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.