Practical estate duty calculation for a deceased person married out of community of property with INCLUSION of the accrual system

Transcription

1 Exam Preparation Workshop 28 January 2014 Presenter: Marius Botha CFP Practical estate duty calculation for a deceased person married out of community of property with INCLUSION of the accrual system 1

2 Stanley and Sybel are married out of community of property with INCLUSION of the accrual system. They have two children John (14) and Anne (10). When they entered into the marriage in 1990 the values of Stanley s and Sybel s estates were stated in the ANC to be Stanley R Sybel R No assets were specifically excluded from the accrual. 3 Currently Stanley s assets consist of: House (residential) Holiday house (inherited from his father 1995) Furniture and effects Motor vehicles Shares in Green Bottle (Pty) Ltd Investment in Collective Investment Schemes Shares (JSE) Cash Investments Life insurance Payable to his estate Payable to his spouse Ceded as security for loan (no beneficiary)

3 Stanley s Provident Fund He is a member of his employer s provident fund which provides a death benefit equal to twice his annual salary. His current annual salary is R He says we must assume that the benefit will be paid to his wife and children in equal shares. Stanley s liabilities Outstanding loan on house CGT on death Car loans Total liabilities R Sybel s assets Share portfolio (JSE) R Cash investments Sybel was awarded an amount of R in damages for defamation because of the fact that her neighbour called her something unmentionable when she complained about the fact that her neighbour s dog barks too much. This happened 12 months ago. Sybel does not have any liabilities that should be taken into account. Stanley s Last Will and Testament He leaves his house, furniture and motor vehicles to his wife. The residue is bequeathed to his children. Sybel s Last Will and Testament She leaves her estate to Stanley. 6 3

4 Accrual claim (assume Stanley dies) Stanley House (residential) Holiday house Furniture and effects Motor vehicles Shares in Green Bottle (Pty) Ltd Investment in CIS Listed shares (JSE) Cash investments Life insurance to estate ceded for loan Total assets Total assets Less: Liabilities Loan on house Credit card Car loans

5 CPI 2014 Adjusted commencement value Stanley 141, = R ,91 CPI 1990 Adjusted commencement value Sybel 141, = R ,91 9 Calculation of accrual claim Stanley Sybel Net value of estate Less: Inheritance (holiday house) Damages Less: Commencement value R minus = R R = R Stanley s estate must pay R to Sybel 10 5

6 Estate duty calculation (Stanley) Property House Holiday house Furniture and effects Motor vehicles Shares in Green Bottle (Pty) Ltd Investment in CIS Listed Shares (JSE) Executor s fee Cash investments Total Property R Plus: Deemed Property Life insurance to estate Life insurance ceded security Life insurance to spouse Property and deemed property Property and deemed property Less: Deductions Funeral expenses Admin fees Executor s remuneration Liabilities Section 4(lA) [ accrual] Section 4(q) Policy Legacies Net Estate Section 4A Dutiable estate Estate duty payable R House, Furniture Motor vehicles 12 6

7 Assets convertible to cash Cash needed for Investment in CIS? Funeral expenses Listed shares? Admin fees Cash investment Executor s fee Life insurance Liabilities Accrual claim 0 Estate duty Cash surplus Assets can be transferred 13 Residue of the estate (inheritance not sec 4(q)) Total assets in estate Plus: Policies payable to estate Total Less: Funeral expenses Admin fees Executor s remuneration Liabilities Accrual claim Estate duty Less: Legacies (house, furniture, vehicles) Residue

8 Astute printout Client ID number South Africa Client name Date of birth Joe Soap Content provider (policy number) Time request ed User name Referen ce Policy number Remarks A123 Active Product type Product code Endowment Start Date Expiry/Maturity date Term/years years Old Mutual Premium Frequency Payment type Monthly Debit order Cover type Illustrative Maturity Value Higher Lower Basic Assurance Currency ZAR (Rand) Death Value Insured amount Net Insured amount Monthly benefit amount Surrender value Loan Value Not supplied Not supplied Insured G Soap Primary Insured DC Soap Insured Child EJ Soap Insured Child Benefits 8

