Late 2022, the ruling African National Congress (ANC), announced plans to reintroduce a long-proposed wealth tax on certain parts of the South African population in order to fund its basic income scheme.
The Davis Tax Committee was founded 10 years ago by then-Minister of Finance Pravin Gordhan to examine the possibility of implementing South Africa wealth tax, a difficult issue that has been contested on a national and international scale.
The discussion on the wealth tax for South Africa was revived after the disastrous impacts of the COVID-19 pandemic and amid talk of instituting a basic income grant.
Nearly two-thirds of South Africans support taxing the wealthiest at higher rates to fund government programs that help the poor, especially those that help the young.
However, critics of the wealth tax warn that South Africa could halt its growth because this would put the country too reliant on tax revenue from rich citizens who will simply migrate to countries with lower taxes anyway.
And while such plans to enact this wealth tax seems to be put on hold at the moment, the South African government can revisit the proposal or enact other ways to tax the country’s high net worth citizens amid mounting pressure from the public.
In this article, we will take a look at the proposed South African wealth tax. This article also explains what it is, who will be affected, and some of the controversy surrounding this idea.
Keep in mind that this article is for informational purposes only and is no way intended to be formal tax advice.
And while we have strived to provide accurate information as it was reported in the media, the discussion may have progressed since this article was written.
If need further guidance about your wealth or South African taxes, it is highly recommended you seek a professional tax attorney or financial advisor familiar with your situation.
If you want to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).
What is the South Africa wealth tax?
A wealth tax, maybe coupled with a land tax, would be implemented to increase income and improve social justice, according to a plan initially discussed at the ANC’s national conference in 2017.
The social relief of distress (SRD) grant provided the South African government during the Covid-19 pandemic has revived discussion of making a Basic Income Grant permanent, funded by a tax on the country’s wealthiest citizens.
According to Mmamoloko Kubayi, head of economic reform, the top five percent of wealthy people and their properties would be the focus of this tax.
Unlike income taxes, which bring in around R50-R70 billion annually, a wealth tax has the potential to bring in R160-R240 billion year, or 1.5%-3.5% of GDP.
The proposal arrives as the country struggles with a number of interconnected crises such as a weak economy, high unemployment, rising costs of living, natural disasters, crime, corruption, ongoing protests, and a lack of reliable energy sources that threatens to stifle economic expansion.
According to research conducted by the Southern Centre for Inequality Studies at the University of the Witwatersrand, only 3,500 people control 15% of the country’s wealth.
The top 1% own 55% of South Africa’s wealth, while 50% of the population lives in extreme poverty with almost no savings at all.
Similar data may be found in a report by the World Inequality Lab, which concludes that “asset allocations before 1993 still continue to shape wealth inequality” in the country.
The Davis Tax Committee presented the former South African finance minister with a report on the viability of a wealth tax in 2018.
While “a recurrent net wealth tax may be admirable and desirable as a form of wealth tax,” the report found that “more work is needed to ensure that the tax is well-designed and will yield more revenue than it costs to administer.”
Some of the report’s arguments against a wealth tax in South Africa are as follows.
- Negative real returns. A wealth tax will accelerate the actual decline of South Africa’s cash and savings because interest on these assets is already low relative to inflation. Therefore, the savings rate and the incentive to save could both be reduced by a wealth tax.
- Low revenue. The examples above show that a wealth tax cannot sustain itself financially. As a result of its low wealth-to-income ratio, South Africa is less likely to generate significant revenue via wealth taxes than from income taxes.
- Inconvenience. Taxpayers have much greater hassle with wealth taxes than with other types of taxes. For instance, a taxpayer may need to liquidate an asset in order to generate the funds necessary to pay their taxes.
- High cost of compliance. Costs to people and the government associated with enforcing and collecting a wealth tax can be high. The analysis found that wealth taxes have relatively significant administrative expenses due to the need for inspection and appraisal of assets.
It’s also possible that the wealthy will be unfairly treated because they can afford to hire tax consultants to help them minimize their tax liability or find ways to evade wealth taxation altogether.
Those with lower incomes will end up paying more in taxes as a result.
What are the arguments in support of the South Africa wealth tax?
