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TIME FOR ESTATE DUTY TO GO?

The days of estate duty may be numbered according to Nicolene Schoeman of Schoeman Attorneys and an article by Barry Ger, Cape Town-based tax consultant, in the May issue of De Rebus, the SA attorneys’ journal published by the Law Society of South Africa (LSSA). His opinion is echoed by several other media reports. In fact, many people’s hopes that this tax was finally on its way out rose significantly during this year’s budget speech.

Estate duty: brief background

Imposed in terms of the Estate Duty Act 45 of 1955 as amended, estate duty is a tax levied at 20%. It is payable in respect of all property (and property deemed to be property) held by a deceased person at the date of his or her death.

In respect of property deemed to be property, the law denotes that even property not actually held by the deceased at death – in other words: some insurance policies – are also deemed to be included in his or her estate as part of the dutiable amount on which the tax is raised.

The tax is subject to a R3 500 000.00 exemption or abatement, which can be increased to R7 000 000.00 if the deceased person was predeceased by a spouse who did not use their abatement.

Ironically, writes Ger, wealthy people are reluctant to pay this tax even with their substantial means. They often engage in expensive and elaborate ownership structures to avoid it. As a result, estate duty contributes a relatively small amount of revenue to the fiscus through SARS and the costs involved in collecting estate duty are high.

Ger also states that he thinks this is the reason behind proposals to abolish the tax. Estate duty presents a number of other problems. For example:

  • Assets owned by a deceased person in an offshore jurisdiction could be subject to local estate duty as well as any other duty imposed in the foreign country
  • Assets that form part of the dutiable estate compromise income or assets already subjected to income tax during the deceased person’s lifetime
  • Worst of all, estate duty overlaps in many ways with capital gains tax (CGT).

For these reasons, the fiscus is considering a new inheritance tax that is common to some other jurisdictions. Alternatively, it will make certain amendments to the CGT provisions. These are still rather unclear and, at this point, amount to little more than speculation.

Therefore, clients are urged to consult suitably qualified attorneys for advice on appropriate estate planning strategies and updates on any relevant developments.

Please take note that it is of the utmost importance that any estate planning strategy is implemented with a legally valid and updated will.

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Posted by on 07/09/2012 in Content

 

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IS FIXED PROPERTY IN A TRUST STILL VIABLE?

Gerrie Vosser examines the tax and costs related to different scenarios in order to determine whether it is still a feasible option to hold fixed property in a trust.

For many years the high transfer duty rate applying to trusts made it less attractive to purchase fixed properties in trust, a situation that changed, quite unexpectedly, for the better when on 23 February 2011 the transfer duty rate for trusts was adjusted downwards to the same more favourable rate as those for natural persons. However, just as unexpectedly, in the 2012 budget capital gains tax (CGT) inclusion rates were increased, resulting in trusts now being exposed to a maximum effective CGT rate of 26.7% compared to those of 18.6% and 13.3% for private companies and private individuals respectively.

Concerns have subsequently been raised that ownership of fixed property in trust as a way to create, protect, utilise and transfer wealth may have been dealt a crippling blow. However, these concerns turn out to be unjustified when various fixed property ownership options are analysed from an integrated, multi-disciplinary point of view.

Optimal ownership of investment property

Consider the example of an investment property, fully paid, currently worth R 1 000 000 (use this as base cost for CGT) with a projected annual capital growth rate of 10% and a current annual rental income of R 72 000 (net of cost). The following comparative tax and cost analysis of various ownership options shows a trust to be the optimal ownership choice:

Personal ownership

Property owned by Joe Bloggs, successful business person and subject to an income tax rate of 40%, married out of community of property to Jill, an unemployed housewife, with two children approaching their teens and Jill’s mother financially dependent on the Bloggs. (Even without the investment property of R 1 000 000, the net value of Joe and Jill’s combined estate and life assurance already exceeds R 7 000 000.)  

Private company

Property owned by a private company the shares of which are held by Joe.

Family trust

Property owned by a fully discretionary family trust with a personalised beneficiary base.

