Estate Duty Slides 1 PDF

Estate duty Chapter 18 By Zurelda Mongane CA(SA)  Introduction and outcomes Tax on transfer of wealth from one person to another upon death. Estate Duty Act 45 of 1955 After completing this chapter: – You must be able to calculate and discuss estate duty tax....

Estate duty Chapter 18 By Zurelda Mongane CA(SA)  Introduction and outcomes Tax on transfer of wealth from one person to another upon death. Estate Duty Act 45 of 1955 After completing this chapter: – You must be able to calculate and discuss estate duty tax. – Remember practicing by doing questions in tax will assist you in passing this course.  Calculation of estate duty ORDINARY RESIDENT levied on the dutiable amount of any person who is ordinarily resident in the Republic at the date of his death. The physical location of the person’s assets is irrelevant. not to a South African resident as per the Income Tax Act 58 of 1962 (the Act). Non-Resident Estate duty will also be payable on assets physically located in the Republic irrespective of where the owner was residing at the date of his death. Double tax agreements might be applicable Calculation of estate duty Refer to page 762 for diagram (we stop at step 6) Example 18.1 on page 763  Property (s 3(2)) Actual property owned by the deceased at the date of his death, whether movable or immovable, tangible or intangible, as well as any right in or to such property (s 3(2)); for example – fixed property – shares – fixed deposits and other cash investments, and – goodwill, copyright and patents. Income earned by the deceased prior to death will form part of the property in the estate. For example, interest earned. Income earned by the estate after the date of death is not included as property in the estate.  Property (s 3(2)) This definition refers to all assets of any person but excludes the following for persons not ordinarily resident in the Republic at date of death: any right in immovable property situated outside the Republic; any right in movable property physically situated outside the Republic; any debt which is only recoverable or enforceable outside the Republic; any goodwill, licence, patent, design, trade mark, copyright or similar right registered or enforceable only outside the Republic, or only attaching to a business outside the Republic; stocks and shares held in a body corporate which is not a company; stocks or shares held in a company where change of ownership is not required to be registered in the Republic; and any rights to any income produced by or proceeds derived from the assets as discussed in the previous four bullets: and  Property (s 3(2)) For persons ordinarily resident in the Republic at date of death, the following is excluded from property: any benefit which is due and payable by or in consequence of membership or past membership of any, pension, pension preservation fund provident, provident preservation fund or retirement annuity fund as defined, on or as a result of the death of the deceased.  Valuation of property as per general definition (section 5(1)) Assets sold Special rules pertain to the property if it is sold by way of a bona fide sale in the course of liquidating the estate. In terms of section 5(1)(a), the price realised by the sale will be the value of the property at date of death. Assets not sold The value of any property for estate duty purposes is the fair market value of the property at date of death in terms of section 5(1)(g). Special rules whether sold or unsold Shares in unlisted (private) companies, members’ interests in close corporations and debentures held in private companies must be valued at fair market value irrespective of the amount realised when these shares or interests are sold (section 5(1)(f)bis).  Valuation of property as per general definition (section 5(1)) Special rules whether sold or unsold If a condition has been imposed on the property, which reduces the value of the property at or after the moment of death (for example, a usufruct granted over the property according to the deceased’s will), the property will be valued as though the condition has not been imposed (section 5(4)). Where the Commissioner is not satisfied with the fair market value of any property, the Commissioner has a right to adjust it  Limited interests, annuities and certain contributions to retirement funds included as property (section 3(2)) Full ownership has two components, namely a usufruct and a bare dominium. For example, a property generating rental income: the right to receive the rental income belongs to the owner of the usufruct, while the person in who’s name the property is registered is the bare dominium holder (he is not entitled to any rent received whilst the usufruct holder is still alive). Although the limited interest (e.g. usufructuary) terminates upon death, the benefit will then accrue to someone else. The value that needs to be included in the deceased’s estate is therefore the value of the benefit that will now be enjoyed by the new person entitled to the right.  