The inclusion rate is the portion of the capital gain which is included in taxable income. In the case of individuals, it is currently 40%, and for companies and trusts 80%. The effective rate on which the portion of the gains is taxed is 16.4% for individuals, 22.4% for companies and 32.8% for trusts.
Nel says with the introduction of a tax on capital gains, inclusion rates were to be kept low to address the impact on inflation. That was why an inflation adjustment was not brought in.
The rates of estate duty and donations tax were reduced from 25% to 20% in 2001 when capital gains tax was first introduced, to counter the double taxation at death (estate duty and capital gains tax).
However, since then the inclusion rates have been increased twice, yet there has been no reduction in the estate duty or donations tax rate.
“The tax on the capital gains at death and the fact that we have no inflation adjustments, makes the tax too high,” Nel says.
When last did we have adjustments?
Cheryl Howard, MD of Talaria Wealth, says the tax free amounts for capital gains tax and estate duty have not been adjusted for years.
Currently only estates valued below R3.5m are excluded from estate duty and the exclusion from capital gains tax (at the year of death) has remained R300,000 since 2012.
The Davis Tax Committee states in its final estate duty report that even if the general abatement (exclusion) were increased to R7.5m, it would not represent a “complete solution”.
“It is not difficult to imagine that a taxpayer’s modest primary residence and personal effects could easily exceed R3m, leaving but R4.5m remaining to cover savings, investments and life insurance benefits,” the report says.
“This may be sufficient to provide for the modest maintenance of a retired widow(er) for five to 10 years, but would be totally insufficient to cover the needs of a middle-class family following the death of a breadwinner.”
The report refers to figures from the South African Revenue Service (SARS) which show that the value of the majority of estates (1,310 out of 1,445) are worth less than R15m. Their estate duty liability amounts to R556m of the total estate duty collection of R1.4bn (2014-15).
“It can thus be concluded that the loss of estate duty associated with dramatically increasing the primary abatement is no cause for alarm,” the committee says.
A relief or not?
Howard says the increase of taxable estates to R15m will be a relief for Average Joe, but Blink Stefaans is clearly targeted with the proposed increase in estate duty, the scrapping of the roll-over relief for couples and the taxing of interest-free loans to trusts.
Howard also warns that the inclusion rate for capital gains can “easily” be increased from 40% to 80%, raising the effective capital gains tax rate for individuals to the same level as trusts (32.8%).
“Trusts remain the most effective way of structuring one’s estate. However, for people with estates valued at less than R30m, it is no longer a cost-effective option because the cost of compliance and punitive rates,” she says.
Nel says middle-class people with an estate below R3.5m have no need to do any planning to avoid estate duty. It is where the combined estate of spouses, exceed the R3.5 m that planning is required.
“The roll-over relief between spouses really gives the only relief. That is why it should not be taken away,” he says.
