2.2.1 Using a case study approach and current tax legislation, is there an overall tax saving when an asset is held in a trust compared to not using a trust?
This sub-problem will create a baseline comparison based on current legislation51 in order
to compare the total taxation collected over the duration of the life of a discretionary inter vivos trust holding wealth assets to the total taxation collected over the same duration where the assets were held in the personal estate of a taxpayer.
Two basic scenarios or case studies will be created, the first being a scenario where wealth assets are transferred to an inter vivos trust and the second where no use is made of a trust. Each scenario will have a timeline of sufficiently long duration together with typical life events along such timelines (for instance, death of the founder, death of the surviving spouse etc.) and typical restructuring events with regard to trusts (for instance, where a single trust is restructured to form separate trusts for adult children to be managed separately etc.). The capital growth and income growth assumptions used for the wealth assets in the two basic scenarios will be the same. All taxation with regard to the income produced by the wealth asset, the CGT paid on disposals and estate duty collected will be calculated for each scenario on an annual basis. The aggregate tax paid by all parties from inception of each scenario will be calculated at the end of each year. This aggregate
51 Including the capital gains inclusion rate increase announced in the 2016 Budget Review (Department of National Treasury 2016a:50).
taxation amount, which will build up over time, will be expressed as a percentage of the theoretical market value of the wealth asset at the end of that particular year (using the abovementioned growth assumptions) in order to get a sense of the relative total taxation levied on the assets at the end of any given year. The comparison between these two scenarios will provide the baseline comparison.
2.2.2 Using a case study approach and applying the recommendations of the First Interim Report on Estate Duty to current tax legislation, is there an overall tax saving when an asset is held in a trust compared to not using a trust and how does this compare to the same comparison using current tax legislation?
In the second set of case studies, the same two basic scenarios used in the previous problem statement will be used but the recommendations of the First Interim Report on Estate Duty will be applied and the relevant difference in total taxation collected over time as a percentage of the value of a wealth asset calculated between the two basic scenarios will be compared to the baseline comparison in order to determine what the effect of these recommendations would have been.
2.2.3 Using a case study approach and applying the expected recommendations of the Second Interim Report on Estate Duty to current tax legislation, is there an overall tax saving when an asset is held in a trust compared to not using a trust and how does this compare to the same comparison using current tax legislation?
In the third set of case studies, the same two basic scenarios used in the previous two problem statements will be used but the recommendations that are expected to appear in the Second Report on Estate Duty together with those recommendations mentioned in the 2016 Budget Review will be applied and the relevant difference in total taxation collected over time as a percentage of the value of a wealth asset calculated between the two basic scenarios will be compared to the baseline comparison in order to determine what the effect of these recommendations would be.
Where information with regard to the expected recommendations is not sufficient, reasonable assumptions will be made.
2.2.4 Can the perceived double taxation on death due to both CGT and estate duty being levied be estimated based on information currently available?
Given the contention in some academic circles52 and in some commentaries to the First
Interim Report on Estate Duty by professional bodies53 that there may be double taxation
on death due to both CGT and estate duty being levied, it may be useful to determine whether the perceived double taxation is significant enough to be taken into consideration. The main issue is that the numbers provided in National Treasury’s annual Tax Statistics for total CGT collected from individuals include both normal disposals as well as disposals on death as no separate breakdown for CGT collected on death is currently provided in the latest Tax Statistics documents issued by the Department of National Treasury and SARS54.
The DTC’s First Report does however contain some assumptions contained in a National Treasury analysis on the combined effective tax rates on death55 and samples of estate
duty collected for 201356. This information could be used together with other assumptions
to determine whether the amount of CGT collected in the event of death is likely to be significant compared to the estate duty collected on death especially given the increased capital gains inclusion rates announced in the 2016 Budget.