Tax & Cost

Investment property ownership options

 

Personal ownership

Private company

Family trust

Scenario one: Situation at Joe’s death 10 years later, property then worth R 2 593 700
Capital gains tax

Maximum effective rate

Capital gains tax

 

13.3%

R 211 962

 

18.6%

R 296 428

 

NA

R 0

Executor’s fee @ 3.5% + VAT

Gross value in estate

Executor’s fee

 

R 2 593 700

R 103 489

 

R 2 297 272

R 91 661

 

R 0

Estate duty @ 20%

Dutiable amount

Estate duty

 

R 2 278 249

R 455 650

 

R 2 205 611

R 441 122

 

NA

R 0

Total tax & cost

R 771 101

R 829 211

R 0

Clearly, Joe’s dependents would have been much better off with the investment property in trust.
Scenario two: Joe bequeaths the property/private company to a trust after 10 years
Transfer duty

Transfer fee

Secondary transfer tax @ 0.25%

R 124 496

R 24 000

NA

R 124 496

NA

R 5 432

NA

NA

NA

Total tax & cost

R 148 496

R 129 928

R 0

Original ownership in trust would have prevented these costs associated with a bequest to a trust.
Scenario three: Income tax during the 10 year period
Income tax rate

40%

28%

0%

Income tax liability

R 288 000

R 201 600

R 0

Dividend withholding tax @ 15%

NA

R 77 760

NA

Total tax liability

R 288 000

R 279 360

R 0

Using the conduit principle, trust gross income is distributed to two non-income earning Bloggs family members resulting in no income tax having to be paid. A trust is the best option again.
Scenario four: Liquidation of property after 10 years during Joe’s lifetime
Capital gains tax

Dividend tax @ 15%

R 207 972

NA

R 296 428

R 344 591

R 42 573

NA

Total expense

R 207 972

R 641 019

R 42 573

Again, using the conduit principle with trust gross income distributed to four non-income earning Bloggs family members, there is a total CGT liability of only R 42 573. A trust, yet again, proves the best option. (The effects on the personal estates of the beneficiaries need to be carefully considered and managed.)

In suitable circumstances and from a tax and cost point of view, a properly structured and professionally used discretionary trust without doubt still provides the optimal ownership solution for an investment property.

Remember however that tax benefits should never be the primary reason for establishing and using a trust. Tax legislation may change for the worse; and personal circumstances may change and neutralise potential tax benefits. Remember too that the planning, drafting and upgrading of trust deeds, as well as the management and administration of trusts requires multi-disciplinary professional skills. Members of the public are advised to seek out a practitioner who is a member of the Fiduciary Institute of South Africa (FISA), who are bound by a code of ethics to adhere to a high professional standard.

 

 
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Posted by on 26/07/2012 in Content

 

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BE CAREFUL NOT TO OVERLOOK SECURITIES TRANSFER TAX

As if there are not yet enough different types of taxes doing the rounds, Securities Transfer Tax (STT) is just another way in which SARS makes a buck.

In the past, the Stamp Duties Act, 1968, catered for the registration of transfer of unlisted securities whereas the Uncertificated Securities Tax Act, 1998, catered for the change in beneficial ownership of listed securities. These two pieces of legislation were repealed with effect from 1 April 2009 and 8 January 2008, respectively.

The Securities Transfer Tax Act, 2007 (Act No. 25 of 2007) was introduced to replace the two different tax types on securities with a single tax in respect of any transfer of listed and unlisted securities and simplify the administration thereof.

This tax type is charged at a rate of 0, 25%, which is to be applied to the taxable amount in respect of any transfer of a security.  In the light of the discussion to follow, it is perhaps useful to briefly define the terms “security” and “transfer”.  Security means (a) any share or depository receipt in a company; or (b) any member’s interest in a close corporation; or (c) any right or entitlement to receive any distribution from a company or close corporation, excluding the debt portion in respect of a share linked to a debenture.  Transfer is defined so as to include the transfer, sale, assignment or cession, or disposal in any other manner, of a security or the cancellation or redemption of that security, but does not include—
       (a) any event that does not result in a change in beneficial ownership;
       (b) any issue of a security; or
       (c) a cancellation or redemption of a security if the company which issued the security is being  wound             up, liquidated or deregistered or its corporate existence is being finally terminated.

