In May, the Organization for Economic Co-operation and Development (OECD) published a report exploring the role of inheritance taxes in addressing the impact of wealth inequality in poorer countries.
The publication of the report was motivated by high wealth inequalities across OECD countries and the economic pressures suffered internationally as a result of the Covid-19 pandemic, says legal firm Baker Mckenzie.
While South Africa is not a member of the OECD, it does adhere to numerous OECD instruments – and the findings of this report have important implications for the country.
“The report states that, on average, the inheritance and gifts reported by the top 20% of wealthy households in OECD countries are around 50 times higher than those reported by the bottom 20% poorest households.
“As such, inheritance tax is a tool intended to reduce this wealth concentration and enhance equality,” Baker Mckenzie said.
“The report also notes that inheritance taxes are easier to assess and collect than other forms of wealth tax, but that only around 0.5% of total tax revenues are currently sourced from inheritance, estate and gift taxes across the OECD countries that levy them.”
How it could work in South Africa
In South Africa, laws such as the Administration of Estates Act, the Wills Act, and the Intestate Succession Act govern inheritance tax. Beneficiaries of an inheritance don’t pay inheritance tax on their inherited assets in South Africa, estate duty is payable by the deceased estate, which is regulated by the Estate Duty Act.
Currently, estate duty is payable at 20% on the first R30 million, and at 25% on amounts above R30 million.
In 2013, the David Committee was set up to review and recommend improvements to the tax policy framework in South Africa.
In 2016, Judge Davis submitted his report, which contained significant proposals to change the way estate duty is paid in the country.
To date, the South African National Treasury has implemented only some of the Davis Committee recommendations, one of which was to increase the estate duty to 25% on estates valued above R30 million.
Other suggested changes from the committee include:
- A change to section 4q of the Estate Duty Act, which involves cancelling the deduction of the full value of a property, that accedes to the surviving spouse, from the estate of the deceased. The suggestion was that this should be replaced with a substantial rebatement.
- Donations that were made before death should no longer be exempt from donations tax.
- The Davis Committee found that taxpayers were using trusts to reduce income and avoid paying estate duty and proposed instead a flat tax rate of 41% on all discretionary income in a trust.
- The Committee suggested that where an interest or low-interest loan existed between a trust and connected person, the assets of the trust should be brought into the estate of the taxpayer for tax duty purposes.
What about a direct wealth tax?
The Davis Committee did not provide details on a potential wealth tax, but said it would conduct further investigations regarding its implementation, Baker Mckenzie said.
The firm cited research from economists which shows that the unequal distribution of wealth in South Africa would make a wealth tax an efficient policy to aid fiscal sustainability.
The economists estimated that the potential revenue that could be collected from a progressive wealth tax on the richest 1% could amount to R160 billion.
The authors found that the top 10% own 86% of total wealth in South Africa and the top 1% own 55%.
The top 0.01% (3,560 individuals) own about 15% of household wealth, greater than the share of wealth owned by the bottom 90% of the population as a whole (32 million individuals).
Meanwhile, the average wealth of the poorest 50% is negative in that their debts exceed their assets. They noted that wealth inequality has remained stable at extreme levels since the end of the apartheid regime.
“South Africa, alongside the rest of the world, is now actively looking at ways to address the devastating economic and social impact of the pandemic, with new and innovative ways to collect revenue currently being studied, proposed and implemented,” Baker Mckenzie said.
“As such, the recommendations of the OECD paper on inheritance tax, in line with Davis Committee proposals, could become applicable in some form in the South African context.”
- Commentary by Virusha Subban (director) and Prenisha Govender (associate) of law firm Baker Mckenzie.