reinstatement of the Committee to continue its work, could include a revisiting of previous recommendations or new recommendations being made after more research has been done on some past considerations.
Suggestions have also recently been made in the press that inheritance taxes at a much higher rate should be introduced in South Africa. Inheritance taxes are levied at higher rates in many other countries, although capital gains taxes on death are not necessarily levied by these countries in addition hereto on the same assets, as in South Africa. Inheritance taxes at too high rates may prove to negatively affect the tax morale of South African taxpayers, and may have dire consequences when imposed at death of a parent with small children still to be educated and maintained.
Measures to enforce tax compliance should certainly be increased and focused on to limit tax evasion, and to increase tax collection from taxpayers. It seems as if the focus is more on high net worth individuals and corporates. The focus on high net worth individuals may imply revisiting wealth taxes to be implemented or to be increased.
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