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.