South Africa’s tax vulnerability

Losing just a few thousand wealthy people could have a huge impact on government revenues.
More than a 10th of SA's revenue is expected to come from just over 120 000 people (0.2% of the population, and the demographic most likely to emigrate). Image: Shutterstock

Given the unsteady state of South Africa’s public finances, meeting tax collection targets is vital. The country has to keep its budget deficit at a reasonable level by ensuring that it brings in enough revenue.

However, figures from the South African Revenue Service (Sars) to the end of August have shown that tax collections have been below where they should be. By this point last year, Sars had collected 39% of its target. For the 2019/2020 year, it had only reached 37%.

Read: SA faces possible tax revenue shortfall of R50-R98bn

As the graph below from Economists.co.za’s Mike Schüssler illustrates, there has been a notable decline in revenue collection relative to previous years. As Schüssler notes, this is despite a higher Vat rate, and personal income tax brackets not being adjusted for inflation, which sees people paying tax at higher rates.

Source: Economists.co.za

This has also resulted in a severe drop in taxes collected relative to National Treasury’s own expectations:

Source: Economists.co.za

Counting on individuals

Personal income tax collections are of particular concern because South Africa relies heavily on these revenues. Of the R1.422 trillion that the government has budgeted to take in during the current tax year, R553 billion, or just under 40%, is expected from this source. The country’s 7.5 million registered taxpayers carry an extremely important burden.

Even more specifically, those who earn more than R1.5 million per year are budgeted to contribute R160 billion in tax this year. That is 11.2% of the total expected revenue.

This is reflected in the table below from the 2019 budget review:

Source: National Treasury

While this illustrates South Africa’s progressive tax system, which requires higher earners to pay proportionally more, it also highlights a vulnerability. More than a 10th of the country’s entire revenue is budgeted to come from just 120 751 individuals – 0.2% of the population.

It has been noted before how placing more and more demands on this small group could increase the risk that they move either themselves or their assets elsewhere. This is, after all, a highly mobile demographic. If they feel their taxes are not being properly spent and the opportunities for them in other countries with lower tax rates are more attractive, they have the option of leaving.

“If just 10% of those people [12 000 individuals] were to decide to leave, you would lose R16 billion of taxes,” says Bernard Sacks, tax partner at Mazars. “That is somewhere we are very vulnerable.”

To put this into perspective: R16 billion is significantly more than the revenue National Treasury projected to take in this year from the 2.4 million taxpayers earning less than R150 000 per year.

Signs of trouble

Worryingly, an analysis of the tax collection figures to August suggests that revenues from this group may indeed be slipping.

Many of the highest income earners in South Africa would be registered as provisional taxpayers. In other words, they earn income other than just from a single salary, and are required to submit returns twice a year.

Comparing the revenue received from provisional taxpayers in the 2018/2019 tax year to how much has been recovered from them so far this year reveals a concerning picture. Despite National Treasury’s expectation that both the number of high income earners and the amount of tax they pay would go up, the figure taken in from provisional tax has actually fallen.

Provisional tax, assessment payments and penalties collected to August

2019/20 

2018/19   
Budget estimate  YTD % Preliminary outcome  YTD % Change
R53 713 812  R14 592 059  27% R49 432 083  R17 796 236  36% -9%

Source: Sars

While, on aggregate, provisional taxpayers will always pay more in the second half of the tax year, the drop in collections both in nominal terms and relative to the total amount expected is noteworthy. It suggests that there may be a gap developing in this segment of the tax base.

This also aligns with figures showing that more wealthy South Africans are looking to emigrate.

LIO Global recently noted that applications from South Africa for the USA’s EB-5 Investor Green Card Programme, which opens up US citizenship for those able to invest at least R7.6 million into the country, have more than tripled.

As Sacks notes, this has potentially serious implications for the country. Not just because of the impact on revenue collection, but for the economy more broadly.

