BUDGET 2018 – INFLUENCE ON ESTATE PLANNING
SECTION 7C REVISITED – YET AGAIN

The purpose of this communication is to inform clients of certain tax increases and proposals that will have an effect on Estate and Financial Planning. Only those changes and proposals directly affecting Estate Planning will be dealt with.

At the end hereof we will briefly discuss Section 7C of the Act and the effect thereof on loans to companies where:

• at least 20% of the shares are held by a trust or a beneficiary of a trust; or
• at least 20% of the voting rights can be exercised by that trust or a beneficiary of that trust. (our emphasis)

1. Budget 2018

1.1General 

In general the 2018 Budget surprised most of us, if only in the sense that we expected an increase in Income Tax rates, as has been the norm in previous years. If this can be seen to indicate a realisation by Government that there is a limit to the amount of tax that can be collected from the so-called “rich”, it has to be welcomed.

1.2 Dividend Withholding Tax

The dividend withholding tax rate was increased by 5 percent to 20 percent in 2017 with effect from the 22nd of February 2017.

There were no subsequent changes to the dividend withholding tax rate.

1.3 Capital Gains Tax

The inclusion rates increased substantially in the 2016 Budget.

The rates remained unchanged for the 2018/2019 tax year.

1.3.1  Individuals/Special Trusts:

1. 1. • Inclusion rate:
        • 40%
      • Maximum effective rate:
        • 18%

1.3.2 Trusts:

1. 1. • Inclusion rate:
        • 80%
      • Effective rate:
        • 36%

1.3.3 Companies:

1. 1. • Inclusion rate:
        • 80%
      • Effective rate:
        • 22.4%

1.3.4 Annual exclusion and exclusion in the year of death:

1. 1. • Annual exclusion:
        • R 40 000
      • Exclusion in year of death:
        • R 300 000

1.4 Transfer Duty

No amendments to Transfer Duty rates.

1.5 Estate Duty

The Estate Duty rate was adjusted upwardly by 5% to 25% applicable to estates where the dutiable amount of the estate exceeds R 30 000 000.

The dutiable amount of an estate is determined by deducting the following from the assets and deemed assets in the estate:

1. 1. • Administration costs;
      • Liabilities;
      • All deductions allowed in the Estate Duty

The result of the amendment will be as follows:

• Dutiable amount up to R 30 000 000:  Rate 20%;
• Dutiable amount over and above R 30 000 000: Rate 20% on the first R 30 000 000 and 25% on the amount above R 30 000 000.

This amendment is according to one of the recommendations of the Davis Tax Committee (DTC) on Estate Duty. Notwithstanding the statement in the 2017 Budget, that the report of the DTC on Estate Duty will receive attention in the 2018 Budget, this is the only amendment which can be traced back to the DTC report on Estate Duty. This does not mean that other recommendations of the DTC will not be implemented at a later stage.

We seriously doubt whether this amendment will have much impact on the amount collected in respect of Estate Duty, as statistics, relied upon by the DTC, reflected that a minute percentage (4%) of estates exceed R 30 000 000.

The introduction of a 5% increase in the rate applicable to these estates will most definitely result in more aggressive tax and estate planning by taxpayers who can afford the best advisors. We will not be surprised to see a decrease in the 4% mentioned above.

1.6 Donations Tax

In order to bring the rate in line with the Estate Duty rate, the Donations Tax rate has been amended as follows:

• Donations up to R 30 000 000:              Rate 20%;
• Donations exceeding R 30 000 000:     Rate 25% on the amount above R 30 000 000.

It is hard to imagine why anybody would want to make donations exceeding R 30 000 000.

1.7 VAT

Effective as from the 1st of April 2018 the VAT rate has been increased by 1 percentage point to 15%.

For information on the effect of the increase and how to deal with the transition, we enclose, for your convenience, a link to the SARS website: http://bit.ly/2oqe09e

1.8 Official rate of interest

The so-called “official rate of interest” is used by SARS to quantify the fringe benefits of low-interest loans provided by employers to employees as well as the amount of a deemed donation in terms of Section 7C of the Act.

At present the rate is calculated by increasing the official repurchase (repo) rate by a 100 basis points (currently 7.75%). The prime rate is, on average, 2.5% above the official rate of interest. It is proposed to increase the “official rate of interest” to a level closer to the prime rate.

This might mean an increase of approximately 2% – 2.5%, which will have an effect on the deemed Donations Tax payable on interest free or low-interest loans in terms of Section 7C of the Act.

SECTION 7C REVISITED – YET AGAIN

Section 7C was amended on the 18th of December 2017 to include a loan, advance or credit that:

(a) a natural person; or

(b) at the instance of that person, a company in relation to which that person is a connected person in terms of paragraph (d)(iv) of the definition of connected person,

 directly or indirectly provides to—

(i) a trust in relation to which—

(aa) that person or company; or

(bb) any person that is a connected person in relation to the person or company referred to in item (aa),

is a connected person; or

(ii) a company, if at least 20 per cent of—

(aa) the equity shares in that company are held, directly or indirectly; or 

(bb) the voting rights in that company can be exercised,

by the trust referred to in subparagraph (i) or by a beneficiary of that trust. (our emphasis)

This amendment was the result of avoidance measures implemented by taxpayers to circumvent the provisions of section 7C by lending money to a company of which a trust held the shares.

Certain further technical amendments were introduced to provide for a loan to a company as envisaged in Section 7C(a)(ii) above. The provisions of this subsection are deemed to have come into operation on the 19th of July 2017.

It is important for clients and their advisors to take cognisance of the new amendments where loans are made to companies as envisaged in the subsection accentuated in red.

Future of trusts

We maintain that trusts still have a place in the Estate Planning environment. Choose your advisor carefully on the basis of:

1. 1. • Expertise and experience in the field;
      • Trustworthiness;
      • Ability to stay abreast of new developments affecting your estate

We will keep you up to date on further developments and the effect thereof on your estate plan.

GPJ van den Berg                                                         WC van der Merwe
B Civ Iuris, LLB                                                            BCom LLB, LLM
Head: Estate & Trust Division                                Associate
Delport van den Berg Inc.                                       Delport van den Berg Inc.
gert@delberg.co.za                                                     callie@delberg.co.za
T: +27 (12) 361 5001                                                    T: +27 (12) 361 5001