Proponents of the wealth tax argue for its implementation to reduce soaring wealth gaps and broaden the government’s tax base for long-term financial stability.
Two thirds of the respondents in a 2021 Afrobarometer study agreed that their government had the right to levy taxes, but many complained that it was unclear what they owed and how the money will be spent.
Majority in the survey also opposed taxing the informal economy and think it is better to tax the wealthy more heavily to help those in poverty.
Tax avoidance may become even more widespread, but the majority of respondents stated they would be happy to pay more in exchange for expanded government services and funding for youth-focused initiatives.
The recent Afrobarometer study was conducted by the Institute for Justice and Reconciliation (IJR) and Plus 94 Research and includes 1,600 individuals in South Africa.
Only about a third of those polled (32%) think wealthy South Africans are paying their fair share of taxation, while 34% say the rich should pay more tax at rates significantly higher than those paid by ‘ordinary’ citizens.
Forty percent of this same group feels that regular South Africans are overtaxed.
In the context of widespread unemployment and excessive inequality, these findings suggest public support for government efforts to investigate innovative ways to extend the tax base in order to finance its development program and respond to crucial socio-economic demands.
The Department of Social Development recognized the importance of this advocacy and undertook a study in 2022 that demonstrated the feasibility of transforming the existing social relief distress grant into a permanent basic income award, funded by increasing personal income taxes on the wealthy.
Tax increases on the wealthy were deemed to be the most effective and “highly distributive” option after four different scenarios were run.
The panel concluded that within two years, 15% fewer households would be living below the lower-bound poverty line if the income tax on the wealthy was raised to pay a Supplemental Nutrition Assistance Program food subsidy.
Seventy percent of those who favored the increased taxes on the wealthy said the money should go toward youth programs, while only twenty-one percent were against this idea.
Citizens place a higher value on investing in education (23%) and job creation (53%) if the government were to raise its spending on such programs.
What are the arguments against the South Africa wealth tax?
Critics however argue that taxes are already high enough for the most affluent South African citizens.
Economists have warned that despite the popularity of calls for a wealth tax, the policy is fraught with complications, would harm the economy, and bring in negligible amounts of money.
It is argued that South Africa’s tax base will continue to decline as the country’s rich seek to expatriate or offshore their assets in the face of the additional wealth tax.
Additionally, the ‘brain drain’ of highly skilled and entrepreneurial South Africans to countries with more predictable tax regimes and more secure political environments is a real risk for the country.
It is also possible that the idea of a wealth tax will encourage young South Africans to look elsewhere for employment and economic opportunity once they graduate from university.
About 4,500 high net worth individuals (HNWIs) have left South Africa over the past decade, according to research from New World Wealth and Henley & Partners, and a wealth tax would only hasten their departure.
Australia, New Zealand, the United States, and Canada continue to be the most sought-after countries for immigrants, especially skilled workers, but countries with residence by investment programs are gaining popularity.
While Cyprus, Malta, Mauritius, and Portugal are among the most cost-effective options for residency by investment, while the United Kingdom, Guernsey, Spain, and the United Arab Emirates also attract considerable interest.
For an example, in Cyprus, foreign nationals can receive Permanent Resident Permits (PRP) within two months for an investment of €300,000. There is no need to speak Cypriot, and holders need only visit the island once every two years.
The PRP can be used for a lifetime and even be handed on to heirs. Those who make Cyprus their tax home can reduce or even eliminate their income tax burden.
Investing and working in Mauritius is now more affordable and convenient than ever. The island has recently lowered the required minimum investment to live in Mauritius as a non-citizen from USD100,000 (MUR867,000) to USD50,000.
Occupation permits are now valid for 10 years instead of 3, and spouses of permit holders do not need their own permits to invest or work in Mauritius. Parents and children under the age of 24 will be permitted to join the permit holders in Mauritius.
For more examples, in an effort to retain and attract top people and further establish itself as a global financial center, Singapore has just introduced the Overseas Networks and Expertise (ONE) pass.
And despite new restrictions on the country’s prized Golden Visa, which grants non-EU qualifying individuals and their families full rights to live, work, and study in Portugal, South Africans are flocking to Portugal in search of a pathway to European Union residency.
