Effects of the proposed wealth tax in South Africa

//Effects of the proposed wealth tax in South Africa

Effects of the proposed wealth tax in South Africa

Wealth tax is a hotly debated topic, especially since South Africa’s taxpayers are already overburdened. So, the invitation from the Davis Tax Committee (DTC) for public submissions on the desirability and feasibility of such a tax has placed the issue squarely in the limelight once again.

The Government is understandably keen on this idea as it needs more revenue to fund the bloated civil service, sustain high levels of other wasteful (and often corrupt) spending, and avoid the policy reforms required to stimulate growth.

Globally, wealth taxes have steadily declined in recent decades.   By 2010 wealth taxes only existed, on an ongoing basis, in three member countries of the Organisation of Economic Cooperation and Development (OECD).   South Africa has a tiny tax base, and is heavily dependent on a small group of individuals and companies that pay around 60% of the personal and corporate income taxes collected each year.  It is feared that imposing a wealth tax on this small group could encourage a flight of capital and skills which would further weaken the economy.

Leeching land-owners

The proposed forms of such a tax in South Africa may include a land tax, and an annual wealth tax.  It is assumed that by a land tax is meant an annual tax on the value of land.

It is hoped that at least primary residences should be exempt from a land tax.  This would be in line with the way primary residences are treated differently from other fixed property for purposes of Capital Gains Tax (CGT).   The justification for such an exemption is rooted in the fact that private ownership of residential property is an enabler for wealth creation, something which is desperately needed in South Africa.

There is the question of what other land should be excluded?   Normal exceptions of land for recreational, educational, religious and charitable purposes, should be considered.  Agricultural land should also be considered in order to avoid a further burden on already thin profit margins.  Famers in some areas, for example, the Karoo, are notably asset rich and cash poor.  An annual tax on land will place them in an even more serious cash squeeze.

If an annual land tax is levied on rented residential property, this sector will experience upward pressure as landlords will pass such a land tax on to the tenant, which will increase pressure on already stretched middle class citizens.

If there is to be a threshold value on such property, what should this threshold be?   There is the possibility that an extremely wealth person with several pieces of land valued at below the threshold will effectively escape the tax.

Many elderly people hold onto their family homes.  These homes can have quite a high value due to market movement, but their elderly occupants can be quite cash poor.  This reality is recognised by many local authorities with special discounts on municipal rates for the elderly.   If such a tax were levied, it would force elderly people of out of their homes.  In addition, quality accommodation in retirement villages has increased by far more than the average increase in property values.  Imposing this tax with too low a threshold will prejudice this already financially vulnerable sector of the population.

Are you one of the few?

The complexities of an annual wealth tax are daunting.   To qualify as a tax on wealth, the net worth of the taxpayer will have to be determined on an annual basis.  This will become an enforcement nightmare from a SARS point of view.

A further question is at what net worth does a person qualify as wealthy?   This question has different answers depending on the life stage and circumstances of the individual.  A 35 year old with R15m may be regarded as wealthy.  However if the 35 year old is disabled, this is not a large amount of money.   At age 65, upon retirement, if the R15m is the sole source from which income must be produced, it is similarly not a large amount of money.  If an annual inflation-linked income of R850,000 per annum is being drawn, it is expected to last less than 25 years.

Very few developing countries have an annual tax on wealth.  Developing countries, by their nature, need foreign direct investment to grow and develop their economies.  They need to be attractive to investors to bring that desired level of foreign investment to grow and develop their economies.  Extra taxes are always a deterrent to capital inflows.

Currently in South Africa, taxpayers with a taxable income in excess of R1m make up only 3.5% of the taxpayers, while contributing 38.5% of the income tax revenue.  Ultimately, South Africa, like all developing countries, needs more growth and not more taxes.

The words of Winston Churchill are a sober reminder:  “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

 

By | 2017-07-11T12:20:50+00:00 Aug 1, 2017|News|0 Comments

About the Author:

Pat Blamire

Pat is a certified Financial Planner. Pat’s personal experience in wanting peace of mind about her own financial affairs being in the best possible order, drove her to pursue a career in financial planning.The freedom that this gave her, prompted her to help individuals in the same situation.

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