“Those mobile people would also be big spenders in the economy,” he points out. “So when they leave, your Vat goes down as well. They could potentially be moving their businesses abroad, so your company tax could go down. Your employment could go down.

“You are not just losing a bit of personal income tax – there is a ripple effect right through the economy.”

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While I’m not disputing the risks here, a few points on the provisional tax issue.
1) For the first time this year, a large number of s8C gains and dividends are accounted for in PAYE rather than the prov tax system. This would have a big impact for these individuals.
2) Prov Tax payments are generally returns on investments or other side line businesses – these are all getting pummeled…

What would really interest me is what the ratio of salary to dividends is for taxpayers. That would, in my opinion be the really telling ratio.

It would be interesting to see the CGT component separately. Mostly paid in the second half as it isn’t relevant to the first prov tax payment. The trend to passive investing and collective investment schemes, in which CGT can be deferred almost indefinitely, probably results in a structural decline. There may be a small windfall from the Naspers/Prosus transaction.

I have a sideline business and am a provisional taxpayer. As Carmen says, times are tough and my business has taken about a 20% knock from 2 years ago.

Also, I am getting more aggressive in minimizing my tax liability. There are some nice and legal ways of doing this, if you have discretion over where your business income goes. Think relatives who are still students, for example….

The total CGT take from individuals is only about 10bn pa, doesn’t move the dial much.

A shift from PAYE to VAT as the main source of tax revenues would in my opinion be more appropriate in a cash based economy such as ours. It may not be as progressive, although widening the range of zero rated good would help with this, it would improve the collection rate.

If people aren’t paying PAYE on cash earnings, why would they pay VAT on cash spending? Child like thinking there.

Exactly.. that and if this came to pass I’d just start a rentals as a side business and keep spending the same.

What a fool I am – by the way can you let me know which parts of Pick n Pay, MTN, Engen etc give you the option of paying the VAT on your bills. They don’t seem to offer that to me – probably my child like demeanor at the check out!!! If you can’t effectively tax income then tax spending.

I suspect the number of people earning enough in the ‘cash-based economy’ to pay income tax is relatively small.

VAT is much more susceptible to leakage due to smuggling and large scale fraud.

agree with Cheetah

You would be surprised how many cash only businesses I’ve come across recently.

What part of pnp and mtn allow you not to PAYE? Oh, but wait it still happens! It is almost like the world is bigger than your local pnp.

I would love to be your tax advisor. I would blow your mind at what can be done. Legally. You aren’t ready for the rest.

VAT not PAYE

What gets me most is not the fact that I receive next to nothing for the tax I pay, or even the billions that are stolen annually, but the government’s haughty, hostile and entitled treatment of the few taxpayers that fund their failures.

I could not agree more especially when they audit by 91 year old father’s medical expenses to get a few rand more by denying what I consider to be legitimate medical expenses.

Well they keep flogging a dead horse. They don’t seem to have any other idea’s.

Remember Trumps tax cuts? Is it going well with the US?

A married couple in the US pay only 12% tax if earning less than about R1.1 million.

Foreign earnings repatriated I think is between 8 and 15%.

Company tax 21%.

Our lot cant think out the box and will just loose more and more taxpayers.

I suspect cryptocurrencies will also have a bigger effect going forward. Especially when Libra goes online.

Will there ever be a point when the ruling party wakes up and realises that their policies are counterproductive to the people and the growth of this country?
Clearly the recent changes to the tax legislation is yet another policy that is once again resulting in further decimation of the countries economy!
Well done to the “leadership” of the rainbow nation!

120 000 people in a country of close to 60 million earn over USD 105k per year. We must realise that we are a dirt poor country yet cannot see it. We do not even have .1% of people being USD millionaires-Switzerland(9m people) has over 10%!