9 Financial Planning Institute of Southern Africa, February CGT on death 120Heir/trust 1 March 120 Deceased Estate R R MV Third party 18 9

10 CGT on death Example Conrad Smith died on 15 July 2013 leaving the following assets: Base cost Market value Primary residence Holiday home Household furniture Yacht (12m in length) Endowment policy Second Hand endowment pol Investment CIS Policy proceeds to estate OBO CGT on death His Last Will and Testament The holiday home is bequeathed to his surviving spouse The endowment policy is bequeathed to his son The secondhand policy is to be left to the SPCA, a registered PBO The rest of his assets must be sold and the residue is bequeathed in equal shares to his spouse and his son. 10

11 CGT on death The capital gain CONRAD (not estate) Asset MV BC Cap Gain/loss Excl R/o Aggregate capital gain Prim res Furniture Yacht ( ) ( ) 0 Endow CIS OBO Pol Hol home rollover 0 2 nd h End Total capital gains Less: Annual exclusion Aggregate capital gain CGT on death Calculation of taxable capital gain Aggregate capital gain Taxable capital gain (33.3% of R ) Calculation income tax Taxable income other sources (assumed) Plus: Taxable capital gain TAXABLE INCOME Tax as per tables Less: Rebate TAX PAYABLE

12 CGT on death CGT by estate After Conrad s death his executor sold the assets that had not been bequeathed to specific persons. This was all done in the 2014 tax year. Before he sold the yacht he had a diesel motor fitted to the yacht to make it easier to find a buyer. The cost of fitting the motor was R The proceeds of the assets sold were as follows: Proceeds Primary residence Furniture and effects Yacht CIS CGT on death The estate administration was completed in the 2012 tax year and the executor made the following disposals Proceeds Base cost Excl Gain Primary residence sold Furniture sold Yacht sold CIS sold Less: Annual exclusion Aggregate capital gain Taxable capital gain (33.3% of R )

13 Wills Act Section 2(3) If a court is satisfied that a document or the amendment of a document drafted or executed by a person who has died since the drafting or execution thereof, was intended to be his will or an amendment of his will, the court shall order the Master to accept that document, or that document as amended, for the purposes of the Administration of Estates Act, 1965 (Act No. 66 of 1965), as a will, although it does not comply with all the formalities for the execution or amendment of wills referred to in subsection (1)

14 Tax example Dividends, RA and medical Jeff (55) is employed by Fender (Pty) Ltd where he is the sales manager. He is married out of community of property. He provided you with the following particulars regarding his income for the 2014 tax year: Salary from Fender (Pty) Ltd Annual bonus from Fender (Pty) Ltd Interest from a local (RSA) Bank Overseas Dividends Interest from foreign source Tax example Dividends, RA and medical In addition to this he expects to receive local dividends of R60000 (before tax) before the end of the tax year. He is a member of a medical aid scheme and contributes R4500 per month. He and his wife are the only beneficiaries. He also had qualifying medical expenses of R32000 which was not recoverable from the medical scheme. Jeff retired from a retirement annuity fund on 1 May 2013 and received a lump sum benefit of R He was under the impression that he had to retire from the fund on turning 55 years old. He contributes 7,5% of his salary to a pension fund. He previously received a cash withdrawal benefit of R when he resigned from a pension fund on 1 July The rest was transferred taxfree to a pension preservation fund

15 Tax example Dividends, RA and medical During the year (on 1 October 2013) theysold their primary residence, which they owned and paid for jointly, for a proceeds of R They bought the property for R on 1 October The market value of the property was R on 1October There was no agent s commission as he sold the house to a friend. In April 2004 they erected a second garage on the property at a total cost of R Tax example Dividends, RA and medical Question 1 Calculate the taxable capital gain made by Jeff in respect of the sale of his primary residence. 50% R = R = R

16 Tax example Dividends, RA and medical 50% 1. MV on 1/10/2001 (50%of R ) = R % of (R ) = R TABC (Joint proceeds R ) TABC = R ( R ) = R R = R Tax example Dividends, RA and medical The TABC is biggest and thus selected as VDV. Base cost = R R = R The capitalgain is R (R1m is exempt). The aggregate capital gain is R (R R30 000) The taxable capital gain is 33.3% of R = R