In determining the taxable amount on which STT is payable, the following should be considered:

(a)     Purchase of listed securities through or from a member:

  • The consideration for which the security is purchased.

(b)    Transfer of listed securities by a participant or in any other manner:    

  • When the security is a share or depository receipt in a company:

      i.      The amount of the consideration for the security declared by the person who acquired that security; or

      ii.      The closing price of the security where no consideration amount declared or the amount declared less

               thank the lowest price on that security.

  • Where the security is a right or entitlement to receive any distribution from a company/cc – the greater of:    

     iii.      The amount of consideration declared; or

     iv.      The market value of the security on the date of acquisition.

(c)     Transfer of unlisted securities:

  • The amount or market value of the consideration given for the transfer of the security.
  • Where there is no consideration given or the consideration is less than the market value of the security, the market value of the security.
  • Where the security is cancelled or redeemed, the market value of that security immediately before the cancellation or redemption value must (market value must be determined as if the security was never cancelled/redeemed).

The following persons will be liable to pay STT in these specific circumstances:

(a)  Purchase of listed securities through or from a member:

  • The member is liable for the payment of the tax to SARS.
  • The member may recover the tax payable from the persons to whom the securities are transferred or from the person that cancels or redeems the securities.

(b)  Transfer of listed securities effected by a participant:

  • The participant is liable for the payment of the tax to SARS.
  • The participant may recover the tax payable from the persons to whom the securities are transferred or from the person that cancels or redeems the securities.

(c)  Transfer of any other listed securities:

  • The person to whom the listed security is transferred is liable for the tax payable.  
  • The tax must be paid through the member or participant holding the listed security in custody, or in the case where the listed security is not held in custody by either a member or participant, through the company that issued the listed security.

(d)  Transfer of unlisted securities:

  • The company which issued the unlisted security is liable for the payment of the tax to SARS.
  • The company may recover the tax payable from the persons to whom securities are transferred.

In respect of the transfer of listed securities, STT must be paid by the 14th day of the month following the month during which the transfer occurred.

The STT attracted by the transfer of unlisted securities, must be paid by the Company, which issued that security, to the Commissioner within two months from the end of the month in which the transfer was effected.

One can pay STT due by effecting an electronic payment, using the SARS e-STT system, which can be accessed through their website (www.sars.gov.za).  In the case of the transfer of unlisted securities, the company that issued the securities must by the end of the second month after the month during which the transfers took place submit a declaration electronically, in the form and manner as the Commissioner may determine and containing the information prescribed by the Commissioner, stating the amount of tax payable.  Revenue stamps or an impressed stamp may not be used to pay Securities Transfer Tax.  The only method of payment will be through the SARS e-STT system

When unlisted securities are transferred, SARS requires that notification be given in that any person to whom an unlisted security is transferred must inform the company which issued that security of the transfer within a period of 30 days as from the date of that transfer.

Should the STT due not be paid in full within the prescribed period, interest will be imposed at the rate prescribed for tax purposes on the balance of the tax outstanding, calculated from the day following the last date prescribed for payment to the date of payment to SARS.

As with all tax related documents, any company which issued unlisted securities and any member, participant or person to whom a listed security is transferred must keep for a period of five years records of every transfer to enable them to observe the requirements of the Securities Transfer Tax Act and to enable the Commissioner to be satisfied that those requirements have been observed.

As they say, for every general rule, there is an exception.  There are a few exemptions applicable to STT.  Should you be interested in the transactions which are exempted from STT, you are welcome to explore these on SARS’s website, as they are set out in great detail there.