For non-EU citizens, such as retirees, who wish to move to Portugal and are in receipt of a decent and regular passive income, Portugal offers the Portugal Passive Income Visa, commonly known as a “D7” or “Retirement” Visa, which grants resident status.
Pensions, rentals, self-employment, dividends, and some types of investment income all qualify as forms of passive income. Passive income of €8,460 (about ZAR150,000) per year is required for the primary applicant, with an extra €4,230 each adult dependent and €2,538 per kid.
Portugal’s special tax regime for Non-Habitual Residents (NHRs) provides eligible business owners, professionals, retirees, and high-net-worth individuals with lower tax rates on income earned in Portugal, while exempting most income earned abroad.
To be eligible for Portugal’s NHR regime for 10 consecutive years, a person must be a tax resident in Portugal and not have been taxed as a Portuguese tax resident in any of the five years prior to the year in which residence is created. This is true regardless of the person’s nationality.
Another argument against the South Africa wealth tax is the fact that just 7.4 million South Africans pay taxes while 29 million receive grants as of the beginning of 2023, as reported by the National Treasury.
That number includes the 11 million who rely on the R350 monthly grant from the government and the 18 million who receive state welfare.
Besides the obvious drawbacks, a wealth tax also cannot be maintained indefinitely.
Acting National Treasury director-general Ismail Momoniat remarked at the SA Institute of Taxation’s (SAIT) Tax Indaba that a wealth tax would not be enough to achieve its suggested goals and that its implementation would have far-reaching repercussions.
The revenue from a wealth tax would be insufficient. It’s not something that can be taxed every year; rather, it’s a “now and then” tax. He explained that taxation would be possible only when individuals received payment for their possessions.
Will South Africa implement the wealth tax in the future?
Though plans to implement the South Africa wealth tax seems to have been shelved at the moment, the high net worth individuals in South Africa may still face changes to how they are taxed.
In his 2023 State of the Nation Address, President Cyril Ramaphosa said that “Work is underway to develop a mechanism for targeted basic income support for the most vulnerable within our fiscal constraints.”
No mention was made of a BIG or its financing source in the 2023 budget address, although R36 billion was allocated to extend the SRD grant until 31 March 2024.
Financing for a BIG was discussed at last year’s ANC policy conference, where it was announced that a wealth tax, the closure of tax loopholes, the elimination of base profit shifting by corporations, and a transaction tax would all be implemented.
Mmamoloko Kubayi, the ANC’s leader of economic reform, said that a wealth tax would be introduced to increase revenue and improve social justice.
The wealth tax, which might be coupled with a land tax, would be levied on the wealthiest one-percent of households and large estates.
Kubayi argued that increasing income or value-added taxes would be too much for already-strapped taxpayers, therefore a wealth tax “is the only acceptable option.”
The annual cost of a BIG was anticipated to be between R20 billion to R2 trillion in an Intellidex report from July 2022.
According to its findings, the following tax hikes would be necessary to pay for a BIG in South Africa:
- There would need to be a personal income tax increase of between 9% and 19%.
- A value-added tax increase of 14% to 29% would be required.
- There would have to be a 24–47% increase in the corporate tax rate.
- South Africa’s tax base is already extremely meager. South Africa has a relatively low personal income tax payer base of 7.4 million, with 1.1% of taxpayers contributing 30% of the country’s total personal income taxes.
- In the form of estate duty, South Africa already has a wealth tax in place. However, the ruling party wants to impose a broader wealth tax.
As it is now, taxes in South Africa are already progressive. This means that when a person’s or a business’s taxable income grows, so does the tax rate applied to it.
Aiming to redistribute wealth and improve social fairness, this form of taxation is already similar to a wealth tax.
The South African Revenue Service (SARS) could also further move into an aggressive compliance mode, targeting high-net-worth taxpayers with complicated financial structures and trusts in particular.
SARS has made it apparent that it intends to go after high-net-worth individuals (HNWIs) by re-establishing its High-Net-Worth Individual (HWI) Segment in 2021. The IRS has improved its investigative capacities and has recently had success in a number of high-profile instances.
The tax agency issued a warning in September 2022 that it was expanding its emphasis on trusts as a result of its analysis of tax compliance by trusts and beneficiaries.
