A historical and comparative study in search of a revised Estate Duty Act 45 of 1955

Abstract

Estate duty is a tax levied on the deceased estate based on the value of the property in the estate at the time of death. The Estate Duty Act 45 of 1955 has been in operation since 1955 and has become stagnant due to the limited changes. Its unchanging provisions in an ever-changing legal landscape have become in need of reform. Many reviews have been done, including those by the Margo Commission (1987), the Katz Commission (1997) and the Davis Tax Committee (2016), where it was each time concluded that the Estate Duty Act should remain but requires an extensive revision. The repeated call for a revision of the Act and the lack of response to it inspired this study, and the primary research question that it aims to answer is, "Through the use of a historical and comparative study, how can the Estate Duty Act be revised to keep up with a changing legal landscape?" This study reviewed the historical recommendations made in respect of the Estate Duty Act, and it was found that apart from the changes to the rate of estate duty, the scope of the primary abatement, and the exclusion of certain property from the estate, many proposals remained unattended to. After an extensive literature review, it was found that a revised Estate Duty Act is both desirable and needed regarding the following aspects: the jurisdictional basis on which estate duty is levied; the scope of property included in the estate; the constitutionality of exempting spousal bequests; the meaning and timing of the "accrual" of an inheritance; the rationale behind valuation rules; the lack of certainty regarding the unilateral relief from double estate taxation; the lack of specific anti-avoidance rules and various administrative misalignments that need to be addressed to enhance efficiency in administering an estate. It was further concluded that the issues identified also result in the Estate Duty Act not adhering to the canons of taxation (equity, certainty, convenience and cost efficiency), which are the criteria for a good tax system. This study also reviewed international principles and guidelines for inheritance taxes laid down by the Organisation for Economic Co-operation and Development (OECD). It was found that the OECD's guidance speaks to most of the problem areas identified under the Estate Duty Act which serves as a valuable benchmark to make enhancements. The OECD guidance includes limited exemptions in respect of bequests to a charity or a surviving spouse, abatements consisting of real-time values, detailed unilateral relief provisions for double taxation and specific anti-avoidance provisions to combat tax avoidance. A comparative analysis of the similar transferor-based wealth transfer tax systems in the United Kingdom (UK) and the United States (US) was done in a benchmarking exercise to determine which lessons can be learnt. It was found that the UK's statutory definition of a "resident" and its detailed anti-avoidance rules concerning inheritance tax provides a useful benchmark regarding enhancements for clarity under the Estate Duty Act. The US' different treatment of residents and non-residents regarding deductions and exemptions provides useful guidance for consideration of a similar approach in South Africa. Both countries provide an alternative treatment of life policies than in South Africa, more detailed provisions regarding unilateral relief and extensive administrative provisions to enhance voluntary compliance. All of those were considered to enhance certainty and clarity if applied to the Estate Duty Act. In answering the primary research question this study provides recommendations for changes to the Estate Duty Act regarding each problem area identified. Each recommendation is designed to promote the objectives of taxation, the "canons of taxation" and to remain aligned with the Constitution of the Republic of South Africa, 1996.