01 - Estate Duty Act

Question 1

Who does the Estate Duty Act of 1955 apply to?

Answer 1

• Applies to any person who:
  
  • dies ordinarily resident in the RSA
  • leaves assets in South Africa.
• Estate duty is calculated on the “dutiable amount”.

Calculating dutiable amount

• Step 1 - Determine value of property
• Step 2 - Determine value of deemed property
• Total value of estate - step 1 + step 2
• Step 3 - Reduce gross value by alloable deductions
• Net value of estate
• Step 4 - Reduce net value by section 4A abatement
• Step 5 - Equals Dutiable amount
• Step 6 - Estate duty = dutiable amount x 20%
• Step 7 - Less specific rebates (if applicable)

Question 2

What constitutes an estate?

(S3(1))

Answer 2

• Property of the deceased person at the date of his/her death.
• All property which in accordance with the Act is deemed to be property of the deceased.
• We have “property” and “deemed property”
• This includes property wherever situated (later more about this).

Question 3

What is the defintion of “property”?

Answer 3

“Property” means

any right in or to property (movable, immovable corporeal or incorporeal) and includes

• any fiduciary,
• usufructuary, or
• other like interest in property (including a right to an annuity charged upon property)

held by the deceased immediately prior to his death

Reference to EDA

3. What constitutes an estate.
   (1) For the purposes of this Act the estate of any person shall consist of

• all property of that person as at the date of his death
• and of all property which in accordance with this Act is deemed to be property of that person at that date.

Question 4

What are some practical examples of “property” in the context of estates?

Answer 4

• Ownership in property (house, car, shares, cash etc.)
•  A fiduciary interest enjoyed by the deceased
•  A usufructuary interest enjoyed by the deceased
•  Any other like interest in property (eg habitatio)
•  Certain annuities (discussed later)

Reference to EDA

(2) “Property” means any right in or to property, movable or immovable, corporeal or incorporeal, and includes—

• (a) any fiduciary, usufructuary or other like interest in property (including a right to an annuity charged upon property) held by the deceased immediately prior to his death;
• (b) any right to an annuity (other than a right to an annuity charged upon any property) enjoyed by the deceased immediately prior to his death which accrued to some other person on the death of the deceased,

Question 5

How is property valued in terms of the EDA?

(Valuations)

Answer 5

Section 5 – Value of property

Methods of valuations for different types of property and deemed property

• Realised property
• Unrealised property
  
  •  farm property (70%)
  •  shares in unlisted companies
• Fiduciary, usufructuary and other like interests
• Annuities
• Property the value of which is reduced because of conditions imposed by any person

Reference to Act

5. Determination of value of property.
   (1) The value of any property for the purposes of the inclusion thereof in the estate of any person in terms of section 3 or the deduction thereof in terms of section 4, determined as at the date of death of that person, shall be—
   a) in the case of property, other than such property as is referred to in paragraph (f)(bis) or the proviso to paragraph (g), disposed of by a purchase and sale which in the opinion of the Commissioner is a bona fide purchase and sale in the course of the liquidation of the estate of the deceased, the price realized by such sale;

Question 6

What is the definition realised property?

Answer 6

Section 5(1)(a)

a) in the case of property, other than such property as is referred to in paragraph (f)(bis) or the proviso to paragraph (g), disposed of by a purchase and sale which in the opinion of the Commissioner is a bona fide purchase and sale in the course of the liquidation of the estate of the deceased, the price realized by such sale;

• In the opinion of the Commissioner disposed of by bona fide purchase and sale.
• In the course of the liquidation of the estate.
  
  • Value is the price realised by the sale.
  • ​Does not apply in respect of shares not quoted on a recognised stock exchange.

Bona Fide

• genuine; real
• made in good faith without fraud or deceit

Unlisted shares

• value = market value not sale value
  
  • Other property would be valued at sale value even though market value is higher

Farm property

• Farm property sold = value is proceeds of sale
• Farm property not sold = value is 70% of market value

Question 7

What is the definition of ordinarily resident?