This is the biggest problem here-unrealistic expectations from 17 MILLION people getting basic income grants from this tiny pool of transient people. Its not sustainable-we are too poor-it is collapsing -and has to get worse!!

yes the anc never worked with money before, never learned how it is generated, controlled and long term plan ahead on a capitalist basis – but according to themselves are overnight experts in that field – based on financial, economical and any other fields they have actually zero experience – from minister level downwards. they base their grants on their original experience of existence – we do not generate income, we live on donations- whilst the donor is inexhaustible taxpayer. they want to be the usa or china of africa, while sa is not a drop in the ocean in comparison of these countries economy and citizens skilled level.

Those wealthy people are going, my friends.

They’ve paid enough to the black hole of ANC corruption and incompetence plus the ANC prefer non-taxpayers and their votes. A house of cards is collapsing.

Ahh but can I do this while I live in SA? Ie be a high income earner but live here but pay tax elsewhere?

Not as a wage slave.

…and if I leave my high income job, then someone else will fill it who will then pay tax. I suspect many of the highest income earners are in corporates, so unless the company is somehow willing to let all its employees work outside SA, SARS has little to worry about there.

What is more concerning is that there are less jobs available due to corporate downsizing, as well as if there are no suitable candidates to replace the people that left.

Think Construction sector. Many, Many highly paid qualified and experienced people have left the country and those jobs are dead. Capacity cant be filled from inside the country anymore so it might be chinese contractors that come and work here. That’s if ever there is work again.

They earn a dollar a day and a bowl of rice. I doubt our Mr. Kieswetter needs to worry about them.

@Mmmm they weren’t going to be earning tax anytime soon so the loss to the fiscus isn’t because of emigration, it’s because of the downsizing that occurred.

It isn’t the business owners either, since they were drawing their income in dividends at 20%, not salaries at 45% either.

So I’m still at a loss as to why emigration would be blamed for a loss of taxpayers at that level. It’s economic downsizing that’s the issue, and capital flight in terms of investment.

Sorry, I posted this previously, but I think this should be considered seriously:

Governments can indoctrinate people to go to war and die. These people are called patriotics.

Religions can also do that.

There is NO reason to use this ‘weapon of patriotism’, coupled with friendly indoctrination, to collect huge amounts of tax from EVERYBODY.

Do away with all these tax laws, tell children and people what is needed, implement a public merit system like China, allow the free flow of capital and cash between RSA and the rest of the world, and we will prosper and grow.

Current SARS employees can be re-trained to assist people in their financial dealings, from primary school level to retired people, and always gave friendly suggestions to each person on how much they can consider to pay, vs the current needs of the government.

Every child should have a tax number, with a Public Merit Number, showing their first payment of R2 at their 6th birthday, thus cultivating social responsibility from a young age.

The public should be able to pay their ‘tax’ at shops, malls, offices etc, and their records should be open to everyone.

Hopefully this system will eventually get rid of money lenders also!

14 million pay tax while the total population is 57 million. The only way to fix whatever is the problem here, is to take the 14ml of honey and add it to the 57ml of water, thus creating a diluted honey-water solution that everyone can drink. Exactly the socialism/communism we are all slowly creeping towards.

No. 14M pay Personal Income Tax. Nearly every economically active person pays tax.

I know this spoils the victimhood agenda and that you feel salty for having to pay income. But you could just resign and that will all stop.

Before you lose the plot, I am not saying this is a desirable situation. I am just laughing at your state of mind and ignorance that would make you think that this is the only tax that exists.

The reality is that wealthy people and their families have already moved a lot of money out of the country and continue to do so. As professionals leave SA so the tax base shrinks and their assets leave to.

The hole created by Zuma and his gang will need to be filled by those who remain and the only logical way to achieve this is cutting government spending, fixing broken SOE’s and collect more tax. This will have a devastating outcome for the ANC vote and potentially cause much unrest as the gap between rich and poor grows even bigger. What is needed is overhaul of policy and fast. A reset as such and then build the country again using the natural strategic advantage SA has in energy (renewable mainly) and natural resources. SA needs to create an environment to attract back all the mining majors that left SA between 2005 and 2012.