Commissioner Edward Kieswetter has claimed that the revenue service upping the ante on compliance is responsible for a revenue increase that year, which is around R93 billion more than previous predictions.
The tax agency SARS has also moved to uncover widespread noncompliance on the part of trust beneficiaries who are failing to report distributions and unregistered trusts. Certain measures, including an improved registration system, have been implemented as a response.
The registration function on Efiling for trusts has proven difficult but the agency intends all trusts to be registered as taxpayers and file tax returns.
In order to meet the standards of the Financial Action Task Force for beneficial owner transparency, the system was upgraded in February 2023 to enable the capture of beneficial owner’s details. The goal is to identify and document the beneficial owners of all newly formed trusts.
SARS also decided to require trustees to report to a third party because of “significant differences” between distributions declared on beneficiary tax returns and distributions declared on trust tax returns.
SARS has stated that the first reporting date will be September 2023, but this has yet to be officially published.
The goal is to have employers withhold employee tax on trust distributions from persons based on effective tax rates derived from third-party data that will eventually be reported in auto-assessments of individuals who are beneficiaries.
Stakeholders are worried that a trust’s representative taxpayer (the main trustee) will face a significant administrative burden and financial implications as a result of the third-party declarations required for reporting beneficial owner information and distributions to beneficiaries.
Many of these taxpayers may lack the resources necessary to acquire the necessary technology or retain the services of qualified tax professionals to facilitate the filing of such information.
How can you minimize your taxes and protect your wealth in South Africa?
Taxes can be complex, and short of leaving the country, many high net worth individuals find that hiring a professional to help them manage their finances is the best way to stay on top of their tax situation.
With the help of an independent wealth manager, you can make sure your assets are invested in a way that minimizes your tax burden.
Tax planning is a specialization within the larger field of wealth management. In addition to tax-related services, such as tax return preparation, financial advisors and wealth managers may also assist customers with budgeting, saving, investing, and retirement planning.
A wealth manager is a professional who helps you manage your wealth. They help you invest your money and reduce your tax burden, plan for retirement, plan for the education of your children, and even plan for the distribution of your estate after death.
Wealth managers can also help you avoid taxes in a variety of ways. One common method is to use tax avoidance strategies, which are legal methods of reducing your tax liability by taking advantage of certain loopholes or deductions.
Such professional tax planners are financial consultants who focus on minimizing their clients’ tax burden by taking advantage of all allowable tax deductions and credits.
A financial planner can help you develop a tax plan that takes into account your specific situation and long-term investment objectives.
Tax planning’s end game is a smaller tax bill. Tax planning is not limited to the tax return preparation process. Instead, it should be an issue all year round.
A tax plan can include liquidating money-losing investments before the end of the year to generate a deduction that can be used to offset taxable income from profitable investments.
Due to the high percentage of investment profits that are taxed, effective tax planning can increase returns. One further factor in tax preparation is determining when and how much to donate to charity.
Retirement preparation involves a lot of tax planning. Investment decisions between a tax-deferred traditional IRA and a taxable Roth IRA are informed by projections of the retiree’s future tax rate.
Tax planning also encompasses wealth transfers via trusts and the reduction or elimination of estate taxes.
The wealthy may be expected to face a higher tax rate in South Africa, but they also have the resources to legally reduce or eliminate their tax obligations.
Dividends are a popular tax avoidance strategy. Corporate dividends are taxed substantially less than salary or hourly pay since they are distributed from a company’s after-tax profits.
There are probably a few ways for an entrepreneur to transfer earnings to their personal finances. If you want to earn dividends instead of a salary, a financial advisor can help you set things up.
This is a tricky situation that varies greatly depending on where you live and work. A competent financial planner will be up-to-date on the topic and familiar with local regulations and standards.
With a financial planner, you can also use charitable contributions to lower your taxable income. Donating to charity not only helps the recipient organization but also reduces the donor’s taxable income.
Donating assets directly to a nonprofit has significant tax advantages, therefore savvy investors frequently use this technique. Discuss these possibilities with your guide. Reach out to the “planned giving” or legacy advancement departments of any non-profits or charities that mean a lot to you.
In the business world, estate planning is one of the most crucial facets of tax preparation. The “death taxes” we owe from our estate upon passing can be substantial (depending on your location), but there are several ways to minimize or eliminate these obligations.
