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Copyright 2019 -

Revised debt restructuring tax rules

Some of the significant changes proposed in 2018 Budget Review, for example, the increase in VAT rate and fuel levies, are likely to affect taxpayers across the board. There are however some amendments as well as proposals that are particularly aimed at those taxpayers who have accumulated wealth and set up structures to house the wealth of families. This article provides a brief overview of these changes and proposals.

Estate duty rate

With effect from 1 March 2018, the value of any estate exceeding R30 million will be subject to estate duty at a rate of 25%. This proposal implements a recommendation by the Davis Tax Committee aimed at achieving a more progressive estate duty.

This change is combined with an increase in the donations tax rate to 25% for annual donations exceeding R30 million. This measure is implemented to ensure that individuals do not gradually diminish estates that have a value of more than R30 million through donations. It is however submitted that the threshold of R30 million for annual donations, compared to the once-off R30 million threshold for estate duty upon death, may still present such opportunities.

Official rate of interest

A development that is closely related to the estate duty and donations tax rates in some respects is the announcement that the official rate of interest will be increased to a level that is closer to the prime rate of interest than the current level of 1 (one) per cent above the repurchase rate. This change will impact on fringe benefits arising from low interest rate loans to employees. It will affect persons with wealth or in the process of accumulating wealth in the following areas:

  • the amount of the deemed dividend that arises if persons, often entrepreneurs, draw funds from a connected company on loan account, or
  • the amount of the deemed donation that arises when trust structures are funded by low-interest rate loans aimed at freezing a person’s estate.

Offshore trust structures

For a number of years, the National Treasury have indicated that they are considering the expansion of the controlled foreign company rules to cover foreign companies held through offshore trust structures for the benefit of South African beneficiaries. A proposal in this regard was included in the draft Taxation Laws Amendment Bill in 2017, but was not included in the final legislation at the end of 2017. This area has once again been identified in the 2018 Budget Review as something that will receive attention.

Review of VCC regime

Since 2014, the number of venture capital companies that offered investors an opportunity to deduct their investments made in such companies have increased significantly. This is due to favourable amendments of the rules and restrictions that apply to these companies. It was indicated in the 2018 Budget Review that the National Treasury will review a number of further technical and administrative matters that are still obstructing an increased uptake. From the perspective of investors with some wealth to invest in these entities, this is likely to lead to a further increase in investment opportunities in the future.

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