1. Types of tax
1.1 Inheritance tax
South Africa has an estate duty applicable on the death of an individual. This is provided for in the Estate Duty Act No. 45 of 1955. The estate duty applies to the net value (i.e., assets, less liabilities) of an individual’s estate when he or she dies. The value of assets disposed of during the course of winding up the estate, is the value to be used, and assets transferred to heirs are priced at market value on the date of death. The statute contains rules relating to deemed property and deemed valuations with respect to certain transactions.
Liability to the tax
The estate of a person who was ordinarily resident in South Africa on the date of his or her death, including the worldwide property of the deceased (subject to certain exclusions dealt with below) is included in the estate for duty purposes.
Specific inclusions in the dutiable estate of a deceased are contained in Section 3 of the Estate Duty Act. Particularly important are:
- Life interests (fiduciary, usufructuary or other similar interests in property) and rights to annuities held immediately prior to death.
- The amounts recoverable under life insurance policies in excess of any premiums that the beneficiary pays (an interest factor of 6% per annum to index the deduction escalates the premium).
Exceptions to this inclusion exists with respect to the policies for the benefit of a spouse or child under a registered pre-nuptial contract, business partners or shareholders who take out mutual survivorship policies and policies in which no relative is a beneficiary and the deceased didn’t pay any premiums.
- Gifts made by the deceased during his or her lifetime as a donation mortis causa, namely a donation executed in similar manner to a will and taking effect only on death.
- Property that the deceased had power of disposal over (i.e., under powers retained over a trust), immediately prior to his or her death.
1.2 Gift tax
Donations (gift) tax is applicable transfers of property and is in part V (sections 54 to 64) of the Income Tax Act No. 58 of 1962. The donations tax is levied on the amount or value of goods donated. The statute contains rules relating to deemed property and deemed valuations in respect of certain transactions. The first R100,000 of donations per annum is exempted.
Transactions liable to the tax
A donation is defined as any gratuitous disposal of property, including any gratuitous waiver or renunciation of a right. Furthermore, the Commissioner for the South African Revenue Service (SARS) is empowered, when he is of the opinion that any consideration paid for a disposal is not an adequate consideration, to deem the transaction to be a donation, the value of which is the fair value of the property, less the amount of the consideration actually paid.
1.3 Real estate transfer tax
Transfer duty is in the Transfer Duty Act No. 40 of 1949 and applies to the transfer of immoveable property. It does not apply to transfers of fixed property to heirs in an estate.
1.4 Endowment tax
There is no net endowment tax in South Africa.
1.5 Transfer duty
There is no transfer duty in South Africa (other than the duty referred to in Section 1.3).
1.6 Net wealth tax
There is no net wealth tax in South Africa.
1.7 Capital gains tax
Capital gains tax (CGT) is levied on death. This tax is in the Eighth Schedule to the Income Tax Act.
Transactions liable to the tax
CGT is charged upon the disposal of property, including deemed disposal by way of inheritance or legacy on death.
In the case of a deceased who was a resident on the date of his or her death, the deceased’s worldwide property is affected, subject to the terms of any comprehensive (income) tax treaty with another country. South Africa has entered into such treaties with 70 countries and is in negotiation or awaiting ratification with another 21.
In the case of a deceased who was not a resident on the date of death, only fixed property (including shares in certain property-rich companies) and assets of a South African permanent establishment are affected.
Valuation and calculation of capital gains
In normal taxable income, 33.33% of any capital gain is included and taxed as part of that income.
The proceeds of the deemed disposal on the date of death are equal to the open market value of the assets concerned (on the basis of a willing buyer and seller in the open market). Unlike the case of estate duty, the proceeds of any actual disposal of an asset during the course of winding up the estate are not taken into account as representing the value at date of death. Deducting the base cost of the asset from the deemed proceeds determines all the capital gain (or loss). Base cost is (broadly):
- In assets acquired on or after 1 October 2001, the expenditure that the deceased actually incurred in acquiring the asset and improving it (provided the improvements still exist at the time of death).
- In assets acquired prior to that date, the asset’s market value at that date. This is determined under a number of detailed rules that limit the recognition of certain losses and permit the elective use of a time apportionment base cost (TABC). The TABC essentially divides the economic gain across the period from acquisition to death and only the post-October 2001 growth or loss in value is brought to account.
Administration and future developments
It was anticipated that the estate duty might have been abolished by 2014, leaving only CGT applicable on death, and donations tax and CGT applicable to lifetime transfers.
