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No wealth tax yet, but bigger administrative burden awaits taxpayers

Davis Tax Committee publishes its final report.

Taxpayers may be forced to submit a statement of all their assets and liabilities from 2020 to inform a future decision about a wealth tax in South Africa.

The Davis Tax Committee this week published its final reports including one on wealth taxes. It did not recommend the introduction of a wealth tax, saying more work is needed to ensure that a “recurrent net wealth tax” is well designed to at least generate more revenue than the costs of administering it.

The committee was appointed by the Minister of Finance in July 2013. Its purpose was to inquire into the role of the tax system “in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability”.

Patricia Williams, tax partner at Bowmans, says the reporting of assets at market value will place quite a burden on taxpayers. The committee also suggested that “substantial penalties” should be charged on incorrect reporting.

“This process would be potentially costly, either for the time and effort necessary for accurate valuations, or for the potential penalties if broad brush estimations of market value are used.”

She says this brings up considerations around the Constitutional right to administrative justice, including that Sars must promote the efficient, effective and economic use of resources.

“Costly or time consuming valuations do not appear to be good uses of taxpayer resources. In the circumstances, there would need to be clear guidelines on easier alternatives that would be considered acceptable to Sars as a proxy for market value.”

The committee says transfer duty currently acts as the principal wealth tax in South Africa. It says the benefits of recurrent taxes on immovable property (and particularly a land tax) are attractive since it is considered to be “the least distortive of all taxes and thus the least harmful to economic growth”.

The committee recognises that there are a number of practical considerations that has to receive attention when considering the recurrent taxation of immovable property.

“The first is the concern about liquidity and the ability to pay. It is not generally feasible to sell off a small portion of land or a home in order to meet the tax liability. The property or land tax needs to be paid from income.”

The committee acknowledged that farmers, who may include previously disadvantaged individuals, who have benefitted from land redistribution policies and retired people with limited incomes will be affected.

Williams says the increase “on paper” of the value of one’s house could threaten housing affordability, particularly when these property price increases are large. 

She refers to the housing market conditions from 2000 to 2008 where property price inflation has been reported as being 304% during this period.

Land tax on the value of one’s house would then have quadrupled, if it had been in place at the time. One can imagine the potential for people to lose their homes in this kind of situation.

“In the circumstances, it is a relief that the committee has recognised some of the real problems with a potential land tax, and recommended no land tax in the near future, with an initial period of data gathering and further consideration of potential wealth taxes,” says Williams.

One would also have expected a discussion around exemptions for personal homes, she adds.

The committee also considered pension assets. Three quarters of household assets in South Africa are financial, with interests in pension funds and long-term insurers constituting the single largest category.

However, it found that a wealth tax may not only discourage saving but may lead to people not holding wealth to fund their needs in future.

The committee noted that capital-related taxes in South Africa such as dividend and capital gains tax, have much lower revenue potential than elsewhere.

Higher taxes might undermine the country’s simultaneous efforts of encouraging capital formation and lowering the dependency on foreign capital inflows.

There is concern that excessive taxation on investment can reach the point where capital is invested abroad, legally or illegally.

According to the Davis wealth report, a substantial proportion of South Africa’s wealth (R2.2 trillion) is held in retirement funds.

The tax incentives and exemptions granted to South Africa’s retirement funds are well motivated, given the fact that overall life expectancy is expected to increase to 70 by 2030.

The committee, however, added that the retirement funds of South Africa have become relative tax havens for the wealthy in comparison to the privately held savings and investments.

The committee frequently referred to the extremely high wealth inequality in South Africa, saying it poses a threat to social stability and inclusive growth.

“It is timely for South Africa to consider a range of ways in which wealth inequality can be reduced,” the report says.

Keith Engel, CEO of the South African Institute of Tax Professionals, says he appreciates the moderate tone and consideration that went into the report.

However, he expressed a deep discomfort with it. One cannot deny that South Africa has a high level of inequality and the associated unsustainable nature of the current economic circumstance, he says.  

“However, the report wrongly fixates on the label of a wealth tax as a viable solution as the only inevitable remedy without meaningful regard to current government interventions.”

He says that estate duty, income tax and current allocation of government budget expenditure already make massive in-roads in this regard despite the lack of a tax labelled “wealth tax”.

“Post-1994 South Africa has made more efforts in this direction than any other country. Multi-lateral organisations indeed recognise that redistribution has its limits.”

Engel says at some point, growth at the bottom-end without forcing further compromises on the rest is the only realistic way out.

“A further tax on the wealthy (in any form) becomes counter-productive no matter the label and no matter the cause. Enough is simply enough.”

The committee says most of the wealth tax submissions received point to the fact that wasteful and corrupt government expenditure should be curbed.

