South African National Treasury Proposes Donations Tax on Non-Resident Spouse Transfers

• National Treasury proposes applying donations tax to transfers between spouses where the recipient is a non-resident.
• The change aims to close a loophole that allows wealthy taxpayers to reduce their capital gains exit tax.
• Taxpayers with spouses living abroad should review their transfer strategies in light of the new law amendment.
• The proposed change may trigger a compounding tax burden on donations to non-resident spouses.
• Legitimate transfers between spouses, such as family support or asset movement for business purposes, may also be caught by the new legislation.

By applying donations tax to transfers between spouses, Treasury aims to close a loophole that allows wealthy taxpayers to exploit the exemption and reduce their capital gains exit tax.

National Treasury is proposing a change to the tax exemption for transfers between spouses. Currently, when a resident spouse donates assets to a non-resident spouse, it triggers a capital gains tax (CGT). However, the new law amendment aims to apply donations tax to this transaction as well, resulting in a compounding tax burden. This change is targeted at wealthy taxpayers who exploit the exemption by transferring substantial wealth to a non-resident spouse before emigrating.

According to tax attorney Reinert van Rensburg, the proposed change may have significant implications for estate duty and wealth planning in South Africa. He notes that when assets leave the South African tax net into the hands of a non-resident and that non-resident passes away, the estate duty is not levied on most of those assets.

The practice of transferring substantial wealth to a non-resident spouse before emigrating has been observed in numerous cases. However, Van Rensburg advises clients to remain subject to the Section 9(H) deemed disposal, which triggers the same taxes as donating to a non-resident spouse.

The proposed change is based on the existing rule that when a resident spouse donates assets to a non-resident spouse, it already triggers a capital gains tax (CGT). The rollover relief does not apply to this transaction, and the resident spouse is deemed not disposing those assets into the open market. This results in the CGT being levied on the transaction.

The donations tax is intended to prevent individuals from transferring their wealth just before passing away to avoid estate duty. By applying donations tax to transfers between spouses, Treasury aims to close a loophole that allows wealthy taxpayers to exploit the exemption and reduce their capital gains exit tax.

Section 9(H) of the Income Tax Act already provides for deemed disposal in cases where assets are transferred to a non-resident spouse. Van Rensburg notes that this provision triggers the same taxes as donating to a non-resident spouse, making it unnecessary to introduce new legislation.

The proposed change has significant implications for South African taxpayers with spouses living abroad. Lawyers advise clients to review their transfer strategies in light of the new law amendment, which may trigger a compounding tax burden on donations to non-resident spouses. This could lead to a higher tax burden and affect estate duty and wealth planning in South Africa.

The change is aimed at preventing wealthy taxpayers from exploiting the exemption by transferring substantial wealth to a non-resident spouse before emigrating. However, it may also catch legitimate transfers between spouses, such as family support or asset movement for business purposes.

Lawyers should advise clients with spouses living abroad to review their transfer strategies, as the new law amendment may trigger a compounding tax burden on donations to non-resident spouses. This could have significant implications for estate duty and wealth planning in South Africa.

Source: Original reporting via Briefly