The Davis Tax Committee ("DTC")
issued a media statement on 25 April 2017, calling for written
submissions on the introduction of a possible wealth tax in South
Africa.
This proposal comes two months after an increase in the top income
tax bracket for individuals by 4% to 45%, resulting in an effective
capital gains tax ("CGT") rate for
individuals of 18%. This should be seen on the back of the increase
the CGT rate by nearly 5% from 13.32% in 2014 to the current 18% in
2017.
It is understood that the background to the DTC being tasked to
consider a wealth tax for South Africa is that "[t]he
distribution of wealth in South Africa is highly unequal" and
that "[i]t is well established that economic inequality
inhibits economic growth and undermines social, economic and
political stability", in the words of Judge Dennis Davis,
leading the DTC.
Unlike income tax, where taxes flow from earnings (ie wages,
salaries, profits, interest and rents), a wealth tax is generally
understood to be a tax on the benefits derived from asset
ownership. The tax is to be paid on the market value of the assets
owned year on year, whether or not such assets yield any income or
differently put, it is typically a tax on unrealised income.
Currently, South Africa has various forms of taxation, which
essentially constitute a taxation on wealth. These include estate
duty, transfer duty and donations tax. The DTC confirmed that the
potential forms of wealth taxes which will be considered
includes:
- a land tax;
- a national tax on the value of property (over and above municipal rates); and
- an annual wealth tax.
Countries that currently levy a wealth tax include Spain,
Norway, Switzerland and France. Some other European countries have
discontinued this kind of tax in recent years. These include
Austria, Denmark, Finland, Germany and Sweden.
While a wealth tax may undoubtedly be beneficial to address the
divide between top and bottom level income earners, two main
problems have been identified by some of the countries that have
abolished this tax, namely the disclosure and valuation of the
applicable "wealth".
The above may be reasons for not many developing countries imposing
a wealth tax. In particular, this tax is not levied in Brazil,
China, Indonesia and Russia. The exception is India, which imposed
a wealth tax until 2016. Some of the reasons for its abolition have
been cited as the disproportionately high administration and
compliance costs associated with this form of tax, as well as
capital flight from the country. This sentiment is shared by
France, where one report, established by the French Parliament,
estimated that more than 500 people left the country in 2006 as a
result of the impôt de solidarité sur la
fortune (or ISF wealth tax).
Looking at the above factors, it is difficult to see how a
wealth tax will assist to improve South Africa's weak economic
growth and unemployment, in particular, if it incites a further
flight of capital and a resultant decrease in economic activity. As
per Mike Schussler, chief economist at Johannesburg-based research
group Economists.co.za. "The only way we can look at how we
can address income inequality is to create more wealth and more
jobs ..."
The DTC will accept comments until 31 May 2017 before scheduling
hearings in respect of the possible introduction of this form of
tax.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.