The committee emphasises that the enhancement of existing wealth taxes, coupled with a decrease in unauthorised and wasteful expenditure and enhanced tax morality will go some way towards reducing South Africa’s unsustainable levels of inequality.

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“The committee says most of the wealth tax submissions received point to the fact that wasteful and corrupt government expenditure should be curbed.”

Why don’t they start there and make it their top priority.They always chasing after the law-abiding taxpayers, meanwhile the thieves are left alone.

“Engel says at some point, growth at the bottom-end without forcing further compromises on the rest is the only realistic way out.”

They are making ppl lazy and unproductive by always taking from the wealthy and giving to the poor. Alot of the wealthy ppl got there from hard work and being productive to become successful.They are creating a society where everything is expected to be for free.

To restate your point, instead of halting the Commission right there, at the point of fruitless, wasteful and corrupt government spending, the ego-maniacal Dennis Davis (learned judge and reality show star as he is, MAHFGR) chose to plough on, incurring fruitless and wasteful expenditure.

Since rates are linked to the market value of property, SA already does have a wealth tax, albeit not as heavy as the anti-rich dogmatists would like. We need policies that are anti-poverty, not anti-rich.

Hello v_3 6 hours ago: What does MAHFGR mean? I’m from the Karoo.

Wealth tax will not raise much taxes, but will have negative consequences for the country as it drives away more successful people. Its driven by left wing ideologists that have envy of successful people.

We are already taxed to the hilt as it is, to even float the notion of a wealth tax on top of all the tax we already pay is ridiculous, 3rd world country problems with a 1st world country effective tax rate, govt should take a hard look at itself and find a way to be more effective with less money.

South Africa is the only country on the continent, having the inequality problem. A left over from struggle times turning victory. Leaders first, became the motto. Making not haves, have it all. Google on it. Voters flocked to the old have city’s looking for money spilling out of white owned walls. Believing their freedom masters. Today, holidaying in Dubai. Having the famous time of life. And homesick for the good old struggle times. Money, plenty, is boring stuff. Ones it flow like a tap on call.

Start by taxing Mr. Zuma and his friends in Dubai first.

They are such geniuses at looking at ways to take more and more from the bleeding/crawling/dying tax payers.

Now we understand why the rich look for ways to hide their wealth.

I agree, if they expropriate the land without compensation, tax it heavily…

I still cannot understand why the committee did not tackle tax-free use of trust assets – maybe too many politicians and committee members use trusts?

There are hundreds of billions housed in trusts. (high end property, farms, yachts, planes, holiday homes, etc). The beneficiaries are only taxed if the trust distributes funds to them. If Johnny lived in his employer’s house and drove his employer’s car, Johnny pays fringe benefit tax. If Johnny lives in a R20m Clifton apartment and drives a R1m mercedes both belonging to the grandpa’s trust, Johnny is not taxed at all. Grandpa’s trust deducts the expenses of the assets from its taxable income.

The fringe benefit tax regulations exist already, so implementation is dead simple: tax the difference between the deemed value and what Johnny actually paid to use the assets.

It would be really intresting if a journo can pose the question??

Dear Mr Davis.Hope that you read this suggestion about trusts’assets.Good advice.

You spoil your point by claiming “Grandpa’s trust deducts the expenses of the assets from its taxable income”. If Johnny is using trust assets for private purposes and not in the production of income, then claiming the costs as a business expense is fraud.

“Taxpayers may be forced to submit a statement of all their assets and liabilities”

This is like putting a sign up outside your house that lists all your possessions so thieves can see exactly what you have inside.

Wealth tax is perfectly acceptable in a first world country but not in a third world one. They’re dreaming if they think it can be introduced here. Wealth tax will take the SA taxpayer to new levels of obverscation and ultimately emigration leaving SARS with nothing.

The governments continued myopian obsession with finding ways to tax (read “expropriation without compensation”) already successful citizens, rather than first removing the plank from their own eye in terms of corruption and inefficiency is part of the continued downfall of SA. In terms of metrics regarding “value for money” on taxes paid, SA is one of the worst in the world. A 4% reduction in the bloated government salaries budget would be worth more than the additional money raised by the VAT increase.

Rather develop and facilitate a culture of growth and entrepreneurship, rather than a “let me see how much I can get for doing as little as possible” mentality. Then you will automatically see an increase in taxes paid as growth picks up.

France has just recently removed wealth tax on financial instruments. (it remains on a property for now)
Italy has followed Cyprus, Malta, Portugal, Spain and UK in introducing a flavour of a non-dom tax favoured regime.
The USA has slashed corporate tax rates.
Now comparing these jurisdictions, which way is the wealthy money going to flow?

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