All of the tax types mentioned are administered and collected by SARS, a federal body falling under the department of the Treasury and that the Commissioner for SARS manages. All tax assessments are subject to a tightly regulated objection and appeal process leading through specialized tax courts and on through the High Court to the Supreme (federal) Court of Appeal.
2. Who is liable?
Residence for estate duty purposes
A person is resident for purposes of the Estate Duty Act if he or she is ordinarily a resident in South Africa on the date of his or her death. A person’s ordinary residence is not defined, but generally denotes the location that is a person’s most settled and habitual residence or his or her real home. Generally, a person cannot be seen to be ordinarily resident in two places at once.
Residence and double-tax treaties
Special rules apply where the deceased was ordinarily resident in South Africa and also in another country that imposes an equivalent tax and with which South Africa has concluded a tax treaty. South Africa has concluded treaties affecting estate duty with Sweden, the UK and the US. The provisions of these treaties vary substantially and are beyond the scope of this article. Generally, however, they grant the priority right to tax to one state and require the other state to grant a credit for tax paid to the priority state. Certain assets may be taxable only in one state.
In the estate of a person who was not ordinarily resident in South Africa for estate-duty purposes on the date of his or her death, only South African-situated property is included in the estate.
Residence for donations tax purposes
Part V of the Income Tax Act levies donations tax upon donations that any person resident in South Africa makes. For this purpose, a resident is a person who is ordinarily resident (see above) or, if not ordinarily resident, a person who qualifies as resident under the days presence test. This test essentially deems a person to be resident in South Africa from the commencement of the sixth tax year in which the following criteria are fulfilled, namely that the person:
- Has been physically present in South Africa for more than 91 days in each of the five prior years and the current (qualifying) year.
- Has been physically present in South Africa for 915 days cumulatively in the five prior years (which is an average of 183 days per annum).
For this purpose, a day includes part of a day, but transit passage through South Africa is not included, provided that the individual does not enter South Africa through an immigration control point. A person who is seen as nonresident in terms of the tie breaker clause of an income tax treaty will, notwithstanding his or her fulfillment of the above rules, still be a nonresident. A number of subsidiary rules within the days of presence test, which affect the commencement and termination of residence, are beyond the scope of this note.
Nonresidents are not subject to donations tax irrespective of whether the property concerned is located in South Africa or that the beneficiary of the donation is a South African resident.
Residence for CGT purposes
The test of residence is the same for CGT as for donations tax above.
Domicile is not a determinant of liability for any of the taxes discussed in this guide.
The rate of estate duty is 20% on the dutiable net assets of the estate. A basic rebate of R3.5 million is deductible from the net assets of the estate in determining the dutiable amount. If any part of the basic rebate is unused at the time of death of the first spouse, it is carried over and added to the basic rebate deductible on the death of the surviving spouse. Where spouses’ deaths are simultaneous, only the larger unused amount (if any) of the two estates is carried over to the other estate. The duty is due on assessment following the Master of the High Court’s lodgment and acceptance of the estate accounts filed under the Administration of Estates Act. Interest on the duty finally assessed is payable from a date six months after the date of death.
Donations (gift) tax
Donations tax is payable at the rate of 20% on the aggregate value of donations made during a year, subject to a basic rebate against the aggregate amount of R100,000 per annum.
Capital gains tax
CGT is charged at the marginal rate of income tax applicable to the deceased’s income tax return on 33% of the net gain from the deemed disposal of assets. Since the maximum marginal rate of tax for an individual is 40%, the effective rate of tax for an individual is generally 13.3% on the net gain.
4. Exemptions and reliefs
Certain assets are excluded from an estate for duty purposes and certain expenditures and liabilities are deductible in determining the net dutiable value.
4.1 Excluded assets
Exemptions apply as follows:
- In the case of a resident, any property or rights in or to properties situated outside South Africa if acquired:
- Before he or she became ordinarily resident in South Africa for the first time.
- After he or she became ordinarily resident for the first time, through a donation or an inheritance, from a person who was not resident at the time of the gift or death.
- Out of the profits or proceeds of any such property.
- Any life interest held on the date of death that a predeceased spouse created in respect of which no deduction had been allowed to that predeceased spouse.
- Lump-sum benefits payable on death by retirement funds.
- In the case of persons not ordinarily resident in South Africa on the date of death:
- Any movable or immovable property situated outside South Africa.
