Why a marriage contract saves you tax

2015-04-07 10:00

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Not formalising your relationship could cost you more than you realise because the papers you sign when you get married define what happens to your finances while you are together, writes Maya Fisher-French

When Melanie and John decided to get married after living together for 29 years, it was a practical decision.

Melanie says: “In September last year, my brother was in a very serious car accident and was on life support for several days. It struck me then that, because we were not married, John would have no say over my future if I was in that situation – yet John was the only person I would want making that decision.”

At that point, the couple discussed putting a power of attorney in place, but nothing came of it until they were faced with a financial dilemma. While no one likes to talk about death, tax is another matter altogether.

When the couple decided they wanted to buy a property together earlier this year, they were faced with a financial shock.

“Although we would be joint owners, John was putting in 80% of the capital. Our accountant informed us that this would trigger a donations tax event. John was going to have to pay about R200?000 in donations tax!” exclaims Melanie.

Soré Cloete, senior legal manager at Old Mutual, explains that if a couple is not married, then not only would donations tax be payable, but the surviving partner, should one of them pass away, could face both estate duty and capital gains tax on that property.

For 29 years, Melanie says, there was never an issue in terms of the couple’s finances. She has signing powers on her partner’s bank account and John’s medical scheme recognised her as a partner. Even when she was diagnosed with a serious illness, the medical scheme did not question the relationship.

“It is only the SA Revenue Service (Sars) that has a problem with recognising a common law marriage,” says Melanie.

Zola Mtshiya, head of communications for the Board of Healthcare Funders, says that a couple living together without a marriage contract can belong to their partner’s medical aid.

“There is an extended definition for a dependant in the Medical Schemes Act, where ‘dependant’ can include a partner,” says Mtshiya, who adds that some schemes may ask for an affidavit for proof of the relationship.

Although the couple married for purely practical purposes, Melanie admits that it has fundamentally changed their relationship.

“I was the biggest cynic in the world about marriage. Both John and I had been married previously and we had not been very happy in our marriages. Our relationship worked for us, so it made no sense to get married.”

Melanie helped John raise his son and is now a devoted grandmother to her stepson’s two children.

Yet somehow, unexpectedly, the marriage has made a difference. “It added such a different dimension to our relationship. It is fascinating that a piece of paper can make a difference, but with the right person this time, it did,” says Melanie, who adds that she always felt that by not getting married she was making a statement.

“I was saying: ‘I choose to be in this relationship because I want to, not because I am married.’”

Yet Melanie says she now realises that this was in some way a fictitious reality. “You are so enmeshed financially after all these years, that it would have been difficult to separate anyway. We may as well have been married. You are in the same situation, but with no protection.”

David Knott of Private Client Holdings says our courts have decided that when a heterosexual couple merely live together without the benefits and obligations of marriage, the surviving partner does not qualify as a spouse and could, therefore, not claim maintenance.

“On the other hand, there is a decided case confirming that the surviving partner in a same-sex relationship would be considered a spouse. However, this case was heard before the adoption of the Civil Union Act in 2006, when it was not permissible for same-sex couples to enter into a marriage-like arrangement. It would be interesting if that case were to be challenged now,” says Knott.

Melanie says that when she met John, she had a really good job and earned well, but once her stepson became a teenager, they felt flexible work would give her the chance to be home more.

“I wouldn’t say I sacrificed my career, but because John focused more on his career than I did, he has made more money,” says Melanie, who adds that while she always considered herself to be financially conservative, she didn’t think about what would happen if he left her.

“Although I doubt it would ever have happened, if he had left me, I could have been left on the street with no claim to anything. That is very scary.”

What was supposed to be a secret courtroom marriage turned into a proper wedding with family, a wedding dress and two very excited grandchildren.

“It was a really special day. It has been amazing. It has added a new dimension, new tenderness and a new chapter in the relationship.

“From being someone who actively campaigned against marriage, I am now its biggest advocate.

“I guess Sars has done me a big favour,” laughs Melanie.

Donations tax

1 Donations tax is not payable between spouses. However, donations tax will be payable if a person donates more than R100?000 to anyone other than their spouse in a tax year. A tax rate of 20% would be applied.

Estate duty

2 Estate duty is not payable on any assets left to one’s spouse.

If you are not married and leave your estate to your partner (or anyone else), estate duties of 20% would be payable on any amount above R3.5?million.

Abatement

3 Not only is an inheritance left to a spouse tax-free, if the R3.5?million tax exemption (abatement) was not used by the first spouse, then the abatement of R3.5?million would roll over to the surviving spouse who would, on their death, now have R7?million to leave as an inheritance, tax-free.

Capital gains tax

4 On death, a person is deemed to have disposed of all their assets for the purposes of calculating whether there will be any capital gains tax liabilities. If an unmarried partner left the property to his/her partner, then capital gains tax on the property would be payable. If they were married, however, no capital gains tax would be payable until the second spouse passed away.

The effect of marriage on taxes

Religion

Muslim marriages

It is worth noting that Muslim couples are considered single and unmarried unless a legal registration of their marriage is made in court.

A draft Islamic Marriages Bill has been prepared by the SA Law Reform Commission, but has not yet been passed.

Fast facts

The marriage contract

Melanie and John decided to get married out of community of property (COP) by signing an antenuptial contract with accrual.

The couple did not declare any individual assets entering the marriage as they had amassed their money together over the past 29 years.

“In effect, we are sharing everything as one would in community of property, but this way I don’t need his signature to open an account,”

says Melanie.

It also means that their debts remain separate and neither one would be liable for the other’s debts, unlike in COP, where the spouse is liable for their partner’s debts.

Soré Cloete, senior legal manager at Old Mutual, says another option for a couple who do not wish to get married but want recognition as a spouse in terms of the Income Tax Act and Estate Duty Act is to opt for a civil union. A civil union can also be used for same-sex couples who want the same legal rights as spouses under the Marriage Act.

Whether you are married under the Marriage Act, the Recognition of Customary Marriages Act or the Civil Union Act, there are three marital regimes you could consider:

In community of property:

The partners share all their assets and are entitled to half the partner’s assets. What each partner brings into the marriage and everything they accumulate, they share 50-50.

It also means they share all debt incurred by either of them. An antenuptial contract is not required for this marital regime – unless you sign a separate antenuptial agreement, you will be automatically married in COP. Upon death or divorce, the joint estate will be “split” to provide each party with her/his share. This means that in a will, each party can only bequeath his/her half of the estate.

Out of community of property, without accrual:

Each partner retains his or her assets – what they had before the marriage or bought thereafter. The partners are not liable for the other’s debts. Upon death or divorce, each party retains his/her estate.

Out of community of property, with accrual:

Each partner retains his or her assets – what they bring into the marriage or bought thereafter. The difference here is that the partners share in the growth of assets after the marriage.

The difference in the growth accumulated will be divided equally upon death or divorce. The partners are also not liable for the other’s debts. Upon death or divorce, each party retains his/her estate, but the party with the larger growth in assets has to pay the party with the lesser growth in assets for the “shared accrual” – the difference between the accruals divided in half.

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