Tax committee proposes overhaul of trusts
IN A range of far-reaching proposals, the Davis tax committee has rejected a wealth tax, but proposed a drastic overhaul of trusts to increase tax revenue.
Trust income — which is vested and taxed in the hands of beneficiaries — is set to fall away, while trusts should be taxed as separate taxpayers, the committee says.
The 20% flat tax rate for trusts in deceased estates should be maintained. However, the committee said, “significant arbitrages exist between trust tax rates and personal income tax rates”.
Taxpayers were almost in a position to freely divert income away from trusts, to be taxed in the hands of beneficiaries with lower effective tax rates, it said.
The committee — under the chairmanship of Judge Dennis Davis — said in its latest report that the attribution principle, which underpins taxation of beneficiaries in a trust, was intended as an anti-avoidance measure to prevent a trust from being used as an income-splitting device.
However, the attribution rules were employed to avoid tax, subverting the purpose for which they were introduced.
The committee was critical of the usage of estate duty measures in tax planning, saying the present system contained generous allowances that enabled most estates to be subject to both capital gains tax and estate duty only after the death of both spouses. “This defers estate duty collection for many years.”
The proposals, if implemented, are likely to come as a shock to taxpayers, as there has been an expectation that estate duty would be done away with, as has happened in developed countries.
Estate duty collections represent just 0.1% of total tax collections in SA and have declined over the past 20 years. Given the huge disparity of wealth in SA, it was hard to justify the repeal of the Estate Duty Act, the committee said.
The committee has set a target to improve collections from estate duty by R10bn-R15bn from the current R1.486bn. “Given the challenges SA faces in reducing its national debt levels this could be a useful contribution.”
It expected it to be implemented with the next budget from March 1 2016, after an extensive consultative process. “The committee recommends that, with some modification, the estate duty system could achieve many of the objectives outlined without resorting to the drastic measure of implementing a capital transfer tax.”
In rejecting a capital transfer, or wealth, tax the committee said the implementation of a capital transfer tax would place an enormous burden on the resources of the South African Revenue Service and the taxpayer.
It also recommended all distributions of foreign trusts be taxed as income. “This will discourage offshore trust formation.”
The principle of interspouse exemptions and rollovers should either be withdrawn completely, or subjected to a specified limit.
The committee criticised the donation of substantial amounts in anticipation of death. It recommended the tax-free estate duty abatement of R3.5m be raised to R6m. The current flat rate of 20% for donations tax should remain.