The Davis Tax Committee (DTC) consideration that a wealth tax for South Africans is not the universal solution to South Africa’s revenue needs. This is the view of Rhodes Business School Professor and DTC member Matthew Lester who was speaking at a BDO South Africa event last week.

Professor Lester dissected the current taxation system within the country commenting on what is working, what isn’t and what changes need to be implemented for the future economic growth of the country.

Estate duty was implemented in South Africa in 1955, but the overall contribution to the fiscus has declined to only R1 billion out of the R1.1tn tax collected per annum. Largely as a result of the correct application of trusts. “When it comes to trusts, taxpayers are allowed to have their cake and eat it too,” says Lester.

Lester acknowledged that the taxation of trusts is a contentious subject that, along with estate duty, is in dire need of modernisation.

“Furthermore, trustees can manipulate the income of the trusts to be taxed in the hands of the donor or the beneficiary using sections 7, 25B and the 8th schedule of the Income Tax act. These provisions are often referred to as the attribution or conduit principles.”

Highlighting the problem of insufficient anti- avoidance measures being put in place in the past the Katz Commission recommended that estate duty be replaced by Capital Transfer Tax (CTT.) The DTC has proposed that the estate duty and donations tax systems be retained, subject to amendment.

The DTC suggests further that trust income will in future be taxed within a trust at the flat rate, currently 41% for revenue income and 27.3% for capital income. “It is recommended that the conduit principles will be written out of taxation laws.”

Another recommendation is that retirement fund benefits should remain exempt from estate duty, subject to certain limits imposed on contributions. Lester advised that retirement annuities may be a better vehicle for housing wealth than trusts moving forward.

‘It’s therefore not impossible to envisage a future where retirement annuities are the vehicle of choice for managing the inter-generational transfer of family wealth’, continues Lester.

People with insufficient retirement savings pose a financial burden to their families and the government. Ultimately, this has a negative impact on the economy and the country’s competitiveness.

Lester also put the onus back on individuals as he stated, “Active understanding, management and appreciation of the financial environment is now paramount for future retirement planning,” emphasising the importance of individuals to be more involved in their financial planning.