Chapter 4 – Estate Duty

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Estate duty notes have been arranged into the following headings:

[spoiler title=”Introduction” open=”0″ style=”1″]Estate duty is levied in terms of the Estate Duty Act, 1955, Act 45 of 1955 (the Act) and constitutes a tax which has been levied at a rate of 20% on deceased estates. Under current legislation it is levied on the “dutiable amount of the estate” exceeding R3 500 000.

The dutiable amount of a deceased estate represents the sum of all property of the deceased and property which is deemed to be property of the deceased as at date of death, less all deductions provided for in section 4 and 4A of the Act.

In general the executor of the deceased estate is liable to pay the estate duty. However, as the estate also comprises property deemed to be property of the deceased of which the proceeds are not for the benefit of the estate as such, the Act specifies that the pro rata estate duty payable upon deemed property is payable by the beneficiary thereof.

When is estate duty payable:
• If the estate duty assessment is issued within 1 year after date of death, the estate duty must be paid within 30 days from the date of assessment.
• If the estate duty assessment is not issued within the 1 year period, payment must be made within 1 year after date of death to avoid the accumulation of interest.

Under which circumstance will extension of time for payment be granted?
If the executor is not in a position to finalise the administration process of the deceased estate within 1 year after date of death, he may request the Commissioner to grant extension of time to pay the estate duty free of interest. The Commissioner will consider such a request on condition that:
• a written request is forwarded for consideration prior to the expiration of the 1-year period after date of death; and
• payment of a reasonable deposit against the duty is made prior to the expiration of the said period.

What is the meaning of a “fideicommissum”?
A fideicommissum is the grant of property to a person (the fiduciary) subject to the condition that upon his death, or the happening of an event (e.g. when he becomes 40) the property must devolve upon another person (the fideicommissary).

What is the meaning of a “usufruct”?
A usufruct is the right to enjoy the use and fruits of property, of which the ownership vests in another, without diminishing the property itself. Usufructuary: The person who has the right and enjoyment of the property subject to the usufruct. Bare dominium holder: The person in whose name the property is been registered.
[/spoiler] [spoiler title=”History of estate duty” open=”0″ style=”1″]Death duties were first imposed in South Africa in 1864 when the Successions
Duty Act (5/1864) was placed on the Statute book (Kahn, 1946:81). The
imposition of death duties was justified by the “social obligation” or the “benefit
and privilege” theory. The theory is based on the idea that the state provides
protection for property as well as law and order, while a person builds up his
financial reserves. The state allows freedom of bequest and therefore an heir
or legatee can benefit from a deceased estate. Since the entire system of
private property and the ability to pass the property on death to heirs or
legatees is subject to a state-supported institution, there is justification for
levying a tax that would compensate for the services it provided while the
estate was being developed (Kahn, 1946:87).

According to Kahn (1946:88) “[t]he influence of death duties on capital
accumulation was not much more unfavourable than other taxes, and this
slight disadvantage was more than counterbalanced by its social effects”.
It is also submitted that death duties are payable wholly “out of capital” and,
according to Kahn (1946:87), it may be concluded that “[i]t is fallacious to
distinguish it (Estate Duty) from the Income Tax, as coming out of the nation’s
capital. Although the duty comes out of the capital of individual estates, it is
provided out of the national income no less than the Income Tax; both forms
of tax alike prevent a certain amount of new capital from coming into being,
the ultimate effect depending very largely on the direction of Government
expenditure”.

Thus, estate duty, previously known as succession duty, is a form of capital
transfer tax. The term ’capital transfer tax‘ refers to a taxation of wealth (Katz
Commission, 1997). The Cape first imposed succession and inheritance tax in
1864. Two types of death duties were levied:
• estate duty – which was levied on the entire deceased estate; and
• succession duty – which was levied only on portions of the estate that
were transmitted to the heirs and legatees (Kahn, 1946:81).
At the end of the nineteenth century, succession and inheritance tax was the
more common form of death duty, and the Cape imposed only this type.

Transvaal levied estate duty, while the Cape, Natal and Orange Free State
levied succession duty. The four provinces levied death duties at different
rates. There was no justification for levying these different rates and therefore
a Union-wide measure was introduced which was called the Death Duties Act
(29/1922) (hereinafter referred to as the “Death Duties Act”). The Death
Duties Act came into force in 1922 and dealt with all death duties payable in
South Africa in its entirety. In 1922 the rates ranged from 0,5% on the first
£2 000, to 17% on amounts exceeding £1 000 000. The abatement was
raised from £1 000 in 1922 to £15 000 in 1934 (Kahn,1946:85).

THE DEVELOPMENT OF ESTATE DUTY OVER THE YEARS
When enforcement of the Estate Duty Act began in 1955, estate duty rates
ranged from 10% on the first R50 000 to 35% of the portion in excess of
R400 000 on the dutiable estate. An estate also qualified for estate duty
threshold abatements. The abatements were used to alleviate an estate from
any estate duty liability. If a deceased was survived by a spouse and/or
children the estate qualified for personal abatements (Silke & Stein, 1984:1,
18).

