Proposal to Implement Wealth Tax to Address Budget Deficit

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JIMMY MOYAHA: As we delve into the budget discussions, we’re exploring different angles. There’s been some speculation about a proposed wealth tax, which isn’t confirmed yet, but it may be mentioned in the upcoming budget speech on March 12. This comes after the 2% VAT increase was unanimously declined before last week’s budget speech.

We aim to investigate the concept of a wealth tax, considering its potential implications and feasibility. Joining me for this discussion is Robin Galloway, senior manager at Forvis Mazars. Good evening, Robin. Thank you for joining us.

What might a potential wealth tax look like in contemporary South Africa?

ROBIN GALLOWAY: Good evening, Jimmy, and to your listeners. Firstly, the National Treasury would need to clearly define who qualifies as a wealthy individual for the wealth tax’s implementation. In other words, we must determine who the tax will impact.

It’s important to note that many affluent individuals in South Africa have protected their wealth through discretionary trust arrangements or utilized complicated offshore structures, making it challenging to ascertain a person’s actual wealth, as a significant portion of it may have already moved abroad.

Interestingly, the Davis Tax Committee previously assessed a wealth tax and concluded that it would be challenging to administer due to these intricate global structures.

We need clarity on the form of wealth tax we’re discussing. Are we considering a separate wealth tax, sometimes referred to as a solidarity tax? Or is it an enhancement of existing wealth taxes?

Keep in mind that South Africa already imposes three primary types of wealth tax. We have a capital gains tax on asset sales that can reach up to 18% for individuals, and even higher for corporations. Additionally, there’s an estate duty ranging from 20% to 25% applicable at a taxpayer’s death, determined by the size of the estate.

Lastly, if one wishes to give away their wealth before passing away, they will also face a donations tax, which also varies between 20% and 25%.

It’s crucial to mention that a wealth tax would be in addition to income tax, which is currently as high as 45%. Essentially, a wealth tax is a tax on assets or wealth that have already been taxed in South Africa.

So, these are indeed intriguing times, Jimmy. I look forward to seeing what the Treasury eventually proposes.

JIMMY MOYAHA: Robin, let’s examine the tax base in South Africa further. Current statistics indicate that 1.5% of the population contributes approximately 61% of all personal income tax. This obviously raises questions about sustainability when such a small percentage of the population is responsible for two-thirds of personal income tax revenue.

Is there not a pivotal conversation about whether we are facing over-taxation? Is it practically feasible to address this?

ROBIN GALLOWAY: A very insightful point, Jimmy. The key takeaway here is that ‘capital is highly mobile.’ It tends to move to where it garners the best returns. The Treasury must consider this fact. A relevant case in point is the UK, where they have eliminated a favorable non-domiciled tax regime that previously attracted wealthy individuals to reside there.

As part of this change, the labour government scrapped the non-dom regime, resulting in roughly 11,000 millionaires rapidly departing for other, more welcoming tax jurisdictions like Malta and Portugal.

So, Jimmy, it’s worth noting that in the UK, 2.6% of a 64 million population contributes 76% of personal income tax.

JIMMY MOYAHA: Now, Robin, another interesting point you raised is that certain forms of wealth taxes are already in play in South Africa. I’d like to discuss a somewhat peculiar concept.

The idea of bracket creep arises from certain tax tables not being adjusted for inflation. How does this phenomenon, which could be viewed as a type of wealth tax, impact taxpayers who may feel burdened by being in the top tax bracket and facing additional taxes?

ROBIN GALLOWAY: Exactly, Jimmy. We’ve seen the Treasury utilize bracket creep over recent years, contributing an additional R16 billion to R20 billion in revenue.

When the public experiences inflationary income increases, they inadvertently ascend into higher tax brackets, resulting in increased tax burdens on their disposable income.

A case in point is estate duty, which has remained at an abatement of R3.5 million for nearly 17 years. Thus, it’s not just bracket creep in income tax; it’s happening across all tax brackets enforced by the Treasury, increasingly impacting the ordinary middle-class taxpayer.

JIMMY MOYAHA: So, Robin, is a wealth tax the answer?

ROBIN GALLOWAY: Quite an interesting question. Looking at three European nations, for instance—Norway and Switzerland introduced wealth taxes that account for only around 1% to 2% of their total revenue. Given the current projected fiscal deficit of nearly R300 billion, aggressive implementation of a significant wealth tax may not suffice as a solution.

Regarding the 2023 tax return queries from [SARS], it’s noteworthy that for the first time, they’ve asked taxpayers whether their assets amount to a market value of R50 million or more. This indicates that the National Treasury is in discussions with SARS to target high-net-worth individuals. It will be intriguing to see who falls under scrutiny.

However, it does seem like the middle class is bearing an increasingly heavier tax load, which is reflected in the data we’re observing.

JIMMY MOYAHA: We’ll have to await the outcomes from National Treasury on March 12. For the moment, let’s conclude our conversation here. Thank you, Robin, for sharing your insights.

Robin Galloway, senior manager at Forvis Mazars, engaged with us to explore the potential of a wealth tax as an alternative to an increase in VAT.

Listen/read: What the proposed wealth tax implies for the economy

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