Money and Marriage – Tax Implications

Last week, we looked at how each matrimonial property regime in South Africa works and how ownership of assets and liabilities are distinguished. This week, we will dive into the tax implications for spouses under these marriage regimes. 

The three most significant impacts marriage has from a legal and tax perspective is on estate duty, donation tax and capital gains tax (CGT).

Donation tax:

• Donation tax is payable on the total value of any property that is disposed of either directly or indirectly. Donation is defined as the ‘gratuitous disposal of property including any gratuitous waiver or renunciation of a right, that is without expecting something in return.”
• Any donation made between spouses, regardless of the marriage regime will be exempted from donation tax.
• As explained last week, couples that are married in community of property will have a joint estate and all property, either acquired before or during the marriage will be owned in equal shares between the two parties. If one spouse therefore disposes of any property in the joint estate as a donation, it will be considered to have been donated by both spouses in equal shares and both will be liable for donation tax on their respective share.
• Donations made to any party that is married in community of property will form part of the joint estate unless the donor stipulates that the donation must not fall into the joint estate. It is however important to understand that although this donated asset can be outside the joint estate, all returns on such an asset will form part of the joint estate.
• Couples married out of community of property, whether with or without the accrual system, have separate estates and therefore donation by one party in the marriage will not affect the other party from a donation tax perspective.
• When calculating the accrual for couples that are married out of community of property, with the accrual system, any donations made between such spouses during their marriage are excluded. This means that the spouse receiving the donated asset does not include it in their growth when doing the accrual calculation, while the spouse that donated the asset automatically reduces their accrual by the value of the donation.

Capital gains tax:

• CGT was introduced in South Africa with effect from October 1 and applies to the disposal of an asset on or after that date.
• So if donating an asset to a spouse is exempted from donation tax, will it be liable for CGT since an asset has been disposed? Well, yes and no.
• A “Rollover Relief” comes into effect for any asset disposed of to a spouse which means that the CGT event is deferred to the ultimate disposal of the asset by the receiving spouse. The liability of CGT being payable is therefore placed on the receiving spouse’s estate in a future year of assessment.
• Sars is aware that there may be a temptation to transfer assets to a spouse with a lower marginal tax rate to maximise tax efficiency. Due to that, paragraph 68 of the Eighth Schedule allows Sars to disregard the transfer if the main purpose is to reduce, postpone or avoid paying tax. The asset will be reverted to the original individual and taxed in the original owner’s capacity.

Estate duty: 

• As stated previously, out of community of property marriages means that each spouse retains their own estate and therefore should one spouse pass away there aren’t implications for the surviving spouse’s estate from an estate duty perspective. 
• Couples married in community of property have a joint estate and should one spouse pass away the joint estate must be wound up. The surviving spouse will have a claim for 50% of the value of the combined estate, thus reducing the actual value of the estate by 50%. The estate is divided after all the debts have been settled in a deceased estate. Burial costs and estate duty are not deducted from the joint estate before dividing it, as these are the sole obligations of the deceased and not the joint estate. 
• Although estate duty is paid only on the deceased’s 50% share of the estate, executor’s fees and master’s fees, which are also calculated as percentage, are paid on the total value of the joint estate. It is important to consider that if there is a situation where the first-dying spouse bequeaths his share of the joint estate to the surviving spouse, it could result in executor’s and master’s fees being paid twice on the same assets.
• Make sure that both you and your spouse understand how each matrimonial property regime will affect and impact on your financial situation. Going through a transparent and comprehensive financial plan together can be a gift of love to give each other.