 
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Posted by on 03/07/2012 in Content

 

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DIVIDENDS PART 2 – THE “ALL NEW” AND CONTROVERSIAL DIVIDEND WITHOLDING TAX

Following suit and aligning its tax on dividends with international practice,South Africais the latest country to replace its secondary-tax-on-companies (STC) regime with the controversial dividend-witholding-tax (DWT), which came into effect on 01 April 2012.

Distinction between STC and DWT

STC was payable at a rate of 10% of the net dividend amount.  The net dividend amount is calculated by taking the dividend declared during the dividend cycle less any dividend accrued during the same period. To illustrate this concept, if a company X declares a dividend of R 100 000 on 1 January 2012 and has accrued dividends of R 60 000 from other companies, the net dividend amount will be R 40 000 (R 100 000 – R 60 000).  STC at 10% of R 40 000 = R 4 000.  This amount is then payable to SARS over and above the dividend of R 100 000 payable to the shareholder.  The liability therefore rested with the dividend declaring company.  Should the dividends accrued exceed the dividends declared by a company, no STC is due or payable.  The amount by which dividends accrued exceeds dividends declared is treated as a STC credit, which is carried forward to the next dividend cycle and set off against the next dividend declaration.

DWT, on the other hand, is a tax levied on the shareholder instead of the dividend declaring company, as is the case under STC.  As DWT came into effect on 01 April 2012, all STC credits had to be disclosed to SARS by way of an IT56 form, whereby a company declares dividends on 31 March 2012, irrespective of whether the company has dividends to declare or not.  A company’s net STC credits on 31 March 2012 will be carried forward into the new DWT regime on 01 April 2012, which may then be used over a period of five years thereafter.

DWT is levied on dividends declared and paid by companies resident inSouth Africaas well as foreign companies which are listed on the JSE (Johannesburg Stock Exchange) at a rate of 15%.  This rate is 5% higher than the initially proposed 10% which was in line with the STC rate.  In this instance, the declaring companies are required to withhold the DWT and pay same over to SARS and subsequently pay the remaining (net) portion of the declared dividend over to shareholders.

Exemptions

As with every general rule, there are exceptions to this one as well.  Beneficial shareholders exempted from paying DWT are the following:

  1. A South African Company
  2. Public benefit organizations
  3. Government and semi-government institutions
  4. Pension, provident, retirement funds and similar funds
  5. Environmental rehabilitation trusts
  6. Shareholder in a micro business (R 200 000 of the total dividend paid by the business during a particular year of assessment will be exempt)
  7. Medical aid schemes

In order to qualify for the abovementioned exemption, beneficial shareholders are required to submit a declaration to the declaring company, notifying it that they are exempt from DWT, along with a written undertaking that they will notify the declaring company of any changes in their details.  Should the exempted shareholder not comply with these pre-requisites, DWT will be withheld by the company and the shareholder will thus not enjoy the benefit of the exemption.  SARS will hold the beneficial shareholder and the company jointly and severally liable for the payment of the taxes until the liability has been discharged.

Foreign shareholders are not exempted from DWT.  Should such shareholder reside in a country other than a treaty country, DWT will be levied at 15%.  If a foreign shareholder resides in a treaty country, the rate provided for in the double tax agreement (DTA) will apply, which rate may be less than 15%.  In order to qualify for this exemption, foreign shareholders must declare to the company that they reside in a treaty country (in terms of which a reduced DWT rate applies) and furnish the company with a written undertaking that they will notify the company of any changes in their details. 

Calculating DWT

If the declaring company sets off its STC credits against the declared dividend during a particular dividend payment, it has to notify the shareholders receiving such dividend that a STC credit was used and the extent of such credit.  As SARS does not have jurisdiction in foreign countries, it is doubtful whether SARS will require declaring companies to send notifications to its foreign shareholders too.  Even though one or more of the shareholders are exempted from DWT and will never use the STC credits, the declaring company is still required to reduce its STC credits by the portion attributable to such beneficial shareholder/s.

