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Nightmare time

Estate duty, at 20% of the inflated value still being placed on Sharemax-promoted investments, represents a significant threat to estates with large exposure to such investments. For example, innocent heirs could suddenly find estate duty levied rendering them insolvent if their late father had been a big investor in the now worthless and totally unrealisable The Villa development.

Nel van Zyl, of Frontier Asset Management, the company that took over management of the investments in Sharemax, says the company simply issues a face value certificate to executors asking for a valuation for an investment in one of the products.

Cobus de Klerk, a retired partner at Brits audit firm GKL, who has years of experience as an executor of estates, confirms he has to use such a “face value” certificate in drawing up an estate’s account and final assessment of estate duty.

Let’s take a salient example to illustrate the problem. Klaas du Preez, a widower and a particularly wealthy man, died on 10 December last year. Most of his estate appears to consist of a R50m investment in The Villa. Van Zyl at Frontier verifies the face value of the investment on 10 December 2010 was R50m and issues a certificate to that effect.

Du Preez’s will states the R50m investment should be equally divided between his three children. The other assets in the estate are a Bushveld farm worth R4m, which should go (undivided) to the three heirs equally. The estate has little in cash. The remainder of the estate on which 20% tax has to be paid is more than R50m, and the SA Revenue Service (Sars) will head the queue of creditors, demanding R10m in cash. Sars will claim that R10m not from the estate but from the three heirs in equal portions. This is a sudden “Rich man, poor man” scenario. Instead of inheriting anything from their wealthy father’s estate, each heir now has to cough up at least R3m.

It won’t help to ask the executor to sell part of the investment in The Villa. It can’t be done – there’s no market for it. And had there been a market it would probably not realise as much as a cent in the rand.

And don’t think there’s an easy solution. The executor will know – if he’s read past copies of this magazine – the investment in The Villa is currently worth nothing. That won’t help him at all. He’d have to persuade Sars the face value certificate from Frontier is wrong, which wouldn’t be easy to do. Or is there an executor prepared to try?

Of course, the heirs could ask the executor to appoint another auditor to issue a different valuation. If you know of an auditor prepared to undertake that, please let me know.

Cobus de Klerk’s temporary solution is to draw up a first distribution account and then later to see what the realisable value of The Villa investment will be. But he admits that’s not much of a solution because “estate duty is payable on the valuation of the asset on the date of decease and not on what’s realised at a later date”.

The new directors of the Sharemax-promoted assets will very soon have to consider the matter seriously. Just take the proposed debenture with a 15-year term due to be distributed to investors in terms of the first Section 311 settlement in exchange for their existing investments in Zambezi Mall. For the next 15 years someone, such as Frontier, may continue to issue certificates with a face value equal to the original investment. Just think what that will do to the estate duty faced by innocent investors and heirs sitting with worthless and unmarketable assets.

As has long been advocated, liquidation of all the insolvent Sharemax-promoted schemes would place at least a realistic value on the assets and prevent investors having to pay estate duty for years to come on an already worthless asset. 
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