Jennifer Jeanne Roeleveld

An argument for either excluding death as a capital gains tax event or abolishing estate duty

South Africa is one of the few countries in the world that imposes both estate duty and capital gains tax on the assets of a person on death. This paper presents an argument for the abolishment of estate duty in South Africa or, in the alternative, making the act of dying a non-taxable event for capital gains tax purposes. While certain political considerations may play a role, this paper also demonstrates, by referring to the recommendations of previous commissions of inquiry into the tax system of South Africa, that the imposition of both capital gains tax and estate duty on death currently has no basis as this was never a policy decision and not recommended by previous commissions. Estate Duty has existed from 1955 and since then the basis of taxation in South Africa changed from source to residence and in 2001 capital gains tax was introduced. The paper also demonstrates, by way of an example, what the impact is of levying the two forms of taxation simultaneously on the death of a person. In order to remove one of these taxes levied on the death of a taxpayer, certain sections of the Income Tax Act would have to be revised and are highlighted in the paper or, in the alternative, the Estate Duty Act would have to be repealed. A brief insight into what taxes are imposed by certain foreign jurisdictions on death is also provided in order to further substantiate the recommendation to abolish one of the two taxes on the death of a person.

A Commentary on SARS’ Proposed Fair Value Tax on Financial Instruments

On 5 July 2012 the South African National Treasury released its draft Taxation Laws Amendment Bill, which included the proposed insertion of section 24JB into the Income Tax Act. The proposed section will require all banks, company members of the JSE Securities Exchange (stockbrokers) and hedge funds to include in or deduct from their taxable income amounts in respect of financial assets and financial liabilities (as defined) according to the profit recognised on those instruments in terms of International Financial Reporting Standards. The effect will be to introduce a fair value tax on the financial instruments of those entities, within the scope of the proposed section. This constitutes a significant change from the current approach that is mostly realisation based. South Africa is not the first country to consider the introduction of a fair value tax on financial instruments, therefore there is precedent. However, both the timing and the approach of the proposal are possibly problematic. This paper discusses the theoretical tax and economic implications of this proposal and attempts to identify positive and negative potential outcomes. A number of unanswered questions are raised that should be addressed before such legislation can be effectively introduced in South Africa. Interview evidence obtained from tax forum meetings, as well as the tax department of one of the banks that would fall within the scope of this legislation, is used to augment the interpretation of this proposal The main findings are that the postulated benefits of the change are unlikely to be realised, that the proposed greater reliance on accounting figures can have unintended consequences and that taxpayers within the scope of the proposed section will lose the benefit of capital gains tax on certain items.