Two of the recommendations in the Davis Tax Committee's First Interim Report on Estate Duty – regarding bequests to spouses and retirement fund contributions – are bound to have a significant impact on deceased estates and the administration thereof.
The Estate Duty Act, 45 of 1955, provides in section 4(q) that the value of any property in a deceased estate that accrues to the surviving spouse of the deceased can (subject to certain provisos) be claimed as a deduction for estate duty purposes. The Act defines 'spouse' as including a person who, at the time of death of the deceased person, was a partner of such person:
It is this last point that causes the Davis Tax Committee some anguish – they are of the opinion that the inclusion of permanent relationships in the definition of spouse is open to widespread manipulation and abuse and requires some interpretation on the part of the Commissioner. The committee is of the opinion that the inclusion of these relationships causes a postponement in estate duty collection as the estate duty is only collected at the death of the survivor. The committee also mentions that bequests to spouses are mostly being made on the grounds of estate duty savings, rather than the true wishes of the taxpayer. They are, furthermore, of the opinion that the preferential treatment of married persons is unconstitutional because it discriminates on the basis of marital status, especially when compared to the one-parent family, which is becoming more prevalent in South African society. They have accordingly recommended that the abovementioned interspousal exemption for estate duty in section 4(q) be withdrawn.
If this recommendation is accepted and implemented, it will have a significant impact on deceased estates. Section 4(q) was originally put in place to alleviate the hardship faced by a spouse who relies on the assets held by the deceased spouse for support. The removal of the exemption could result in estate duty being payable by the deceased's estate and, therefore, the hardship that the exemption served to avoid in the first place. Any estate duty that is payable by an estate has to be met from the assets of the estate, which means that the estate should have cash available to settle the debts, including the estate duty. In addition, if the interspousal bequest deduction is repealed and a person disinherits his/her spouse, this will in all likelihood prompt the surviving spouse to lodge a maintenance claim under the Maintenance of Surviving Spouses Act, 27 of 1990, (MSSA) against the estate of the deceased spouse. Our law recognises a legal duty of support between spouses, and the MSSA provides for the continuation of this duty after the death of one of the spouses in certain circumstances. Such a claim would also require the availability of cash in the estate.
Life insurance is generally used as an efficient and cost-effective way of addressing any potential cash shortages in an estate. There is a concern that, if the repeal of the interspousal bequest deduction is done without a phasing-in period, it will have an exceptionally negative impact on persons of advanced age who can no longer make use of life insurance to alleviate cash shortages caused by an inflated estate duty liability. Couples who are asset-rich but cash-poor (eg farmers and owners of small to medium-sized businesses) will also be impacted and this could jeopardise the continued viability of these businesses.
Should the interspousal exemption be abolished, it will not only impact the assets in the estate, but also the proceeds of life insurance policies for which the deceased nominated the surviving spouse as beneficiary. While such policies currently fall under the section 4(q) deduction, this will no longer be the case. Life insurance is often used as a substitute for the income contributed to the household and family by the deceased spouse and a means to provide the surviving spouse with funds to use for his/her and the children's needs. The repeal of the deduction will erode this substitute means of living of the surviving family members.
The reality is that most South Africans die while in some form of a life relationship, but the repeal of the deduction for an interspousal bequest does not take cognisance of this reality. We anticipate that the public comment on the Davis Tax Committee Report will prompt the committee to reconsider this recommendation.
2. Retirement fund contributions
Section 3 of the Estate Duty Act provides that benefits from a pension fund, provident fund or retirement annuity are exempt from estate duty.
The Davis Tax Committee recommended that all retirement fund contributions made on or after 1 March 2015, and disallowed in the determination of taxable income, should be included as an asset in the estate duty computation. (It should be noted that the report was supposed to have been issued at the end of 2014, but was delayed. The reference to 1 March 2015 was therefore outdated by the time the report was issued).
This proposal has already been included in the draft Taxation Laws Amendment Bill, 2015, which was issued in July 2015. The bill includes an amendment to section 3, which provides that all contributions made by a person in consequence of membership or past membership of any pension fund, provident fund or retirement annuity fund, and which were not taken into account for a deduction when determining the person's taxable income, will be included in the definition of 'property' in that person's deceased estate. This effectively means that such contributions will in future no longer be exempt from estate duty.
The bill provides that the proposed amendments will come into operation on 1 January 2016 and apply to the estates of persons who die on or after that date. This means that the date of the contribution is not relevant (as was suggested in the proposal) and the date of death is the only determining factor. If a person had, therefore, at any time made contributions to a retirement fund, for which income tax deductions have not been granted, and the person dies on or after 1 January 2016, the part of the contributions for which no deduction was granted will form part of the assets in the estate for estate duty purposes. As expected, this proposed amendment prompted public comment and we are happy to see that the National Treasury and SARS heeded the comments, issuing a draft response document on 15 October 2015. As a result this proposal will be amended to apply only to contributions not eligible for deductions that were made on or after 1 March 2015.
Please contact your relationship manager to schedule an appointment with a fiduciary specialist, who will assist you with drafting or reviewing your will.
DISCLAIMER The Fiduciary Focus Newsletter is intended for general information purposes only and should not be construed as tax, legal or accounting advice. This communication is based on our bona fide interpretation of legislation, rules, regulations and publications. Nedbank Private Wealth provides estate and tax planning advice; however, we do not provide tax, legal or accounting advice and you are requested to consult a professional tax advisor or professional in this regard.
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