Treasury may not have increased tax rates affecting high-net-worth individuals as was expected by many analysts but proposals were made in this year’s budget review which are tantamount to wealth taxes. The proposed manner in which trusts will be taxed going forward will have a significant effect on the way that affluent South African families organise their affairs in the future.
The first proposal is to increase the inclusion rate of capital gains for companies and trusts from 66,6% to 80%. The inclusion rate is the percentage of the annual capital gains to be included in taxable income where it will be taxed at normal income tax rates. An inclusion rate of 80% means that capital gains in trusts will effectively be taxed at 32,8% whereas normal taxable income will be taxed at 41%.
This inclusion rate hike seems as if the government heeded the call of Thomas Piketty, the French economist who visited South Africa last year, to tax capital growth more aggressively. Piketty argues that capital grows faster than income from employment and that this benefits affluent persons and increases inequality. The fact that government will require more revenue in the coming years to deliver on its fiscal commitments increases the probability that the inclusion rate of capital gains for companies and trusts will eventually be increased to 100%. This will place a significant limitation on the ability of affluent families to grow their wealth in future years to the benefit of the National Treasury.
Judge Dennis Davis, the chairman of the Davis Tax Committee, made brief mention in a tax practitioners’ webinar held in December 2015 of the proposed manner in which government aims to tax assets held in a trust. Davis explained briefly that this proposal will deem trust assets, which are held in a trust that was financed through interest-free loans of a certain size, to be effectively controlled by the lender due to the extent of the influence such a large creditor would have over said trust. This will result in the trust assets of such trust to be included as deemed property in the estate of the lender at his or her death and being subject to estate duty regardless of the fact that the trust assets are not owned by the deceased estate.
The next that was heard of this proposal is a very short and cryptic paragraph in the budget review which refers to proposed measures to curb tax avoidance through the use of trusts. If the limited information available to date is taken strictly at face value, one manner in which this proposal could be understood would be as follows: If assets are sold to a trust against loan account and such a loan account is of a certain size and interest-free, then such an interest-free loan will be taxed as a donation. The underlying assets of the trust will furthermore be included in the estate of the lender at his or her death and be subject to estate duty.
Such an interpretation gives rise to so many questions, however, that there is no space to start evaluating all these questions. It also seems as if the implications of this proposal could be highly discriminating as it does not seem as if it will affect more sophisticated financial and inheritance succession structures.
In light of government’s apparent approach regarding taxes affecting affluent individuals, as indicated by the increase of the inclusion rate of capital gains, it seems as if this proposal is a first crude attempt to gain access to assets held in trust structures. Whether government will succeed in this approach, only time will tell.
In the past, many family structures were implemented without a long term plan in mind or without taking into account the long term needs of the eventual beneficiaries. Several legislative changes have been made through the years and it is now more important than ever for such structures to be evaluated and updated with the help of skilled and experienced advisors to ensure that such structures will continue to function optimally in the future.
Tenk (FH) Loubser is a director of TLA Wealth and Advisory Services. view profile>
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