Treasury ponders viability of a wealth tax, and how it relates to property taxes and estate tax, to mitigate expected budget deficit of R709bn this financial year.
Once again, it will be wealthier taxpayers who will have dig deep into their pockets for the additional R40 billion in tax revenue that government wants to collect over the next four years to make its books look better.
And in South Africa, you could find yourself helping to foot the state’s bill if you pay municipal property taxes, sell assets that require capital gains tax to be paid, purchase a property and pay transfer costs and earn dividends that are taxable or receive an inheritance, say tax experts.
During a parliamentary meeting on Friday, Edgar Sishi, acting head of National Treasury’s budget office, said Treasury was considering proposals from the Davis Tax Committee, such as the viability of a wealth tax and how it related to property taxes and estate tax, reported businesstech.co.za.
Since February’s budget was presented, the state’s financial position has worsened dramatically due to the impact of the Covid-19 coronavirus pandemic.
A budget deficit of R709 billion is expected for this financial year.
This pushes the consolidated budget deficit up from the figure of 6.8% of GDP that was expected in February to 15.7% of GDP.
Kyle Mandy, head of tax policy at PwC SA, said that, although Finance Minister Tito Mboweni said during his supplementary budget last week that an additional R5 billion in tax revenue was expected in 2021/22 (and even bigger sums in the subsequent three years), these forecasts may well be revised during the medium-term budget policy statement in October.
After the supplementary budget was presented, Sishi indicated that Treasury could implement tax increases of R20 billion over the next two years.
Mandy said that, while wealth tax is levied on personal capital or wealth, a solidarity tax is usually a once-off levy on taxable income above a certain threshold, but it is progressive, which means individuals with a higher income and bigger companies will carry more of the burden.
He said forecasts about tax increases next year were uncertain.
Although there are a couple of options, no tax increases – even those aimed at wealthy South Africans – can be implemented without taking the impact of these taxes on the economy into account.
According to Mandy, as well as Jean du Toit, technical head of tax affairs at Tax Consulting SA, the SA Revenue Service (Sars) should rather focus its attention on more effective tax collection instead of higher taxes.
According to the supplementary budget document, Sars will in future increase its focus on, among other things, tax evasion, syndicates that claim fraudulent VAT repayments and data from third parties, such as the Deeds Office, to trace taxpayers who fail to comply with their obligations.
Mandy said the Davis Tax Committee was investigating the tax gap (the difference between the total tax payable and that which has already been paid), which is estimated to be at least R200 billion.
Earlier this year, Sars commissioner Edward Kieswetter said that, thanks to its focus on improving tax compliance, Sars collected an additional R75 billion in the past tax year.
Du Toit said the easiest way to collect the additional R5 billion in 2021/22 was to not adjust tax curves for inflation-related increases.
This is known as bracket creep and means that people who receive inflation-linked increases fall into a higher tax bracket and therefore pay more income tax.
In last year’s budget, it was estimated that this would result in an additional R12 billion in tax revenue.
According to Mandy, Treasury would most likely focus on tax increases that would cause little economic disruption or damage, such as increased taxes to encourage behavioural change or healthier behaviour – for example, environmental tax and taxes that encourage healthier living.
Increased taxes on wealth, such as increased estate and donations taxes, were also possible, but didn’t result in much revenue for the state, he said.
According to Du Toit, increased estate tax resulted in an estimated additional tax revenue of R150 million for the state.
Mandy said the problem with estate tax and donation tax was not so much the applicable rate, but rather administration and enforcement.
South Africa does not do as well with these collections as it should.
In this year’s budget, it amounted to an estimated R3 billion.
If Sars can improve compliance and implement better anti-evasion mechanisms, it could result in a 1% increase in total revenue collection, which is in line with other countries.
The recent debate about inheritance tax, according to Mandy, stems from high levels of inequality in South Africa.
In essence, such a tax would be similar to estate tax (both are taxes levied on the transfer of wealth when a person dies), but the difference lies in the person on whom the tax obligation rests.
Estate tax is paid out of the deceased’s estate, while an inheritance tax must be paid by the heir.
Du Toit said a solidarity tax – collected for a specific purpose, such as the reunification of east and west Germany in the 1990s – would not necessarily focus on the super-rich, but they would inevitably pay for the largest portion of it.
If implemented in South Africa, it would most likely be a temporary measure.
Although a 5.5% levy on high-income earners was recently successfully implemented in Mauritius, that country’s tax rates are much lower than South Africa’s, and much less tax is paid in general.
Under current economic circumstances, with taxpayers already under immense financial pressure, such a tax would hopefully be a last resort, said Du Toit.
Mandy said it could mean an additional R30 billion in revenue for the state.
However, it is unclear how big South Africa’s revenue base will be in the future because of job losses and salary cuts.
Although a VAT increase would be an unpopular political decision, and is not seen as likely, higher indirect taxes (such as VAT) are more likely to be implemented than direct taxes, which have negative implications for economic growth and tax morale.
Du Toit said that, when the VAT rate was increased to 15% in 2018, it resulted in additional revenue for the state, estimated at R23 billion.
However, poor economic activity also constrains VAT revenue.