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Introduction

I recently attended the FISA (Fiduciary Institute of Southern Africa) conference and listened to a very interesting presentation on freedom of testation and digital assets by Ms Deidre Booyens.

Digital assets may be so-called e-books; downloaded music; digital photos and documents in 'the Cloud' – things that almost everybody owns, or think they own. Cryptocurrency is also regarded as a digital asset. It has a monetary value unlike other digital assets such as login credentials and social media profiles. SARS does not regard cryptocurrencies as legal tender like coins or notes. Cryptocurrencies are not backed up by our Reserve Bank as legal tender is. They are the subject of a contract between private individuals and companies.

Do I own it?

In South Africa, we have an almost unlimited choice as to whom we may leave our assets ("property") to by virtue of our last will and testament.

In terms of the Administration of Estates Act the definition of "property" includes a "contingent interest in property". So may this include digital assets? Maybe, maybe not.

The nature of the custody of digital assets

It appears that when it comes to Amazon®; Google® and Apple® the user does not own the content. So, for example, when you die your e-books 'die' with you and cannot be transferred to anybody else. Like a pharaoh, your riches go with you to the grave. Even though you thought you had 'bought' a book (and paid for it) and 'owned' it, you cannot lend or transfer it to anybody else.

Apparently, Facebook® and YouTube® have adapted their terms of sale (TOS) to state that the user also owns the content and information posted by the user.

'Research has shown' (unsurprisingly) that most people don't read TOS. A survey conducted by an international group on an online spoof product showed that users still clicked on 'I Agree' even though they were agreeing to 'surrender their firstborn as payment' in return for the right to use the software!

In South Africa, section 24 of the Electronic Communications and Transactions Act, states that unilateral statements made by means of data messages in an online agreement are valid.

You also cannot assume that your e-mails are your property and e-mails may not be accessible at all by your executor and heirs.

What is interesting as well is that apparently some TOS allow the provider to use your digital content by granting sublicenses or even transferring it, royalty-free. So there goes your home movie that you thought would be a Hollywood blockbuster, but which you uploaded for editing by a top movie director you met unsolicited on line...

What about online business records, accounting software and the like? It is so important to back these records up, in a format that is relatively easy for an authorised person to access should the business-owner become incapacitated or die.

Taxation

Our tax authorities are busy working with global technology companies to establish more efficient ways of tracking cryptocurrency trades. SARS has stated that cryptocurrency transactions are subject to the general principles of our tax law. Therefore, any revenue received, gains made, or losses incurred may be regarded as:

  • Revenue in nature and be included in the taxpayer's income tax; or
  • As capital in nature and be subject to capital gains tax in the taxpayer's hands.

The usual test to establish whether tax of a revenue or capital nature will apply is basically the intention of the taxpayer when acquiring the cryptocurrency, and the facts or circumstances of each case.

However, there is also a view that a cryptocurrency is just another way of paying for goods and services. If you are not using cryptocurrency to trade currencies for profit, there should not be any tax consequence at all. The same as if you use your credit card to buy something in dollars on line.

The estate

It is clear that the value of cryptocurrency is 'property' in a deceased estate. As I mentioned before, it does not qualify as 'cash'. Is it a claim in favour of the estate or movable property as such? It has no obvious intrinsic value; so, how shall it be reflected in an estate account?

Generally, things like digital photos would have zero commercial value. However, what if they are subject to copyright? Then the intellectual property may have significant market value.

The issue of what constitutes a digital 'asset' is far from certain. The definitions are too narrow at present. The laws regulating protection of and access to personal information have to be considered as well (POPIA and PAIA).

Should the law allow a person charged with a fiduciary duty to at least have access to a person's digital profile to enable him or her to wind-up the estate? How can we be sure that the person actually wanted his social media profile and digital assets to be revealed to his heirs?

As mentioned in a previous article, no power of attorney or grant of agency can endure after the death of a person in South Africa. Only a valid Will can be binding on third parties, but to add to the uncertainty it appears that the rights to inherit (if any such right exists at all in respect of digital assets) are subservient to the rights of service providers.

Conclusion

Any prudent business person will have to watch this space carefully. More and more important information is held online or in 'the Cloud', rather than in paper files. Estate planning will have to cater for these modern-day assets in future. It may be wise to hold digital assets in a trust or company as that entity can outlive the estate planner. Whether that is possible, is another story.

Article written by David Thomson, Senior Legal Adviser, Sanlam Trust

 

 

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