Dividends received by a company after 01 April 2012 will generally not form part of its STC credits.  The only way in which a company’s STC credits can increase after 01 April is when it, as a shareholder of another dividend declaring company, receives notice from that company of an amount by which the declaring company’s STC credits have been reduced by a particular dividend payment to the receiving company.  The STC credit of the receiving company will then increase with the proportionate reduction in the declaring company’s STC credit.  Thus, this is basically a transfer of STC credits from one company to another.  However, should the STC credit be “used” on a shareholder who does not declare dividends and can therefore not use the STC credits, e.g. an individual, the STC credit will be lost to the fiscus.   As SARS does not have jurisdiction in foreign countries, STC credits used on foreign shareholders will also be lost to the fiscus and not transferred to the foreign juristic shareholder.

Practical perspective

Along with the new regime came an additional layer of administrative rules and regulations.  This will burden further the already compliance burdened tax payer.  Additional supporting data required to accompany a dividend tax return is onerous.  Although dividends will now be taxed in the hands of the shareholder, the company declaring the dividends will act as a collection agent on behalf of SARS.  Whether the taxpayer and SARS will be able to handle and efficiently manage the new tax regime remains to be seen.

 
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Posted by on 03/07/2012 in Content

 

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ESCAPING THE HIGHER CAPITALS GAINS TAX RATE

By Barry Ger, senior manager for corporate tax at KPMG

01 April 2012

 A window of opportunity opens for some companies.

 If your company is thinking of selling any capital assets and its year end is not February  or March there may be a window of opportunity to do it at the lower effective tax rate for a short while.

In his Budget Speech on February 22 2012, Finance Minister Pravin Gordhan announced increases to the capital gains tax (CGT) rates. Companies, trust and individuals would now be paying 18.6% (previously 14%), 26.7% (previously 20%) and a maximum of 13.3% (previously a maximum of 10%)  respectively of any capital gain that arises in their hands from the sale of their assets over to the South African Revenue Service (SARS).

In a new tax bill released on March 13 2012, it has been proposed that these new rates will take effect from tax years beginning from March 1 2012. The tax years of individuals and trusts perennially begin on March 1 anyway so for them the new rates apply already. The tax years of companies, on the other hand, have a multitude of different starting dates which means that some companies, specifically those with tax years that do not begin in March, have a short period in which they can still benefit from the lower rates. This period is, of course, longest for companies with tax years that commence much later in the calendar year or even in the next year. Companies with January 31 financial year ends, for example, will have almost 11 Months, until February 1 2013, to dispose of their assets before the new 18.6% rate kicks in.

The question arises though whether a company that makes use of this opportunity and sells off many of its high value assets before the end of its current tax year would be investigated by Sars for tax avoidance. The answer to this is probably not. Provided the company has primarily a commercial (but non -tax related) reason for making such disposals, it is unlikely Sars would be able to make such a claim stick.

It would be the height of foolishness, of course, for companies to rush off to sell their assets so as to take advantage of the lower rate.  The tax tail should never wag the commercial dog.   However, for those who were contemplating a sell-off anyway, the looming increase in CGT rates would no doubt spur them to make such decisions sooner rather than later.

 
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Posted by on 05/04/2012 in Content

 

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BUYING YOUR PROPERTY IN A TRUST: IS IT REALLY WORTH IT?

To buy or not to buy, that is the question.

A trust is a legal entity with its own distinct identity. It has the contractual capacity to acquire, hold and dispose of property and other such assets for the benefit of its nominated beneficiaries. All trusts are governed and administered in terms of the Trust Property Control Act, and formed and governed in terms of a trust deed, a written agreement concluded between the trustees and the founder of the trust.

Perhaps the most significant purpose for establishing a trust is the separation of ownership, which is often desired for reasons including asset protection, risk mitigation and limiting ones tax liability. In order for the trust to transact, a trustee(s) are duly appointed in the trust deed who are thereby authorised to act on behalf of the trust. A trustee may act on behalf of a trust provided that he has been duly appointed to act in this capacity in the trust deed, that the trust has been registered with the Master of the High Court and the Master has authorised such appointment in writing by issuing Letters of Authority to this extent. Further, the trustees’ powers to transact are set out in and may be limited by the trust deed.