Answer 7

• A question of fact.
• Requires some degree of continuance.
• Person with no place of abode in SA and who only visited SA occasionally cannot be considered to be ordinarily resident in SA.
• Person who during his life maintained a home in SA and occupied it regularly.

Question 8

How is foreign property treated?

(Ordinarily resident vs. Not ordinarily resident)

Answer 8

Ordinarily resident in SA

• Property wherever situated included as property.

Not ordinarily resident in SA

• Section 3(2) (c) to (h) exclude certain property and “deemed property” not situated in SA from PROPERTY in cases where the deceased was not ordinarily resident in SA at the time of his death.
• The effect is that the estate of a deceased not ordinarily resident in SA will consist only of property (including fiduciary, usufructuary interests) situated in SA.

Question 9

What does the EDA say about double taxation agreements?

Answer 9

Section 26(1) of the Act

• National executive can enter into an agreement
• with any other country
• to prevent, mitigate and discontinue
• the estate duty in respect of the same property
• or for the rendering of reciprocal assistance
• in the administration and collection of estate duty

RSA have entered into agreements with many countries

Question 10

What does the EDA say about Marriage in community of property?

Answer 10

• Only one-half of the joint estate owned by deceased
• Certain assets excluded (discussed later)

Question 11

What is the defintion of a fiduciary interest?

Answer 11

From Institutes of GAIUS

Be though Lucius Titius my heir. I request and beg thee, Lucius Titius, as soon as thou art able to enter upon my inheritance, to render and make it over to Gaius Seius.

• Certain persons could not inherit from a testator.
• Lucius Titius becomes owner of the property.
• Gaius will only acquire a right on the death of Lucius.
• He only has a “spes” prior to that.

Question 12

What is Bare Dominium?

Answer 12

Definition

Valuation of bare dominium held by deceased

• BD = FMV minus Usufruct

Reference to EDA

(f) in the case of a right of ownership in any movable or immovable property which is subject to a usufructuary or other like interest in favour of any person, the amount by which the fair market value of the full ownership of such property exceeds the value of such interest, determined—
* (i) in the case of a usufructuary interest, by capitalizing at twelve per cent. the annual value of the right of enjoyment of the property subject to such usufructuary interest over the expectation of life of the person entitled to such interest, or if such right of enjoyment is to be held for a lesser period than the life of such person, over such lesser period;

Question 13

How does the EDA distinguish between different types of annuity?

Answer 13

Annuities

• Annuity charged upon property
• Annuity NOT charged upon property

Annuity charged upon property

This is an annuity usually payable out of the income of a specific property or a fund.

• An annuity charged upon property enjoyed by a deceased immediately prior to his death
• is property in his estate irrespective of whether the annuity payment ceases
• or whether it becomes payable to some other person on the death of the annuitant (section 3 (2) (a)).

Annuity not charged upon property

• An annuity which is not charged upon property
• is only property in the estate of the annuitant
• if on the death of the annuitant it accrues to some other person.

Question 14

What does the EDA say about life insurance?

Answer 14

Life insurance – Section 3(3)(a)

Deemed property

• An amount due and recoverable
• Policy of insurance (life policy as defined in section 1 of the Long-Term Insurance Act)
• On the life of the deceased
• “Domestic policy” as defined in section 1 of the Estate Duty Act (if not a domestic policy it is “property”)

Requirements

1. Ownership of the policy is not a requirement
2. The policy must have been on the life of the deceased
3. If the deceased owned a policy on some other person’s life it will form “property” in his estate
4. It is not a requirement that the policy must have been solely on the life of the deceased.

Notes

• On the life of the deceased
  
  • Death must be the contingency upon which the amount becomes due.
• Amount due and recoverable
  
  • If the amount is fixed or ascertainable, there is no problem.
  • If the benefit is payable in the form of an annuity and the annuity is only payable if the annuitant survives the date on which each annuity falls due, one can argue that the term “amount due and recoverable” is not wide enough to include such an annuity.
  • HOWEVER, section 5(1)(d)bis of the ED Act contains a valuation provision for any annuity to which the provisions of section 3(3)(a) or (a) bis apply. This provision is not covered here. Read it.