- Any debt or right of action not enforceable in South Africa and any intangible rights not enforceable in South Africa.
Deductions allowed in determining the dutiable value of an estate are:
- Funeral and other estate expenses.
- All debts due to South African creditors on the date of death that have been discharged from property included in the estate.
- Debts due to nonresident creditors that exceed the value of foreign assets and that have been discharged from the South African estate.
- Bequests to public benefit organizations and the state.
- Bequests to a surviving spouse, but excluding any property bequeathed subject to a requirement that it be disposed of to another person, or bequeathed into a discretionary trust with other potential beneficiaries.
Donations (gift) tax Exemptions and reliefs
The only material exemptions from donations tax are:
- Donations cancelled within six months from the date they take effect.
- Donations of property situated outside South Africa and that the donor acquired:
- Before the donor became a resident in South Africa for the first time.
- Through an inheritance or a donation from a person who was not resident at the time of donation or death.
- Out of funds derived from the above events or out of revenues from property referred to.
- A trust’s distributions (i.e., the trustees are not subject to donations tax on amounts or assets distributed under and in pursuance of that trust).
- Donations to public benefit institutions or the state.
Capital gains tax Exemptions and reliefs
The values of assets bequeathed to the surviving spouse of the deceased and of retirement fund interests and certain life assurance policies are excluded from the calculation of the net gain.
The values of the assets on the date of death, which are included in the calculation of the net gain, become the base cost of the asset concerned in the hands of the heir or legatee (or in some cases the estate), for purposes of any subsequent disposal. Gains derived from assets that the estate disposed during the process of liquidation will be brought to account in the estate as a separate (individual) taxpayer.
5. Filing procedures
Generally, payment is due within 30 days of the assessment issued by the Commissioner for SARS after lodgment of interim
or final estate accounts with the Master of the High Court under the Administration of Estates Act. However, irrespective of
the date of the assessment, interest will be payable in respect to unpaid duty finally assessed at the rate of 6% commencing
12 months after the date of death up to the date of eventual payment, unless it is shown that the delay was in no way due to any
default by the executor of the estate or any other person liable for duty.
The duty is generally payable by the executor of the estate, but where deemed property is included in the estate (such as insurance policies or life interests ceasing), the person becoming entitled to the proceeds of the policy or to the property on which the life interest was held, is liable to reimburse the executor.
Donations tax is due three months after each donation made, which exceeds the cumulative R100,000 relief. Donations must be reported on Form IT144 filed with SARS.
The person liable for payment of the tax is the donor, provided the donor does not pay the tax within the period prescribed, the donor and donee are jointly and severally liable.
Capital gains tax
The CGT liability is computed together with the deceased’s income tax liability up to the date of death and is assessed by SARS as a component of the winding up process of the deceased’s estate, generally within about nine months after death.
6. Assessments and valuations
Assets are valued for estate duty purposes at their fair market value (FMV) as confirmed by:
- Published market values in the case of listed equities.
- An auditor’s valuation in the case of shares in private companies.
- Sworn appraisements in the case of fixed property and other assets unless they are clearly of no commercial value or if the
estate clearly falls below the basic rebate threshold.
- Sale proceeds in the case of assets disposed of during the course of winding up the estate.
In the case of income rights ceasing on death, the value is determined by capitalizing the income yield over the life expectancy of the persons who inherit the right or the outright ownership of the asset concerned.
Essentially the same procedures are used for donations tax as for estate duty.
Capital gains tax
The open market value on date of death is the basis for the calculation of a gain on death.
7. Trusts, foundations and private purpose funds
Trusts are often used in South Africa as a means of protecting assets from commercial or familial risk or to limit the incidence of estate duty. Growth assets sold to a trust during the lifetime of an individual, with the purchase price left outstanding on a loan account are removed from the estate of the individual for estate duty purposes. In such a case, the only asset in the deceased’s hands on the date of death will be the balance of the loan account then outstanding. No deemed interest charge arises either for income tax purposes or for estate duty purposes if the loan bears a rate below a normal market rate of interest. However, for as long as the loan remains outstanding, any income the trust earned from the assets concerned may be attributed to the creditor for income tax purposes, if not distributed during the tax year to a beneficiary of the trust (other than a minor child of the creditor).