Financial advisors frequently employ business structures like family trusts and foundations to avoid or substantially lessen the impact of estate taxes.
Finding the best tactics for you and your family is something a professional advisor can assist you with. Getting help from a professional is beneficial for tax preparation regardless of one’s financial situation.
A competent advisor will guard the value of your savings while also helping you develop them.
Retirement income is also ssignificantly impacted by taxes. If you want to make sure you get the most out of your retirement savings, it’s worth you to seek professional guidance.
Should you move out of South Africa?
If you think that moving out of the country before the South Africa wealth tax is implemented is better for your financial situation, there may be ways for you to easily transfer your assets to tax-friendlier countries.
You can move abroad lawfully and take your belongings with you by using investment migration. For individuals who want to invest abroad but don’t want to deal with the headache of standard immigration procedures, it’s a fantastic choice.
Over 80 different countries allow legitimate entry through investment migration. Austria, Italy, Greece, and Switzerland are among them, as are Canada, the United States, the United Kingdom, Hong Kong, Australia, and Singapore from North America and Oceania.
Wealthy foreign nationals can lawfully emigrate to a country in exchange for a financial investment through investment migration, also referred to as “golden visa” programs.
An investment relocation may be advantageous to both parties. Government initiatives like infrastructure and social welfare programs receive significant money from nations that encourage investor migration, and these nations also provide employment opportunities for their native citizens.
While benefiting from a wider variety of lifestyle options, investors can take advantage of the opportunity to escape to safer nations during periods of economic or political instability or catastrophe.
For example, if you have significant investments in Greece and satisfy the requirements for the nation’s residence by investment program, you and your family are eligible to travel without a visa while your golden visa is valid.
Different citizenship and/or residency possibilities around the world provide both immediate and long-term financial advantages.
By making investments in nations other than your own, you can considerably improve the diversity of your assets and lessen the effects of changes in the local and international markets.
To put it simply, investment migration offers a wide range of opportunities for obtaining citizenship or long-term residence in a country of your choice in exchange for a monetary investment.
International capital flows have increased as a result of the growth of a globalized economy. This is because many OECD nations have included the focus of their investment migration programs on a candidate’s aptitude for innovation and entrepreneurship into their larger immigration policy.
With the aid of an immigration scheme known as investment migration, you can shift your possessions and your family abroad. It’s not always necessary to leave one’s home country in order to transfer one’s assets before immigration.
For a variety of reasons, including family reunification or economic opportunity, sovereign countries frequently support international migration.
Due to the current political and economic environment, investor mobility has become more widespread.
Investment migrants are often well-off individuals who want to relocate abroad but do not want to establish themselves as citizens or permanent residents.
Most investment migrants are categorized as “non-permanent residents,” but other nations include citizenship or permanent residency as part of their investment migration policies.
These people typically have sizable holdings in stocks as well as other assets, such real estate, in their new nation of residence.
Anyone looking to improve their living and working conditions, including celebrities, athletes, eminent physicians, and successful businesspeople, could be an investor who relocates using these methods.
Investment-based citizenship or residency can offer security, improved access to education and employment opportunities, and increased mobility.
Investment migration strategies are frequently used by nations of all sizes and powers, as well as those on the economic periphery, to entice qualified workers and financial resources.
Investment migration is increasingly being advocated as a means of advancing the UN’s Sustainable Development Goals.
Law firms, suppliers of due diligence, and professional consultants work in the investment migration sector to assist governments and citizens by conducting the necessary due diligence on applicants and their financing sources.
Working with a business like this one might make moving your investments easier. They will guide you through the process of choosing a country as your destination that has suitable visa requirements.
They might also be able to help with administrative tasks like finding a bank that accepts wire transfers abroad or getting a new passport.
You can always consult with a personal financial adviser or a specialist with experience in your particular situation if you need assistance making the best selections for your investment migration.
If you or someone you know is thinking about making an overseas purchase, these pros can also guarantee a problem-free investing process in any nation.
Depending on the country of application, different minimum investments are needed. An investor may not always have to use his or her own assets to purchase real estate; instead, he or she may decide to invest in funds that will purchase properties using a combination of their own funds and funds from lenders or other investors.
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