With a massive tax shortfall in South Africa, new ways of drawing in revenue for the fiscus are being considered, including a wealth tax.

However, experts warn that a wealth tax is unlikely to cover even a quarter of South Africa’s current debt shortfall of R50 billion, meaning that a VAT increase in some form is also likely.

This is according to Judge Dennis Davis, who was speaking to BusinessDay ahead of a new wealth tax report set to be released by the Davis committee at the end of November.

Early signs indicate that a wealth tax could raise as little as R6 billion, meaning that it will have to be used in conjunction with other tax hikes.

“The problem with a wealth tax in SA is that it would be levied on an incredibly narrow base,” said Davis. “A huge amount of wealth in SA is also tied up in retirement funds, and we are busy investigating the implications of that.”

The committee is also concerned that a new wealth tax may penalise middle-class savings, and is aware that the South African Revenue Service (SARS) would need to institute a sophisticated system to administer it.

In comparison, Davis said that just a 1-percentage-point increase in the VAT rate (bringing it to 15%) would raise R20 billion.

Another option being mooted is a multi-tiered VAT system of 0%, 14% and 20%, said Davis.

This would result in a further twenty “necessities” being zero-rated, while luxury items such as smartphones could see a 20% VAT tax.

“It all comes down to the fact that we have to increase VAT,” said Davis. “Raising personal and company income tax isn’t going to get us there.”

Wealth tax

The Davis Tax Committee 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 arrived 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.

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.

According to law firm ENSAfrica, 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”.

“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, said ENSAfrica.

“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,” it said.