Trusts in South Africa may be established inter vivos or by will. The South African inter vivos trust is a creation of South African common law (i.e., Roman-Dutch law), with modifications introduced from Anglo-Saxon common law. The South African trust is a bilateral agreement between the founder and the trustees, so that the rights, powers and duties of the founder, the trustees and the beneficiaries are derived ex contractu. It is now settled law that the terms of an inter vivos trust may be amended via agreement between the founder and the trustees and any beneficiaries who may have accepted benefits up to that date. Amendment after the death of the founder will depend upon the terms of the trust deed. A testamentary trust may not be amended otherwise than by court order. Any renunciation of a vested right under a trust in the course of such an amendment might, of course, give rise to a donations tax liability.
Generally, the form of a South African trust and its effect is extremely similar to that of an Anglo-Saxon trust. Vested rights, discretionary rights and interests in possession (usufructuary rights) are commonly created. There is no rule against perpetuities and on termination of a trust or on a pre-termination distribution of capital, no estate duty liability arises. However, distributions of assets from trusts give rise to disposals of assets for CGT purposes, with the CGT generally being assessed in the hands of the beneficiary who becomes entitled to the asset or the gain concerned.
South Africa is not a signatory to the Hague convention on the law applicable to trusts.
Foundations, private purpose funds and other structures These entities are not formally recognized in South African law.
There are no specific rules in South Africa regarding estate taxes.
9. Life insurance
There are no specific rules in South Africa other than those referred to in Section 6 discussion on estate duty regarding estate taxes.
10. Civil law on succession
10.1 Estate planning
There are no specific rules in South Africa regarding estate taxes.
10.2 Laws of succession
Succession and probate
The Master of the High Court appointed executor (usually) winds up the deceased person’s estate and administers the will of the deceased on the application. The executor collects the assets and determines and pays the debts of the deceased and the estate duty. He draws up a liquidation and distribution account noting the division of the net estate among the heirs and legatees specified in the will or under the law of intestacy, and after the Master of the High Court’s inspection, this is advertised for objection. Thereafter, the assets are distributed. This process generally takes between nine months and two years to complete depending on complexity.
10.3 Forced heirship
There are no forced heirship rules in South Africa.
10.4 Matrimonial regimes and civil partnerships
South Africa recognizes three matrimonial property laws:
- Community of property (which is now largely obsolete except in certain conservative or rural communities).
- Complete separation of the estates of spouses because of a prenuptial (or, occasionally, postnuptial) contract.
- A presumptive accrual regime whereby assets brought in to the estate by the spouses are kept separate but accruals to those assets are shared in common — together with variations of that theme by prenuptial or postnuptial contract.
Polygamous marriages are legal and not uncommon in traditional African societies. Special rules apply to such marriages.
If there is no valid will at death, then the deceased’s estate passes under predetermined rules known as intestate succession.
The rules of intestate succession are complex but, broadly speaking, provide that:
- In the case of a deceased person who leaves only a surviving spouse, the spouse inherits the entire estate.
- In the case of a deceased person who leaves descendants and a surviving spouse, the children and the spouse share equally (descendants of predeceased children inheriting by representation).
- If no spouse or descendants survive, the parents, if any, inherit, and thereafter, the deceased’s siblings or their children by representation.
A will is a legal document that regulates an individual’s estate after death. South Africa will normally accept the formal validity of a will drawn up under the laws of the deceased’s domicile at the time of making the will, but will require certification of the acceptance of the will by the probate authority in the country in which the will is first registered after death. The Master of the High Court of South Africa grants the probate for a will for the division in which the deceased was a resident on the date of death or, in the case of a nonresident, where assets are situated.
11. Estate tax treaties
South Africa has concluded treaties affecting estate duty with Sweden, the UK and the US. The provisions of these treaties vary substantially and are beyond the scope of this article.
Comprehensive income tax treaties have been entered into with the following jurisdictions: Algeria, Australia, Austria, Belarus, Belgium, Botswana, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, former Czech Republic, Denmark, Egypt, Ethiopia, Finland, France, Germany, Ghana, Greece, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Kuwait, Lesotho, Luxembourg, Malawi, Malaysia, Malta, Mauritius, Mexico, Mozambique, Namibia, Netherlands, New Zealand, Nigeria, Norway, Oman, Pakistan, Poland, Portugal, Romania, Russian Federation, Rwanda, Saudi Arabia, Seychelles, Singapore, Slovak Republic, South Korea, Spain, Swaziland, Sweden, Switzerland, Taiwan, Tanzania, Thailand, Tunisia, Turkey, Uganda, Ukraine, United Kingdom, United States, Zambia and Zimbabwe.