This article is based on tax law for the tax year ending 28 February 2013.
By Prof Matthew Lester (TaxTalk)
One still often hears that old brag: "I've got this bright accountant/lawyer who has set up all my properties in separate companies and trusts. Since my spouse and I are directors/trustees, we won't ever pay estate duty.”
This lot should all receive Pro Patria medals for paying more tax than they should. They have missed the plot regarding all the changes in tax over the past 10 years. And one shudders to think what they pay to establish and maintain these structures.
Effective April 1 2012, capital gains tax (CGT) rates for companies increased to 18.65%. And, when dividends tax is added, the effective corporate tax rate jumps to 31%. By comparison, trusts have a flat CGT rate of 26.6%.
Meanwhile, the individual's CGT rate is just 13.3% (after deducting a R30000 annual exemption), or less if the taxable income is less than R617000.
Some say they can get around the adverse CGT rates on trusts by causing gains to be taxed in the trust beneficiaries' hands. Yes, this loophole exists for some trusts. But for how much longer?
The SA Revenue Service is going to have to place even more reliance on personal income tax. Short of an overall personal tax increase, SARS will target capital gains.
In this climate, establishing an estate-planning structure when you are probably going to live at least another 20 years is just bonkers. Estate duty will probably be gone by then.
SARS has made attempts to encourage taxpayers to unload their residences from trusts and companies. It's a difficult topic, because there are hundreds of permutations of structures to cover in the legislation.
The scope of the relief was extended in the tax amendments for 2011 to include holiday homes. It allows residences to be transferred from trusts and companies to individuals meeting the qualifying criteria without incurring CGT, transfer duty or dividends tax.
After the transfer an individual using the residence as a primary residence will be exempt from CGT on a capital gain of up to R2-million. It applies only to residences and steps must be taken to wind up the company or trust within six months of transfer.
The updated SARS "Guide to Disposal of a Residence from a Company or Trust” is available on http://www.sars.gov.za/. The opportunity closes on December 31.