Question 15

To what extent is life insurance deemed to be property?

Answer 15

• It is not the amount due and recoverable that is deemed to be property,
• but so much of that amount as exceeds any consideration to acquire the policy and also any premiums plus 6% compound interest,
• paid by the person who is entitled to recover the policy proceeds.
• In the case of a marriage in community of property one must deduct one half of the premiums paid by the joint estate.

Question 16

What life insurance policies are not deemed to be property?

Answer 16

• Payable to child or spouse of deceased under duly registered ante- or postnuptial contract – sec 3(3)(a)(i)
• “Buy-and-sell” policies - sec 3(3)(a)(iA)
• Policies not taken out by or at the instance of the deceased ‘key person policies” - . sec 3(3)(a)(ii)

Question 17

What are the requirements for key-man policies to not be deemed as property?

Answer 17

Section 3(3)(a) excludes a policy on the life of a deceased person if the CSARS is satisfied that:

• (i) the policy was not taken out by or at the instance of the deceased;
• (ii) no premium on the policy was paid or borne by the deceased; and
• (iii) no amount due and recoverable under the policy has been or will be paid into the estate of the deceased.
• (iv) no such amount has been or will be paid to, or utilised for the benefit of any relative of the deceased or any person who was wholly or partly dependent for his maintenance upon the deceased, or any family company which was at any time a family company in relation to the deceased

All 4 requirements must be met.

At the instance – request or suggestion.

Not at instance of deceased if the proposer would not have taken out the policy but for the request of the life insured.

Question 18

What are other types of deemed property?

Answer 18

1. Donations exempt from donations tax - sec 3(3)(b)
2. Accrual claim - sec 3(3)(cA)
3. Property of which the deceased was competent to dispose of section 3(3)(d)

Note

• Section 3(3)(a)bis was deleted with effect from1 January 2009.
• Section 3(2) was also amended to exclude retirement fund death benefits from the definition of “property”. This is effective from the same date.

Question 19

What deductions are allowed according to the EDA?

(4a to 4g)

Answer 19

• Section 4(a)
  
  • Funeral, tombstone and deathbed expenses which SARS considers fair and reasonable.
• Section 4(b)
  
  • Debts due in SA discharged from property included in the estate.
• Section 4(c)
  
  • Master’s fee maximum R600.
  • Executor’s remuneration.
  • Valuation expenses etc.
• Section 4(e)
  
  • Foreign property is included as property.
  • If deceased is “ordinarily resident” in SA all property situated all over the world is property for estate duty purposes.
  • ​If deceased is not ordinarily resident in SA, then only property situated in SA is included as property
  • Deduction – value of foreign property acquired by the deceased
    
    • Before he became a resident in SA for the first time.
    • After he became a resident of SA for the first time by
      
      • (i) donation by donor who at that time was not ordinarily resident in SA
      • (ii) inheritance from person who at date of his death was not ordinarily resident in SA
      • ​(iii) out of profits or proceeds of any suchproperty.
• Section 4(f)
  
  • ​Debts due by deceased to persons ordinarily resident outside SA is deductible,
  • but only to the extent that the amount of the debt exceeds the value of assets of the deceased outside SA and not included for estate duty in SA.
• Section 4(g)
  
  • ​Deduction – the value of a limited interest included as property of the deceased by virtue of a donation to him by a person to whom the right of enjoyment of the property accrues.
  • Basically if the usufruct goes back to person who donated it to the deceased.

Question 20

What are deductions allowed by the EDA?

(4h to 4q)

Answer 20

• Section 4(h)
  
  • Deduction – Bequest to a PBO is deductible.
• Section 4(i)
  
  • The amount by which the value of any property included in the estate has been enhanced by any improvements made to the property
    
    • (i) at the expense of the person to whom the property accrues on the death of the deceased, and
    • (ii) during the lifetime of the deceased and with his consent.
• Section 4(j)
  
  • Deduction – This deduction is similar to section 4(i), but the value of a limited interest is enhanced because of the improvement.
• Section 4(lA)
  