Valuation of limited interests (section 5(1) (b)) See page 767 Example 18.2 on page 767 Example 18.3 on page 768 First proviso if the Bare Dominium holder paid any consideration for the bare dominium from the creator of the usufruct (the original owner) and the full right to enjoyment will then accrue to this bare dominium holder, the value to be included in the estate of the usufructuary must be reduced. Additional two steps – see page 769 Example 18.4 on page 769  Property deemed to be property (s 3(3)) – Step 2 In terms of the Estate Duty Act, certain deemed properties need to be taken into account in the estate of the deceased in order to determine the gross estate. Property which is deemed to be property of the deceased, includes: – domestic insurance policies on the life of the deceased (section 3(3)(a)); – any property donated by the deceased in terms of a donation which was exempt from donations tax under section 56(1)(c) or (d) of the Income Tax Act that is property donated by the deceased under a donatio mortis causa or in terms of a donation whereby the donee receives no benefit until the death of the donor (section 3(3)(b)); – any claim against the spouse under section 3 of the Matrimonial Property Act 88 of 1984 (section 3(3)(cA)); and – property of which the deceased was, immediately prior to his death, competent to dispose for his own benefit or for the benefit of his estate (section 3(3)(d)).  Domestic policies of insurance on the life of the deceased (s 3(3)(a), General rule all proceeds from insurance proceeds are deemed property except: 1. When the proceeds are payable to the surviving spouse or child of the deceased under a duly registered ante-nuptial or post-nuptial contract (proviso (i) of s 3(3)(a)). Child is defined in the Act to include any adopted person. 2. When the proceeds are payable to a person who, at the date of the deceased’s death, was – a partner of the deceased, or – a co-shareholder in a company in which the deceased also held shares, or – a co-member in a close corporation of which the deceased also was a member; provided that – the deceased paid no premium on the policy, and – the policy was taken out for the purpose of enabling that person to acquire the deceased’s share in the partnership, company or close corporation (proviso (iA) to s 3(3) (a)).  Domestic policies of insurance on the life of the deceased (s 3(3)(a), A family company is defined in s 1(1) as any company – that is not listed on a recognised stock exchange, and – that at any relevant time was controlled or capable of being controlled, directly or indirectly, by the deceased or by the deceased and one or more of his relatives. Therefore, an amount due under a policy on the deceased’s life that was taken out by his employer would not form part of the deceased’s dutiable estate if the employer – did not take out the policy at the instance (instruction) of the deceased – bears the premiums – is the beneficiary of the policy, and – is not a family company in relation to the deceased.  Domestic policies of insurance on the life of the deceased (s 3(3)(a), The value of a domestic insurance policy that needs to be included will be the proceeds (full amount due and recoverable) of the policy. If the beneficiary of the policy (other than the deceased) paid the premiums, the proceeds can be reduced by the amount of premiums plus interest at 6% per annum.  Domestic policies of insurance on the life of the deceased (s 3(3)(a), The definition of “spouse” refers to any person in relation to the deceased at the time of death where that person was his or her partner: – in a marriage or customary union recognised in terms of the laws of the Republic; – in a union recognised as a marriage in accordance with the tenets of any religion; or – in a same-sex or heterosexual union, which the Commissioner is satisfied is intended to be permanent. The amount to be included cannot be reduced if the deceased paid the premiums himself.  IMPORTANT This amount will be an allowable deduction under section 4(q) as property accruing to the surviving spouse (refer to 12.5.15). Section 5(1)(d)bis determines that if the annuity received from the domestic insurance policy on the life of the deceased ceases to be payable within five years after the death of the deceased because: – of the death of the annuitant within that period; or – where the annuitant is the widow of the deceased, because of the remarriage within that period, the value of the annuity in the re-assessed estate of the predeceased shall be deemed to be an amount equal to the lesser of: – the aggregate of the amounts which accrued to the annuitant in respect of the annuity and any amounts which accrued to the person or the person’s estate upon or as a result of the termination of the annuity; or – the capitalised value of the annuity.  Property donated under a donatio mortis causa (s 3(3)(b)) A donatio mortis causa is a donation in contemplation of death. The donation takes effect only if the donor dies. No donations tax is payable on these donations if the donation is exempt in terms of s 56(1)(c) of the Income Tax Act.  