Tax collection efficiency trumps wealth taxes in the short-term

22 April 2024 ,  Tanya Strauss 235
Speculation surrounding the introduction of formal wealth taxes in South Africa has subsided for the time being. The South African Revenue Service (SARS) appears to have reconciled itself to the recommendations outlined in the "Feasibility of a Wealth Tax in South Africa" Report by the Davis Committee, which underscores deficiencies in wealth information and tax collection as requiring attention and not necessarily additional ‘wealth taxes’ in the short-term. SARS's intensified focus on collecting clearly indicates its intentions to address this information and tax compliance gap.

Over the past decade, there has been much speculation surrounding the potential introduction of formal wealth taxes in South Africa. Drawing parallels from international models, such a tax would be a percentage-based tax calculated on the market value of an individual's net assets.

Five years ago, the Davis Committee issued a Report assessing the “Feasibility of a Wealth Tax in South Africa”. The Report confirmed that South Africa effectively already has wealth taxes in the form of estate duties, donations tax, transfer duties and security transfer tax which it can leverage as mechanisms to tax the wealthy. The Report however identified the lack of comprehensive data collection to ensure that the affluent are fully compliant as an obstacle to efficient tax collection — an obstacle referred to by the Commissioner as the "compliance dividend”. A substantial enhancement in data collection would therefore be a fundamental prerequisite before considering the true feasibility of a wealth tax over the longer term. 

Finance Minister, Enoch Godongwana, also maintains that increasing taxes for the current limited tax base is not the optimal solution, emphasising the necessity for enhanced efficiency in tax collection and echoing the sentiments of the Davis Report. Therefore, despite the absence of obvious increases in wealth-related taxes in the 2024 budget, it is evident that SARS is increasing its efforts to gather more information on high-net-worth individuals, trusts, and companies in its drive to increase tax compliance. 

For individuals, the 2023 personal income tax returns began by requesting individuals with net assets exceeding 50 million Rand to start reporting personal balance sheets at market value, a direct outcome of the Davis committee's recommendation aimed at identifying undeclared income. Additionally, SARS has established the High Wealth Individual Unit with a primary focus on detecting undisclosed income among affluent individuals. This scrutiny will be bolstered by increasing information sharing between institutions locally and globally.

Similarly, trusts are subject to heightened scrutiny, typified by the new requirements for trusts to submit beneficial ownership reports as well as signed resolutions of all financial transactions to SARS as part of the 2023 trust income tax return. Additionally, information requests about interest-free loans from trustees and tax registration numbers of beneficiaries receiving trust distributions (as examples), aim to ensure compliance and more detailed available information. Likewise, Treasury's introduction of new IT3(t)s for trust distributions which mirrors existing IT3(b) and IT3(c)s received from financial institutions, is aimed at enhancing transparency, and cross-referencing potential discrepancies. The deadline for this new tax certificate is 30 September 2024.

Even companies are being targeted, with additional beneficial ownership reporting now accompanying annual CIPC returns for companies and with the 2024 national budget proposing mandatory systems for automatic uploading of VAT information to SARS. Implementation of this latter measure is likely for certain entity types within the next five years, necessitating preparation and vigilance on the side of companies.

In conclusion, it may be fair to say that South Africa still has some way to go before it can justify the implementation of a formal wealth tax, but in the short-term tax collection and information sharing will make the necessity for absolute compliance with existing tax regulations and reporting an imperative for every taxpayer.

For assistance and guidance on the new tax reporting and accounting requirements don’t hesitate to make contact with our Tax & Accounting Team.

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