  • Deduction – Accrual claim against estate under section 3 of the Matrimonial Property Act by the surviving spouse of the deceased is deductible.
• Section 4(m)
  
  • The value of a usufructuary or other like interest in property (also an annuity charged upon property) if
    
    • (i) such interest was created by a predeceased spouse of the deceased, and
    • (ii) the property over which such limited interest was created formed part of the estate of the predeceased spouse, and
    • (iii) no deduction was ALLOWED in respect of the value of such interest or right in the estate of the predeceased spouse [section 4(q) deduction].
• Section 4(p)
  
  • Deduction – So much of the value of property deemed to be property of the deceased as has been taken into account in the determination of the value of company shares (or interest in CC) included as property of the deceased.
• Section 4(q)
  
  • Property that accrues to the surviving spouse is deductible
  • The property must have been included in the estate of the deceased
  • The deduction must be reduced by so much of any amount that the surviving spouse is required in terms of the Will to dispose of to any other person or trust.
  • No deduction is allowed in respect of property that accrues to a trust established by the deceased for the benefit of the surviving spouse, if the trustee of such trust has a discretion to allocate such property or any income there from to any person other than the surviving spouse.

Question 21

What is the abatement allowed in the EDA?

Answer 21

Section 4A amended

• R3 500 000 abatement becomes portable between spouses
• Effective where person dies on or after 1 January 2010
• Method of determining abatement for surviving spouse is to multiply the abatement (R3 500 000) by 2 and then to reduce the amount by amount deducted from estate of predeceased spouse.
• The executor of the second deceased’s estate will have to submit a copy of the estate duty return submitted to the Commissioner of SARS in respect of the estate of the first deceased’s estate.
• More than one wife - split first deceased’s estate’s surplus apportionment by the number of wives.

Question 22

How is estate duty apportioned?

Answer 22

• Limited interest
• Policy not payable to the estate
• The person to whom the benefit accrues/usufructuary

Reference to Act

11. Person liable for duty.—The person liable for the duty shall be— where duty is levied on property of the deceased which falls under subsection (2) of section three—

• (i) as to any property referred to in paragraph (a) or (b) of that subsection, the person to whom any advantage accrues by the death of the deceased;
• (ii) as to any other property, theexecutor;

(b) where duty is levied on property which, in accordance with subsection (3) of section three, is deemed to be property of the deceased—

• (i) as to property referred to in paragraph (a) of that subsection, the executor: Provided that where the amount due under the policy is recoverable by any person other than the executor, the person liable for the duty shall be the person entitled to recover the amount due under the policy;
• (iA) as to property referred to in paragraph (a) bis of that subsection, the executor: Provided that where the benefit in question accrues to any person other than the executor, the person liable for the duty shall be such other person;
• (ii) as to any property referred to in paragraph (b) of that subsection, the donee;
• (iii) as to any property referred to in paragraph (cA) or (d) of that subsection, the executor.

Question 23

What happens in the event of a rapid succession?

Answer 23

Principle: Person who effectively pays estate duty is the person who inherits the residue of the estate.

Rebate – death within 10 years

• within 2 years - 100%
• 2 to 4 years - 80%
• 4 to 6 years - 60%
• 6 to 8 years - 40%
• 8 to 10 years - 20%

Rebate not to exceed duty attributable in to the estate of first-dying.

Question 24

How is dutiable amount calculated?

Answer 24

Calculating dutiable amount

Step 1 - Determine value of property

Step 2 - Determine value of deemed property

Total value of estate - step 1 + step 2

Step 3 - Reduce gross value by alloable deductions

Net value of estate

Step 4 - Reduce net value by section 4A abatement

Step 5 - Equals Dutiable amount

Step 6 - Estate duty = dutiable amount x 20%

Step 7 - Less specific rebates (if applicable)

Question 25

What is the difference between ‘property’ and ‘deemed property’?

Answer 25

Property

• Any right in or to property, moveable or immoveable, corporeal or incorporeal.
• The definition includes not only full ownership of an asset but ‘rights in or to’ to property.
• Includes:
  
  • any fiduciary
  • usufructuary
  • other like interest in property (including a right to an annuity charged upon property)
• held by the deceased immediately prior to his death.

