Treasury changes its mind on estate-duty exemption

In trying to encourage South Africans to save, the Treasury has realised that it has unintentionally opened a massive loophole in the country’s tax laws.

Accordingly, the concession proposed in Finance Minister Trevor Manuel’s February budget to exempt all forms of life insurance from estate duty has been scrapped before reaching the statute book.

Cecil Morden, the Treasury’s chief director of tax policy, told Parliament’s finance committee on Monday that life insurance often contains both a savings element and a risk element, which are hard to separate.

“In some quarters we were warned that you are opening here a significant avoidance problem. People could make their savings in one vehicle and then get it into their estate duty tax-free,” Morden said. “Although it was a well-intended proposal, the risks associated are just not worth it and therefore we are withdrawing it. The minister also concurs with that.”

The issue of pensions going into estate duty tax-free is still being considered, Morden said. He also agreed with Narend Sing, the finance spokesperson of the Inkatha Freedom Party, that it may be worth coming back to the idea later after further detailed consideration.


But he suggested that perhaps the fairest proposal all round would be to increase the general exemptions available on estates.

The Treasury has also rethought the budget proposal that withdrawals from retirement funds be subject to a simplified tax regime, which would allow a withdrawal to be taxed at the employee’s marginal rate with standard rebates, but only at half of the primary rebate.

Morden told the committee that the scheme would be complicated to administer, and would unduly disadvantage people who left their jobs after working for more than 10 years. There is also an anti-avoidance concern that arises if long-term funds are withdrawn immediately before retirement in order to escape having them put into a mandatory retirement annuity.

The revised proposal seeks to alleviate the pre-retirement taxation of longer-term savings without encouraging withdrawals immediately before retirement by linking the pre-retirement tax regime with the retirement lump-sum formula.

Accordingly, a similar lump-sum formula will be applied except that only 7,5% of the R300 000 exemption will apply to pre-retirement withdrawals.

The tax rate will increase after the 7,5% exemption to 18% up to R600 000 with a top rate of 36% at R900 000. The withdrawals will be taxed on a cumulative basis — monitored, Morden said, by the South African Revenue Service.

In calculating the tax liability on retirement, the accumulated pre-retirement withdrawals will be counted with the lump sum.

With the approval of the minister, the Treasury has also changed two other proposals.

One affects provisional tax payments. It follows the argument made during public hearings on the Revenue Laws Amendment Bills that it would be too harsh to exact a 20% penalty that would apply if the provisional payments fell short of 90% of the final tax bill. That has now been eased to 80%.

In addition, a measure that sought to amalgamate into one scheme measures aimed at preventing employees from disguising their status in order to avoid paying PAYE, or to obtain other tax benefits, has been altered because of the effect it would have on genuine “personal service providers”. — I-Net Bridge

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