Concerns about impact of increased taxes on declining tax morality

Although the Medium-Term Budget Policy Statement (MTBPS) is not usually the time when large scale tax changes are announced, this has certainly been an unusual year which may call for unusual measures.

This could explain why Finance Minister Tito Mboweni will be delivering his mini-budget speech a week later than scheduled.

Tax experts have raised concerns that the unusual measures could include the introduction of a solidarity tax, increases in estate duties, the reintroduction of tax on retirement funds – and see an increase in tax evasion due to the decline in tax morality.

Bernard Sacks, tax partner at Mazars, says the firm expects the introduction of an “extraordinary, once-off tax” or some sort or levy.

This could be similar to the so-called transition tax of 5% that was introduced after the end of apartheid.

However, David French, tax consulting director at Mazars, warns that this could have a knock-on effect on emigration. As it is, the firm’s private client business has been “inundated” with work related to emigration.

Read: The three-year rule for tax emigration sticks

He believes people are leaving the country partly because of deteriorating tax morality. Tax morality is the willingness of individuals to pay their taxes and comply with tax laws.

Tax evasion and punishment

Janel Viljoen, director of VRA Accountants, is currently researching the phenomenon of tax evasion in SA and whether the current punishment system acts as a deterrent and leads to rehabilitation.

She says some studies show that in Asian countries tax evasion is “almost non-existent” no matter how low the tax morale. However, in western countries like SA and first world countries studies have found a direct correlation between high levels of tax evasion and low levels of tax morality.

Viljoen says although her doctorate research does not focus on corruption, concerns about the high levels of tax evasion by so-called tenderpreneurs were raised during interviews with legal practitioners and the South African Institute of Tax Professionals (Sait).

It is obvious that people who obtained multi-million-rand contracts by way of bribes or through political connectedness will be loath to voluntarily pay tax, let alone declare their true income.

Viljoen says conviction rates for tax evaders are quite low in SA. It appears as though the South African Revenue Service (Sars) would rather extract as much money as possible from these offenders than engage in expensive and protracted legal fights. A contributing factor to the low conviction rates is the lack of technical tax expertise both on the part of Sars and the National Prosecuting Authority.

Althea Soobyah, also from Mazars, says there needs to be a shift from focusing on taxing legitimate taxpayers to targeting those with ill-gotten gains.

“Claw back the ill-gotten gains from officials who used government funds and make those who have abused their positions of power for financial gain pay back the money – with interest, not just the tax,” she says.

An ‘easy’ tax for government

Mientjie van der Merwe, specialist independent tax advisor and a former director in National Treasury’s division responsible for drafting pension and tax legislation, is concerned about the possible reintroduction of tax on certain types of retirement fund income.

She refers to the taxation of interest and rental income in retirement funds that was introduced in 1996 at a rate of 17% and later increased to 25% before being abolished around 2007.

“The reason I am concerned is because it is an easy way of collecting tax money. Government needs money and this is not a foreign concept to them as opposed to a new wealth tax. They have done it before and they can do it again.”

She adds that this is not to say that a wealth tax is completely off the radar.

Read: Wealth tax should not be an option

Van der Merwe also has concerns about further increases in estate duty taxes. Estate duty is currently levied on the dutiable value of an estate at a rate of 20% on the first R30 million and 25% thereafter.

Estate duty is unlike capital gains tax where there is only tax payable on the gains. Estate duty is payable on the value of the entire estate. “These amounts can be astronomical,” says Van der Merwe.

The counterintuitive approach …

Sacks believes government should be looking to reduce tax rates for a better “long-term outcome”. He says although lower taxes will take time to work through the system, they will help the private sector spend more and stimulate economic growth.

“It seems counterintuitive to be dropping the tax rate when tax revenue is dwindling, but now is the time to do it,” he says.

Whether we can afford the time lag is another question though, he adds.