Deemed property

• proceeds from certain domestic poilcies of insurance
• porperty donated by the deceased and that was exempt from donations tax under section 56(1)(c) or (d) of the Income Tax Act 58 of 1962
• claims in terms of the Matrimonial Property Act 88 of 1984
• property controlled by the deceased prior to their death

Question 26

What is a fiduciary?

Answer 26

A fiduciary is responsible for managing the assets of another person, or of a group of people. Asset managers, bankers, accountants, executors, board members, and corporate officers can all be considered fiduciaries when entrusted in good faith with the responsibility of managing another party’s assets.

The fiduciary is expected to manage the assets for the benefit of the other person rather than for his or her own profit, and cannot benefit personally from their management of assets.

Question 27

What is difference between usufruct, usus and habitatio?

Answer 27

USUFRUCT

• A usufruct is a right that entitles a person to have the use and enjoyment of another’s property and to take its fruits without impairing the substance.
• For instance, the object of a usufruct over a farm will normally extend not only to all buildings but presumably also to livestock, farming equipment and the furniture in the homestead.

USUS

• A servitude of use or usus resembles a usufruct but the holder’s rights are far more restricted.
• If the property is movable he may possess and use the property and if the property is immovable he and his family may occupy it.
• The holder may take the fruits for his and his family’s daily needs.
• The holder may not sell any fruit, nor may he grant a lease of the property.
• There are a few exceptions, for example should the house be too large for the holder’s use, he may let a portion of it.
• The holder’s use must, however, be without detriment to the substance of the property.

HABITATIO

• The servitude of habitatio confers on its holder the right to dwell in the house of another, together with his family, without detriment to the substance of the property.
• The holder may grant a lease or sublease to others.

Question 28

What is a legatee?

Answer 28

A person who receives a legacy.

Legacy

• an amount of money or property left to someone in a will.

Question 29

What are the rights of a usufructary?

Answer 29

The usufructuary

• has the right to possess, the right to use and the enjoyment of the property
• they do NOT own the property
• must preserve the substantial character of the property
• usufruct expires on the death of the usufructuary
• they have the right to the profits and the fruits of the property
• usufructuary must maintain the property, bear the cost of ordinary repairs and pay rates and taxes
• a usufruct that accrues to a person married in community of property falls outside the joint estate.

Question 30

What does section 5 (1) (d) of the EDA say?

Answer 30

• In the case of any right to any annuity referred to in paragraph (b) of sub-section (2) of section three,
• an amount equal to the value of the annuity capitalized at twelve per cent over the expectation of life of the person to whom the right to such annuity accrues on the death of the deceased,
• or if it is to be held for a lesser period than the life of such person, over such lesser period;

Question 31

Further explanation of section 4 (m) of the EDA.

Answer 31

Example

Mike and Jenny were married. Mike died in 1980. He bequeathed a usufruct over his fixed property to Jenny. Jenny dies in 2015. The usufruct ceases on her death and the bare dominium holder becomes the full owner of the property. The value of the usufruct included in her estate is R467 982.

As her predeceased spouse’s estate did not qualify for the section 4(q) deduction (it was only introduced from 1 November 1985) Jenny’s estate will qualify for a deduction in terms of section 4(m).

If Mike died on or after 1 Nov 1985, his estate would have qualified for a deduction under section 4(q) and consequently Jenny’s estate would not qualify for a deduction under section 4(m).

Question 32

EDA Section 4(q)

• A testator establishes a trust in terms of which a portion of the income is to accrue absolutely to the surviving spouse
• and in respect of the rest of the income the trustee has the discretion as to its allocation to a number of beneficiaries (Meyerowitz par 28.18).

Does the existence of the discretion in regard to the balance of the income nullify the deduction?

Answer 32

Meyerowitz says NO.

• He suggests that whenever the surviving spouse’s right to income (in whole or in part) from the trust cannot be defeated by the exercise of the trustee’s discretion,
• including his discretion as to the allocation of capital,
• the proviso should not operate to prevent the value of the vested right from being deductible.
• This is how SARS applies the rule.