Disclosure of Wealth
Currently, provisional taxpayers with business interests are required to disclose assets and liabilities on their tax return. These assets are generally disclosed at cost. The Budget proposals include a proposal that all provisional taxpayers with assets exceeding “R50 million be required to declare specified assets and liabilities at market values in their 2023 tax returns”.
The reason provided for such disclosure is noted as follows:
- “to assist with the detection of non-compliance or fraud through the existence of unexplained wealth”; and
- “to help in determining the levels and structure of wealth holdings as recommended by the Davis Tax Committee.”
The adoption of the Common Reporting Standards (CRS) and the tax information exchange agreements (TIEA) negotiated with various countries provides the South African Revenue Service (SARS) with a vast amount of information regarding foreign assets or income of South African residents.
The Panama Papers (information leaked 10 May 2016) provided SARS with a list of 1917 cases involving South African residents, the majority of whom were individuals. The SARS website provides further insight into the analysis of the 1917 cases and the fact that 817 of these cases have been risk profiled with 701 cases meeting the risk criteria of “under-disclosure or no disclosure in some cases”. According to the SARS website the “Paradise Papers” which were downloaded in November 2017 has identified 302 South African residents to date.
Based on the current information at SARS disposal it seems unnecessary to impose additional disclosures of this nature on taxpayers, particularly with regards to the subjectivity in the determination of a market value of an asset in order to detect non-compliance or fraud through the existence of unexplained wealth. SARS have in the past made comments which suggests that their strategy is to enhance compliance through a simple and efficient tax system by attempting to reduce the compliance burden on taxpayers yet this proposal seems to go contrary to that strategy.
The second reason provided for this proposal speaks to the recommendations of the Davis Tax Committee (DTC). The DTC in its final wealth tax report issued on 29 March 2018 acknowledges that “South Africa has existing taxes in the form of Transfer Duty, Estate Duty and Donations Tax” but due to the wealth inequality in the country which “poses a threat to social stability and inclusive growth” the Minister of Finance had requested the DTC to “consider the feasibility of introducing a new wealth tax”.
According to this report empirical evidence suggests that wealth inequality in South Africa is extremely high, not just in respect of income inequality but also in respect of global wealth inequality with the “top 10 percent of the population in South Africa owning more than 90 per cent of the total wealth in the country”. The DTC goes further to propose that “as a first step,” “all personal income taxpayers above the filing threshold be required to submit a statement of assets and liabilities for the 2020 tax year onwards”.
Whilst the current tax regulations only require provisional taxpayers with business interests to disclose their assets (at cost) and liabilities, the current budget proposal to require provisional taxpayers with assets exceeding R50 million to submit assets at market value may be a first step in the assessment of whether a wealth tax should be introduced in South Africa. The DTC report highlighted difficulties in ensuring compliance with the determination of the open market value due to challenges that come with “different valuation methodologies across countries yield[ing] different administrative costs and burdens. Often, this brings the impartiality of the tax system into question.”
The introduction of a possible wealth tax comes with its fair share of complexities and as highlighted in the DTC report, “wealth taxes are merely one tool amongst many, with which to address the pressing problem of inequality”. Therefore, one hopes that proper consideration will be given as to whether imposing such compliance burdens on taxpayers is warranted for a system that might prove to be unsuccessful. Perhaps we need to take heed of the fact that countries like Denmark, Germany, Finland, Sweden and Spain have abandoned the taxation of net wealth.
Consideration must also be given to the possible flight risk of the wealthy taxpayers with personal income tax contributing 39.1% of the 2021 tax collections. We have seen a significant number of taxpayers ceasing tax residency in the last 2 years with the introduction of the capping on the foreign employment exemption. Therefore, introducing a further tax on the wealthy may result in a permanent loss to the current tax base in those individuals rather opting to pay their exit taxes and leave the South African tax net.
Author: Kubashni Moodley
Tax Partner, PKF Durban
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