The levying of estate duty and capital gains tax as double tax in South Africa

Abstract

It is almost certain that there would be tax implications at the death of a natural person. Currently, estate duty is levied in terms of the Estate Duty Act at a flat rate of 20%. Capital gains tax on the other hand, is levied in terms of the Eighth Schedule of the Income Tax Act with an inclusion rate of 33,3% of the capital gain, after which it is taxed according to the progressive scale at which the deceased was taxed prior to his or her death. South Africa is the only country in the world to have two forms of capital transfer tax. These taxes recently came under review, with ample grounds for the view that estate duty should be abolished. However, instead of abolishment the emphasis was on reforming estate duty to increase the efficiency of the tax. Estate duty is considered a wealth tax, with the aim to tax the transfer of wealth. Capital gains tax, on the other hand, is widely considered as a wealth tax because it is levied on any income accruing to a person that is of a capital nature, created by the disposal of assets. Assets significantly increase the size of a person‘s estate, and therefore also their wealth. It is therefore regarded as a secondary or indirect wealth tax. The levying of both estate duty and capital gains tax amounts to double taxation under certain circumstances – that is, in the instance that both are applicable to the estate of a deceased natural person. The definition of double taxation varies according to the circumstances to which it is applicable. This study considers these circumstances. The aim of this study is to document the instances where both estate duty and capital gains taxes are applicable and how it amounts to double taxation. Double taxation is frowned upon internationally, and therefore this study focuses on the capital transfer taxes of Canada and Australia and the historic background of the taxes in these countries. In light of treatment that double taxes receive internationally, the current review of capital transfer taxes in South Africa under the Davis Tax Committee is briefly investigated and compared to international perceptions of double taxes. Taxation should be fair, neutral, effective and simple, and when double taxation occurs, these principles are undermined.