This document summarizes proposals from the Davis Tax Committee regarding changes to estate taxes, trusts, foreign trusts, and contributions to retirement funds. Some key points proposed include removing the ability of trusts to shift taxable income, taxing trusts as separate taxpayers at 41%, limiting inter-spouse donations and exemptions, and including disallowed retirement fund contributions in estate duty computations. The document provides comparisons of investing as an individual versus through a trust, noting trusts may still provide tax benefits. It clarifies the proposals are not yet law and changes should not be made until finalized.

1. Welcome

2. DAVIS TAX COMMITTEE

3. ITS ONLY A PROPOSAL!

4. CAUTION!
The Davis Tax Committee “Estate Duty
Report” is exactly that. A report!
This is not the law and no changes should
be made to your personal structures until
we have absolute certainty as to what
changes are going to be implemented.

5. WHAT THE PRESS SAID

6. – DTC recommendations may see Trusts
receive a full frontal tax lobotomy – Biznews
– Davis Tax Committee – Estate Duty needs
modernisation, seeks public comment –
Biznews
– Tax committee proposes overhaul of trusts –
Business Day
– Estate planning: Tax trouble for trusts –
Financial Mail

7. PANIC!

8. SYNOPSIS OF REPORT
• Trusts ability to shift taxable income be
removed. The trust should be taxed as a separate
taxpayer.
• Principle of inter-spouse exemptions and roll-
overs should be withdrawn.
• Limits placed on inter-spouse donations.
• Contributions made to retirement funds in excess
of the allowed annual deduction be deemed as an
asset in calculating estate duty tax.

9. SYNOPSIS OF REPORT
• Both capital gains and estate duty tax be retained
on death of the taxpayer.
• The primary estate duty abatement is inflation
adjusted to R6 million.
• Estate duty tax remains at 20%.
• Donations tax remains at 20%.

10. SO TELL US THE GOOD NEWS!

11. GOOD NEWS
• No increase in any of the tax rates.
• No tax on interest-free loans to local trusts.
• No implementation of Capital Transfer Tax
(CTT) and Net Wealth Tax (NWT).
• Can continue to write of the annual
R100,000 donation.

12. DTC ON TRUSTS
• The only change that has been proposed
with regards to trusts is the removal of the
“attribution principles” as defined in section
7 as well as section 25B.
• These two sections allowed the trust to pass
through any taxable income to one or more
natural persons for the income to be taxed
in their hands.

13. DTC ON TRUSTS
• The result is the trust will now be taxed as a
separate taxpayer at its own flat rate.
• It has been proposed that this flat rate
should be maintained at its existing levels
i.e. 41%.
• An exception to this rule is the taxation of
“special trusts” as defined.

14. END OF TRUSTS?

15. IS IT SO BAD?
• Maximum tax rate for an individual –
41%.
• Tax rate of a trust – 41%
• Maximum CGT rate for an individual –
13.7%.
• CGT rate for a trust – 27.4%.

16. IS IT SO BAD?
• In essence you are paying an extra
13.7% CGT in the trust to save;
– Executors fees of 3.99% on the growth,
and
– Estate duty tax of 20% on the growth.
• In your hands death will trigger CGT
whereas in the trust the event will
determined by the trustees.

17. COMPARISON BETWEEN INDIVIDUAL AND
TRUST
• Amount invested: R10 million,
• Period of investment: 10 years,
• Returning an annual compound yield of
10%,
• Primary abatement: R6 million
• CGT exclusion on death: R300,000
• Estate Duty Tax: 20%

18. INDIVIDUAL
• Initial investment: R10 million
• Maturity value after 10 years: R25,937,425
• Growth: R15,937,425
• Deemed CGT on death (@13.7%): R2,134,978
• Executors fees (@3.99%): R1,034,903
• Estate duty tax (@20%): R3,353,509
• Total death duties: R6,523,390
• Death duties as a % of Maturity value: 25.15%

19. TRUST
• Initial investment: R10 million
• Maturity value after 10 years: R25,937,425
• Growth: R15,937,425
• Deemed CGT on death: R0
• Executors fees (@3.99%): R379,050
• Estate duty tax (@20%): R700,000
• Total death duties: R1,079,050
• Death duties as a % of Maturity value: 4.16%

20. TRUST
• Contingent CGT within trust (@27.4%): R4,351,873
• Total death duties including contingent CGT:
R5,430,923
• Death duties as a % of Maturity value: 20.94%

21. TRUST
Difference between investing in own name vs trust:
R1,092,466 in favour of TRUST.
•Reason is due to the interest-free loan to the trust
being static and growth taking place in the trust’s
name.
•Furthermore, the loan to the trust can be reduced on
an annual basis by using the R100,000 donation.

22. FOREIGN TRUSTS

23. FOREIGN TRUSTS
Recommended that;
• Attribution principles remain in place.
• All distributions of foreign trusts be taxed as
income.
• Inclusion of separate criminal charges in the Tax
Administration Act that can be brought against
taxpayers who fail to disclose direct or indirect
interests in foreign trust arrangements.

24. LOVE and MARRIAGE (and tax)

25. CURRENT POSITION
• NO donations tax on assets
donated to your spouse.
• NO estate duty tax on assets
bequeathed to your spouse.
• NO capital gains tax on assets
transferred to your spouse.

26. PROPOSED
• Spouses may still freely donate to each
other without triggering donations tax.
Excluded from this though is shares and
fixed property.
• Bequests to spouses should no longer be
exempt from estate duty tax or capital gains
tax.

27. PROPOSED
• It is proposed that the “portable spouse”
abatement be reframed.
• Currently the deceased estate (second dying) is
permitted to increase the basic abatement by the
unutilised portion of the primary abatement of
any pre-deceased spouse (first dying). In other
words, if the surviving spouse inherited some or
all of the first dying spouse’s abatement then this
amount can be added to his / her primary
abatement.

28. PROPOSED
• If the inter-spouse abatement is withdrawn (currently
known as section 4(q)) then it may be possible to
advance the primary abatement of the surviving
spouse(s) to be offset in the estate duty computation
of the first deceased spouse. The estate of the
surviving spouse would ultimately forfeit some or all
of the primary abatement in the future. The surviving
spouse can elect to ‘pass’ his/her primary
abatement.
• In essence this is almost a reversal of what is
practised today.

29. CONTRIBUTION TO RETIREMENT FUNDS

30. CONTRIBUTION TO RETIREMENT FUNDS
• Current position:
• All contributions to retirement funds are
exempt from estate duty tax.
• Proposed:
• All retirement fund contributions which are
disallowed in the determination of taxable
income will be deemed to be included in
the estate duty computation.

31. QUESTIONS
GORDON STUART
gordons@sentineltrust.co.za
083 650 8613
011 656 2722