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I forecast in August of last year and again three weeks ago that Manuel was going to abolish Exchange Control “to thunderous applause” on the 15th of February and now set out my miserecordiam (sad confession)!
Firstly Manuel did not abolish Exchange Control as I had predicted, but increased the amount able to be invested Off-Shore from R750 000 to R2m. Neither was this announcement made to ‘thunderous applause’ and thus I confess to being wrong on two counts! However, factually it’s probably the end of exchange control for individuals in that it means that a couple are able to invest without further ado up to R4m; and if they emigrate another R1m by way of personal assets and pay 10% on anything thereafter which would have been left behind. If there is no huge outpouring from this, which there won’t be, the limit will be doubled next year and then as it becomes a non-issue, the controls will disappear completely.
I think that serious thought was given to abolishing Exchange Control and there must have been fascinating and furious behind the scene arguments with some saying ‘be brave and just do it’ and put the Rand into the real world and others saying ‘do nothing’, but with the type of inflows that we’ve had in recent months i.e. Barclays and Vodafone, the Treasury no doubt drew comfort and concluded that Exchange Control was not a factor impeding outsiders putting their money into South Africa. To be frank, it would also have been extremely awkward with the Amnesty process being only just completed, to so soon announce that in fact it wasn’t really necessary anyway. The process just took much longer than anyone had anticipated with 42 672 successful applications having been made. R68.6 billion came to light as a result of the Amnesty and R2.9 billion came back to South Africa as levies. Not a bad tax bonanza.
From an Estate Financial Planning point of view there was much to cheer about in the budget. Most importantly the deduction for Estate Duty has been raised from R1½ to R2½m. Manuel explained that the figures have remained constant for many years and inflation needed to be taken account of. In the same vein he increased the Donations Tax exemption from R30 to R50 000. Transfer Duty with effect from 1st March 2006 will only apply for purchases in excess of R500 000 up to R1m at the rate of 5% and thereafter at 8%. Transfer duty for Companies and Trust is reduced from 10% to 8%. In view of my constant emphasis on Trusts as a primary estate planning tool, this is also good news. However, even with these increases it still makes sense to invest using a trust. The fact that I was told by an executive of a major bank the other day that 24 out of 25 of their wealthiest clients invest via a Trust says it all!
With the appreciating value of property in South Africa probably still heading the world ratings it will be a simple calculation to determine how quickly the approximately 28% death duty/cgt payable is more than covered by a payment of transfer duty now. Take, for instance, a property now worth R1 million on which transfer duty of approximately R80 000,00 would be payable if transferred to a Trust. Assume that the owner dies 12 years later when the property is worth R5 million equating to a total CGT and Estate Duty liability of approximately R700 000,00 (and allowing for all deductions). Taking the sum of R80 000,00 and compounding it by say 8% a year for 12 years would result in a value of approximately R220 000,00 which less CGT and Estate Duty will equate to approximately R160 000,00 (but not including income tax on the interest!) all in, i.e. a difference in value of money in the hands of your family of R540 000,00 in 12 years time. It’s still money! Take a more realistic case of the property being worth say R8m and including the deductions allowed, you would pay about R1.3m extra in taxes!
In so far as Capital Gains Tax is concerned various increased deductions were made which I find quite interesting in that the Tax is still relatively new and not much ‘suffered’ by the average taxpayer. I thought it was a wealth tax introduced for political reasons which would mean a very hesitant approach to increasing any allowances. It seems I was wrong again! The general deduction is increased from R10 000 to R12 500 and from R50 to R60, 000 for an Estate. The Primary Residence deduction is increased from R1m to R1.5m. From a CGT point of view Trusts also continue to offer what can only be described as a superb tax saving vehicle. I shudder when I see articles in newspapers pointing out the dire consequences of Trust taxation rates, i.e. 40%, which would mean an effective Capital Gains Tax rate of 20%. However, as a Trust is no more than a conduit because income or capital retains its identity when payment is made to a beneficiary, if the Trustees decide to distribute a capital gain made on the sale of an asset to a beneficiary, that gain will be taxed in the hands of the beneficiary at that beneficiary’s marginal tax rate. The principle is very simply that provided you distribute any monies obtained by the Trust in the same year that they accrue, the tax consequences relating to such monies will be determined by the tax regime applicable to the beneficiary in question.
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