17 February 2010

Death, taxes and death taxes

We must pay taxes. And we must die. But for some unfortunate citizens death and taxes coincide.

In fact, when some taxpayers die their executor must account for more than one form of tax, namely, estate duty and capital gains tax (CGT). Generally speaking a person must account for estate duty when his net estate exceeds the amount of R3,5 million. Further, for CGT purposes, when a person dies he is deemed to have disposed of all his assets for proceeds equal to the market value.

In the 2010 Budget Tax Proposals, the National Treasury acknowledges that the imposition of both estate duty and CGT on death can be perceived as constituting double taxation. Interestingly, the Treasury notes that estate duty raises limited revenue, is cumbersome to administer and is not very efficient as "many wealthy individuals escape estate duty liability through trusts and other means". In the 2009/2010 fiscal year, the Treasury collected R740 million on account of estate duty (compared to R600 million, for instance, in respect of airport departure tax for the same period).

The Treasury then states that "taxes upon death will be reviewed". Precisely what the Treasury considers doing in this regard is not apparent. If the Treasury were to scrap estate duty it would be great news for taxpayers as it would simplify their estate planning significantly.

The estate duty regime was simplified last year with the introduction of the (awfully named) "portable spouse deduction" which, effectively, allows the surviving spouse to enjoy a R7 million abatement. The Treasury also recently scrapped stamp duty, another tax which provided little revenue, but was administratively burdensome.

It is always great when the Treasury scraps a tax. As the great economist, Milton Friedman, said: "I am favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible."

Ben Strauss, Director, Corporate and Commercial

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