The Davis Tax Committee’s proposed scrapping of the spousal rollover for estate duty could have far-reaching implications.
By: INGE LAMPRECHT
THE PROPOSAL of the Davis Tax Committee (DTC) that the preferential estate duty regulation for bequests to spouses should be scrapped could have far-reaching implications if it is adopted, especially for lower and middle-income earners.
Where an individual leaves assets to a surviving spouse, Section 4(q) of the Estate Duty Act specifies that it qualifies for a deduction for estate duty purposes (subject to certain exclusions). Practically, this means that if an individual leaves their entire estate to their spouse (assuming that no assets accrue to third parties outside the estate), no estate duty will be levied.
The Act defines a spouse fairly broadly to not only include married couples or partners in customary unions, but also partners in religious marriages, as well as those who are in permanent same-sex and heterosexual relationships. In its first interim report on the topic published in July 2015, the DTC argued that the provision was unconstitutional as it discriminated on the basis of marital status, and ignored the growth of the single parent family phenomenon. The DTC added that the inclusion of permanent relationships in the definition of ‘spouse’ also opened the door to abuse.
The 2016 Budget did not provide any more detail, and at this stage it is unclear whether the DTC’ s recommendations would ultimately be introduced. There is no clarity on when the next version of the DTC report can be expected.
Ronel Williams, chairperson of the Fiduciary Institute of Southern Africa (FISA), says that the Section 4(q) provision was originally intended to protect the surviving spouse and family members whose financial position could be adversely impacted if estate duty had to be paid from the estate of the first dying. The intention was not to eliminate estate duty, but merely to defer payment to a later stage (the death of the surviving spouse). This is referred to as the spousal rollover or deferral of estate duty.
Williams says that low- and middle-income earners will most likely bear the brunt of the changes, should the proposal be implemented. Young couples in their early thirties may just be starting to build an asset base, and probably won’t have enough cash-type assets to settle the estate duty, which may force them to sell some of their possessions. Similarly, older couples may not be in a position to effect life insurance to alleviate any cash shortages as a result of the estate duty liability.
Moreover, if the surviving spouse is unable to support themselves with their own assets and their inheritance, they can lodge a claim against their partner’s estate in terms of the Maintenance of Surviving Spouses Act. Williams adds that if the individual left their entire estate to their spouse, a maintenance claim will have no impact. However, if they only left part of their estate to their spouse, the absence of Section 4(q) could trigger estate duty—and if the spouse lodged a maintenance claim on top of this, the pot available to the heirs could reduce substantially. It should be noted that Section 4(q) is also applicable to assets like life insurance policies that are paid to the surviving spouse outside the estate. Life insurance policies are usually obtained to ensure that the surviving spouse has immediate cash available outside the estate. If these recommendations become law, these policies would be fully taxable, and could substantially reduce the cash available to the surviving spouse.
The first R3.5 million of the net value of an estate is currently free from estate duty (the primary abatement). To overcome the potential negative implications of the removal of Section 4(q), the DTC has recommended that the primary abatement be increased to R6 million.
The DTC also proposed that if the scrapping of the provision still triggered estate duty, even in the face of a higher primary abatement, the surviving spouse could choose to bring forward the use of his primary abatement. Thus, if the value of the first dying spouse’s net estate is R7 million, it would be reduced by their R6 million primary abatement, which means that estate duty would be payable on R1 million.
The surviving spouse could then choose to use R1 million of their primary abatement in the estate of the first dying spouse to avoid payment of estate duty, but upon the death of the surviving spouse, their primary abatement would reduce to R5 million.
Williams notes that while the implementation of these recommendations would ease the pain in most instances, the scrapping of Section 4(q) will still have a significant impact on many estates.
Finally, scrapping the 4(q) provision due to its unconstitutional nature does not make sense if the surviving spouse is allowed to utilise their primary abatement at an earlier stage, as this entitlement would be based on the surviving spouse’s marital status as spouse, Williams concludes.
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