There are various advantages related to purchasing property in a trust as opposed to buying it in your personal capacity of which the following are the most prominent:

A trust is a flexible vehicle, capable of catering for various changes and uncertainties occurring in one’s life over time e.g. a larger family, death, insolvency, legislative and financial changes and other circumstances.

Since the property is not registered in your name, the value of your personal estate upon death is reduced. The direct implication hereof is a reduction in your estate duty exposure. Also, should the asset value have increased over time, this growth will be excluded from your estate and the capital gains tax (“CGT”) payable on your estate is reduced accordingly. Executor’s fees pertaining to these assets will also be eliminated.

Provided that you do not establish your trust(s) with the intention of prejudicing creditors, purchasing or transferring a property into a trust helps to protect the specific asset from creditors.

It is advisable to create and operate a trust with appropriate tax advice. In this way a trust will enable you to mitigate your tax liability with specific reference to income tax, CGT, estate duty, donations tax and transfer duty.

Trusts are excellent succession planning tools as a property bought in a trust can remain in the trust indefinitely. Consequently, there is no need to transfer the property from the deceased into the name of his heir. In turn this saves on unnecessary transfer costs and CGT duty.

When finance is required to purchase a property in the current “market” the banks are less likely to grant a 100% bond to a trust and demand a deposit of up to 20% when a trust acquires a property. It appears in some instances individuals may receive up to 100% property finance.

Looking at the downside, the following count under the most burdensome disadvantages of purchasing property in a trust .

All trusts are taxed at an income tax rate of 40%. Consequently, it seems to be more favourable to buy a property in your individual capacity rather than in a trust. Here is why: CGT on the growth of the value of the property comes into play once a property is sold.

Trusts are subject to the highest inclusion rate. 66.66% of the net gain must be included in the trust’s taxable income for the year in which the property is sold. Consequently trusts are taxed at an effective rate of 26.6%. This is compared to individuals who are subject to an inclusion rate of 33.33% and a maximum effective rate of only 13.33%. However, if the profit or gains are distributed to the beneficiaries of the trust during the same tax year, the tax payable may end up being the same amount, as if a natural person is disposing of a second property.

Another downside of the trust owning the property is that the founder does not enjoy control over that property as the trust will be the legal owner of the property and the trustees will have the power to administer same.

Therefore based on the above, if administered correctly, one can benefit tremendously from the exercise of purchasing a property in a trust. It is, however, crucial to determine whether the addition of a trust to your portfolio is necessary and beneficial based on your individual needs and circumstances.

 
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Posted by on 08/03/2012 in Content

 

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CAPITAL GAINS TAX LIABILITY: INCREASED RELIEF FOR INDIVIDUALS

CAPITAL GAINS TAX LIABILITY: INCREASED RELIEF FOR INDIVIDUALS

Any person’s capital gain or loss is determined, for each asset disposed of, during the year of assessment as follows:

Proceeds                                                       xxxx

Less: Base cost                                             xxxx

                         Equals: Capital gain or loss                           xxxx

In order to calculate a taxable capital gain, the sum of all the capital gains and losses for each asset (determined separately) disposed of during the year of assessment is determined. The resulting total is then reduced by an annual exclusion for a taxpayer who is a natural person or special trust.

As of the 1st of March 2011 this form of relief to natural persons has been increased as follows:

  • The annual exclusion has been increased from R 17 500.00 to R 20 000.00 for individuals during their year of assessment.
  • In the case of an individual in the year in which the individual dies, this exclusion has jumped from R 120 000.00 to R 200 000.00.

It is important for all taxpayers to be aware of their tax liabilities and also how such liability is incurred. It is for this reason, coupled with recent changes in legislation that we have decided to dedicate a portion of the next few posts to capital gains tax liability in order to keep all OMDW clients and followers updated and fully informed.

 
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Posted by on 22/12/2011 in Content

 

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