How to stop additional tax
In 2000 chartered accountant John Frith successfully challenged the South African Revenue Service (Sars) on a method it used to calculate estate duty.
However, despite the court ruling in his favour many estates still pay tax on tax or a higher effective tax rate than necessary as the related law has not been changed.In this Q&A Frith tells MoneywebTax readers how to avoid additional tax...
MoneywebTax: How do you pay additional tax?
John Frith: If you were given a gift of R800 000 from your mother or father, the tax would be R160 000 (20%), but if you received R800 000 from their deceased estate the tax would be R200 000 - R40 000 more tax even though the tax rate is also 20%.This R40 000 applies for each and every additional R1m over the threshold.If the gift had been R8m the additional tax would have been R400 000.
MoneywebTax: What is the only legal way to avoid this additional tax?
John Frith: Through the Family & Charity will structure.
MoneywebTax: How does it work?
- Gives assets of a specific value to your nominated persons or trusts.
- Leaves the remaining assets to a combination of spouse and/or charities. The remaining assets are those assets left after the allocation of specific bequests, and the payment of costs and estate duty. If specific bequests are properly determined, little remains.
- The assets that would have been used to pay the additional tax are paid to your chosen beneficiaries, with a small portion to a charity of your choice.
MoneywebTax: Who is covered in the will?
- Every eventuality regarding order of death of spouses and possibility of simultaneous death.
- All increases or decreases in net assets ensuring maximum to you nominated beneficiaries.
- Every eventuality of tax rate and initial allowance changes.
- Any possibility of an under age beneficiary.
- All deemed assets (life insurance, usufructs, foreign assets etc) if disclosed in the initial set up.
- No law changes can prejudice this will.
MoneywebTax: What are the disadvantages?
- Because any beneficiaries name should be spelt out in full any change will result in a change to the distribution clause.
- If you wish to change an amount or proportion to a beneficiary the distribution clause must be changed.