A claim against the surviving spouse in terms of s 3 of the Matrimonial Property Act 88 of 1984 (s 3(3)(cA)) If the deceased was married out of community of property under the accrual system, the spouses retain their respective estates at the beginning of the marriage. Upon the death of the deceased the growth (accrual) in both of the spouses’ estates must be calculated. The spouse with the smaller accrual has a claim against the spouse with the higher accrual for half the difference between their accruals. An accrual claim that the estate of the deceased has against his surviving spouse or the estate of his deceased spouse constitutes deemed property in the estate of the deceased (s 3(3)(cA)).  A claim against the surviving spouse in terms of s 3 of the Matrimonial Property Act 88 of 1984 (s 3(3)(cA)) The calculation of the accrual excludes, however, the following assets: – inheritances, legacies and donations received; – damages received in respect of non-financial losses; – donations between spouses; and – assets excluded in terms of the ante-nuptial contract. A provision for indexing is made and the inflation rate reflected in the consumer price index is used in practice for this calculation. If an amount is due to the deceased under this system, it will be included as part of deemed property in the estate. Example 18.9  Property that the deceased was competent to dispose of for his own benefit (s 3(3)(d)) Property that the deceased was competent to dispose of for his own benefit or for the benefit of his estate immediately prior to his death, is deemed to be property in his estate (s 3(3)(d)). Example 18.10  Deductions (Step 3) (section 4) Funeral and death-bed expenses (section 4(a)) Debts due to persons ordinarily resident within the Republic (section 4(b)) All allowable costs in the administration and liquidation of the estate (section 4(c)) Sundry expenditure incurred in meeting the requirements of the Master or the Commissioner of the South African Revenue Service (SARS) (section 4(d)) Certain foreign assets and rights thereto (section 4(e)) Any debt due by the deceased to persons ordinarily resident outside the Republic (section 4(f )) Example 18.12  Bequests to public-benefit organisations (section 4(h)) The value of any property included in the estate, which accrues to the following institutions, will be allowed as a deduction: – a public-benefit organisation which is exempt from tax in terms of section 10(1)(cN) of the Act; – any institution, board or body which is exempt from tax in terms of section 10(1)(cA)(i) of the Act and which has as its sole or principal object the carrying on of any public-benefit activity contemplated in section 30 of the Act; or – the State or any “municipality” within the Republic as defined in section 1 of the Income Tax Act.  Deemed property taken into account in valuing unlisted shares (section 4(p)) If there is any deemed property included in the estate that has been taken into account in the determination of the value of any unlisted shares or a member’s interest in a close corporation included in the property of the estate, the value of the deemed property will be allowed as a deduction to the extent that it has not been allowed under any of the other before-mentioned deductions. The purpose of this deduction is to avoid what will effectively be a double inclusion in the estate, as the value will be included in the value of the unlisted shares and the inclusion of deemed property.  Deemed property taken into account in valuing unlisted shares (section 4(p)) The deemed property that will qualify for the deduction will be: – domestic insurance policies; – benefit payments from funds; – property donated under a donatio mortis causa or in terms of a donation whereby the donee receives no benefit until the death of the donor; – claim against the spouse under the Matrimonial Property Act; – property of which the deceased was, immediately prior to his death, competent to dispose of for his own benefit or for the benefit of his estate.  Property accruing to the surviving spouse (section 4(q)) So much of the value of any property included in the estate (which has not been allowed as a deduction under the foregoing provisions) as accrued to the surviving spouse of the deceased, will be allowed as a deduction. This deduction will refer to all items bequeathed by the deceased to the surviving spouse as well as all other benefits accruing to the surviving spouse due to death of the deceased. An example of the latter will be a life insurance policy taken out by the deceased on his life with the spouse as beneficiary.  Property accruing to the surviving spouse (section 4(q)) The deduction will not be allowed if the spouse has to dispose of the property to any other person or trust in terms of the provisions of the will of the deceased. No deduction will be allowed in respect of any property accruing to a trust established in the will of the deceased for the benefit of the surviving spouse, if the trust will be a discretionary trust and the trustee can distribute income to any person other than the surviving spouse.  Section 4A abatement (Step 4) The net value of the estate must be reduced by the section 4A- abatement. Currently the abatement is R3 500 000. If the deceased was the spouse of a person who died before him/her, the abatement must be calculated as follows: The value of the section 4A abatement (currently R3 500 000) plus [value of the section 4A abatement (currently R3 500 000) less the amount used to reduce the net value of the predeceased person’s estate].