17 Tax example Dividends, RA and medical Question 2 Calculate the income tax payable by Jeff for the 2014 tax year. Leave the tax on the lump sum out of account. Salary Bonus Interest (local) Foreign dividends Interest (foreign) Dividends Gross income Less: Exemptions Interest Dividends (local) Dividends (foreign) ( ) Income Tax example Dividends, RA and medical Income Less: Deductions Pension contributions Plus: Taxable capital gain Taxable income before medical deduction Less: Medical deduction Qualifying expenses Scheme contributions [ (5 808)] Less:7,5% of R Taxable income R

18 Tax example Dividends, RA and medical Tax on Less: Rebates Under Tax credit (medical) Tax payable

19 Fund Benefits and Divorce Orders Under section 7(8) the Court may make an order that any part that is due or assigned to the other party in terms of section 7(7), shall be paid to that other party when any pension benefits accrue in respect of that member. Section 37D(4)(a) of the Pension Funds Act provides that for the purposes of section 7(8) of the Divorce Act, the pension interest assigned under a decree of divorce is deemed to accrue to the member on the date on which the decree of divorce is granted. Section 37D(4)(d) provides that where the decree of divorce has been granted prior to 13 September 2007, the amount assigned to the nonmember is deemed to have accrued to the member on 13 September Continued 37 Section 37D(1)(d) provides that a registered fund may deduct from the member s benefit or minimum individual reserve (as the case may be) any amount assigned from such benefit or individual reserve to a nonmember spouse in terms of a decree of divorce granted under section 7(8) of the Divorce Act as well as any income tax to be deducted or withheld in terms of the Fourth Schedule (tax is dealt with later). Under section 7(8)(ii) the Registrar of the Court must notify the fund concerned that an endorsement be made in the records of the fund that that part of the benefit is so payable to the other party

20 Example of pension interest James and Emma are in the process of getting divorced. They are married in community of property and have agreed that the estate must simply be divided equally between them. Their joint estate consists of the following assets: Residential property R Cash investments Unit trust funds Furniture and household effects Total R They are members of the following retirement funds. James is a member of a pension fund. He will be paid a resignation lump sum of R under the rules of the fund if he should resign today. continued 39 Example of pension interest Emma is a member of a retirement annuity fund. She has been a member for 4 years and has contributed R per year throughout this period. According to the latest statement she has received from the fund, the value is currently R The pension interest in respect of each of the two funds must be taken into account to determine the patrimonial benefits to which each party is entitled

21 Example of pension interest The pension interest in respect of the RA fund is R (R ,155 10) = R or R ,5% 4 = R R ,5% 3 = R ,5% 2 = R ,5% 1 = R R = R Under section 37D(5) of the PFA the total amount of simple interest payable in terms of the definition may not exceed the fund return on the pension interest assigned to the non member. 41 Example of pension interest The total value of the joint estate plus the value of their respective pension interests is: Joint estate R Pension fund Retirement annuity fund Total value R R = R They must each get R in value. Various permutations are possible as to how the assets can be divided. What follows is merely one possibility to show that it is not always necessary to assign a portion of the pension interest to the nonmember spouse

22 The parties have agreed that the assets are to be divided as follows: Emma Residential property RA pension interest (own) Cash Household furniture James R Pension interest (own) Unit trust Cash R In the example the parties were able to divide the assets between them without it being necessary for any of the two pension interests to be assigned to the nonmember spouse. 43 Sample question 2 Divorce 50% of pension interest to exspouse. He did forfeit 50% of his retirement capital needed. Retirement capital must be recalculated. Only one person now to get the benefit of his retirement fund. Contributions to the fund will remain the same. Maintenance etc does not affect his cash flow as he would have had to maintain children even when he was married. 22

23 Sample question 2 By going to Brazil he will not contribute to his retirement fund. This will reduce maturity value at retirement. He will earn more in Brazil. Also no tax. Extra income to be invested for retirement Dependant on cost of living in Brazil. Depending on that he may even earn less. Additional income can be used to pay off on bond (townhouse). Income required not given. Sample question 2 Salary ( ) = = R Tax?? Additional costs? Investment structure. Age (14 years). Children 5 and 7. 23