I personally have left SA and as a result significantly increased my spending power in USD. The emigration stats speak for themselves (2016-2019); many professional young people have left and with that the tax base shrinks. The reasons for this are simple; expropriation without compensation, increasing tax, prescribed assets (with a low return), low salaries, shrinking economy and the unwillingness to pay for fraud and corruption.

My sense is that there will be a big shock in TAX collections as indicated by this article and the governments reaction to filling this gap may cause even more money and people to leave SA.

…you saved me the effort in writing an essay 😉 Well said.

Thank goodness. Please tell us again about the sanctions against SA? That was hilarious. And you wonder why you lot can’t be taken seriously anymore.

I questions these emigration stats. When I graduated from university, 90% of my class went overseas (they still had the 2 years working Visa then). So the majority of young professionals left, purely to see the world and get some experience.

A large portion returned and are still returning.

The emigration stats are high now as these emigration “specialists” advise emigrating to avoid the new tax rules – which is CR*P.

Over the past 2 years I have had 1 client emigrate (in the wealth management space) and I have noticed that the majority of professionals in SA are here for a reason. They have usually worked overseas already and have assets offshore. From my limited observations, I see guys with average careers wanting to rather be average in the UK or Aus. No issue there, but I do question the flight of professionals, in terms of the actual quantity leaving due to push factors.

Interestingly, I am seeing quite a few young entrepreneurs from Europe setting up in SA (ok, mainly CT), as they prefer the value for money and opportunities in SA. Had to try convince one why its not the best idea to bring Euro500K into SA and earn 7.5% as opposed to -0.7% in Holland.

Those high earners will soon be decimated by the mass exodus of medical personnel. Not to mention the VAT lost from all the former private practices and their suppliers and related businesses. NHI will be the death of SARS.

Net VAT collection from the Medical & Veterinary sector is only about 10bn. Corporate and business income tax together, maybe 6bn. Can’t find sectoral PAYE,but it would include the state sector anyway.

That compares with 25bn in medical tax credits which would fall away.

There are much bigger issues with NHI than tax collections. Good thing it’s probably a long way off.

Surprised you don’t have a hundred ‘farmer in a different language’ accusing you of supporting the NHI. They must be braaing already.

Repatriation the stolen billions by the Zuptas would also will also have a huge impact on Government revenues!

Before talking tax, restore confidence in the goverment.
Put capable engineers in charge of Eskom, for a start.
As the possible overseas investors have asked, ‘when do we see one of the looters and enablers (read Jacob Zuma) in jail?

Engineers engineer. They don’t have the skills, qualifications or experience necessary to run a huge organisation with half a trillion Rand of debt. I know it sounds like a good idea, but it would be as bad as putting a politician there. As an engineer.

Really?

What is your wonderful solution instead?

A bankruptcy/business rescue/foreclosing specialist.

Gee, if only there was a qualification for skilled people to administer businesses…

What is your lot’s obsession with putting the wrong people in the job? Just the other day you had a goat herd as a president and now you want a heavy current engineer to run a business in deep crisis. Please apply your minds.

Don’t give up your day job, son!

Accountants and lawyers don’t cut it for real work of this magnitude.

The “heavy electrical engineer” (true fact) running China is doing a pretty damn good job making that country the world’s new super power.

Eskom (and SA!) needs someone like a PW Botha. But there is nobody and no political will like this now.

The best advice in SA is actually coming from the EFF proposal!

Dr. McRae oversaw the construction of Eskom’s current fleet of power stations, as head of its Central Generation Undertaking from 1971 to 1977, head of operations from 1977 to 1980, head of engineering from 1980 to 1984, and chief executive from 1985 to 1994.

They should have put an Engineer in charge of the design at Medupi.

End of comments.

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