From 1 April 1986 deceased estates were subject to estate duty at a rate of
10% on the first R100 000 and 3% for every additional R100 000 of the estate
value which amounted to 35% of the values in excess of R800 000 (Olivier &
Van den Berg, 1991:41; Victor & King, 2008:291). On 16 March 1988 it was
announced that all personal abatements were being abolished and replaced
with a single abatement amount of R1 000 000. Estate duty was then levied at
a rate of 15% on the dutiable amount of the estate (Olivier & Van den Berg,
1991:43). On 14 March 1996 the rate of levying estate duty increased to 25%,
and on 1 October 2001 it was reduced to 20%. CGT was introduced on
1 October 2001 and the estate duty rate was reduced as a result of the
implementation of CGT (Victor & King, 2008:291).

Currently estate duty is levied at a rate of 20% on the dutiable amount of the
estate (First Schedule of the Estate Duty Act; Davis et al., 1998:2-5). In 2001
the rebate amount increased from R1 000 000 to R1 500 000, and in 2006 it
increased again from R1 500 000 to R2 500 000. Since 2007 the rebate
amount in terms of section 4A has been R3 500 000 (section 4A of the Estate
Duty Act; Victor & King, 2008:291).

Section 4(2)(2) of the Estate Duty Act reads as follows:
“Estate duty shall be charged upon the dutiable amount of the estate
calculated in accordance with the provisions of this Act, and shall be
levied at the rate set out in the First Schedule.”
The dutiable amount is “determined by deducting from the net value of the
estate, as determined in accordance with section 4, an amount of R3 500 000”
(section 4A of the Estate Duty Act).

To determine the net value of an estate, allowable deductions as set out in
section 4 of the Estate Duty Act should be deducted from the value of the
property and deemed property as set out in section 3 of the Estate Duty Act
(section 4 of the Estate Duty Act).

When compiling an estate plan it is of utmost importance to take the type of
marital regime of the resident into consideration as the different marital
regimes impact the amount of estate duty and CGT payable by the deceased
estate.

Adapted from Bornman C dissertation on Estate planning: The impact of estate duty and capital gains tax on offshore assets
[/spoiler] [spoiler title=”General rules for taxation of estates” open=”0″ style=”1″]A deceased person cannot be a taxpayer. All income received or accrued prior to his death will be
taxable with the executor or administrator acting as the deceased’s representative taxpayer. From
the date of death of a person until the date of confirmation of the liquidation and distribution account
when the assets are either handed over to the heirs or delivered to the trustee of a trust estate, a
new taxable entity comes into existence – the Estate. Income, which accrues to the estate after the
death of the deceased but prior to the distribution of the assets to the beneficiaries, is dealt with in
section 25 of the Income Tax Act.

If the income received by the estate can be specifically identified as relating to an asset which will, in
terms of the will or the laws of intestate succession, be distributed to an ascertainable beneficiary,
then that income will be subject to tax in the hands of that beneficiary except in circumstances where
the corpus (capital) or portion of the corpus of the estate has to be administered by a trustee.
Whether such income is taxable in the hands of the trust or the beneficiary will depend on the terms
of the trust provisions.

For example, if there is no vesting of the income in the hands of the beneficiary, such income is
taxed in the hands of the trust. Income of the estate which cannot be identified with any particular
beneficiary, is taxed in the hands of the estate, which is regarded for tax purposes as a trust. The
income of a trust is taxed at a flat rate of 40%.

Income from an estate which is taxed in the hands of heirs or legatees, retains its identity (conduit
pipe principle).
[/spoiler] [spoiler title=”Calculation of the dutiable amount” open=”0″ style=”1″]Click here Estate duty example calculation[/spoiler] [spoiler title=”Property” open=”0″ style=”1″]What Constitutes “Property of the Deceased”?
Property is comprehensively defined and includes amongst others:
• All assets of the deceased (movable and immovable, corporeal and incorporeal).
• All rights to property such as a fiduciary, usufructuary or other like interest in property.
• Any right in or to an annuity.
• If the deceased was ordinarily resident in SA, his/her foreign property is also subject to estate duty.[/spoiler] [spoiler title=”Property deemed to be property” open=”0″ style=”1″]What is the Meaning of “Deemed Property of the Deceased”?
Property which is deemed in terms of the Act to be part of the deceased’s estate for estate duty includes the following:
• The amount due and recoverable under a policy of insurance on the life of the deceased, irrespective of whether such proceeds are paid to the estate or to a beneficiary.
• Lump sum payments paid by a pension / provident / retirement fund which are due and payable as a result of the death of the deceased. This section has been repealed with regard to persons who dies or died after 1 January 2009.
• The right to a claim under the accrual system in terms of the Matrimonial Property Act, 1984.
• Any donation received under a “donatio mortis causa” and also a donation in terms of which the donee did not obtain any benefit thereunder until the death of the donor.
• Any property which the deceased was competent to dispose of for his own benefit or for the benefit of his estate immediately prior to his death.[/spoiler] [spoiler title=”Allowable deductions” open=”0″ style=”1″]General deductions to which a deceased estate is entitled The deductions as set out in section 4 of the Act, comprise amongst others, the following:
• Funeral, tombstone and deathbed expenses.
• Debts of the deceased as at date of death.
• Administration costs incurred in the winding up of the estate.
• The accrual claim against the estate in terms of the Matrimonial Property Act, 1984.
• Bequests to “public benefit organisations” as approved by SARS.
• All property included in the estate which accrues to the surviving spouse.[/spoiler]

Other rebates

Apportionment of estate duty

Marriage in community of property

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