Wealth declaration is not all negative

The announcement during the tabling of the 2022 budget last week by Finance Minister Enoch Godongwana that provisional taxpayers will in future have to declare assets above R50 million at market value should not be seen as “entirely negative”.

This is in line with the recommendation made by the Davis Tax Committee back in 2018 and is probably the only way government will be able to get some kind of handle on wealth distribution in South Africa.

“Frankly, I would far rather that government gets better information on wealth before they start making any moves to introduce a wealth tax,” says tax expert Prof Jackie Arendse.

“It is a means for government to build up their data on wealth. At the moment it is a big guessing game as to where the wealth is held,” she said during the Tax Faculty’s post-budget presentation on Friday.

Arendse said there has been an increased focus on wealthy individuals in recent years, especially those with offshore earnings. “At the moment we know so little about the wealth in SA, how it is held and who holds it.”

Godongwana said in his maiden budget speech the disclosure of wealth will only be extended to provisional taxpayers with assets of more than R50 million.

This is to detect non-compliance or fraud through the existence of “unexplained wealth”.

Cost of compliance

Arendse said a statement of assets and liabilities is currently only required from individuals who have business interests, and not from all taxpayers.

“I think it is actually a good thing that it is being extended to all provisional taxpayers initially, and ultimately to all taxpayers, although provisional taxpayers are probably the higher wealth earners.”

She said taxpayers and their practitioners should “brace” themselves for these declarations at market value instead of at cost in the 2023 tax returns.

The burden of obtaining valuations on assets will add an additional cost to compliance, she says.

This will include the market value of private companies, as well as financial instruments. The prices of listed companies are in the public domain, but it could be a bit of a “mission” to obtain the market value of private companies.

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“Hopefully there will be some cognisance of the difficulties in obtaining valuations on a year-by-year basis. I would suggest that when it comes to holdings in private companies that it should be done on a five- or 10-year basis and not annually.”

However, the devil is in the detail and Arendse said taxpayers should keep an eye out for the draft legislation that will give details of what the South African Revenue Service (Sars) and National Treasury will require.

Dennis Davis, who has been appointed on a consultancy basis at Sars, raised a few eyebrows when he said that a quick investigation revealed that several Ferrari-owing South Africans earned very little income, or declared very little income to Sars.

There have been widespread calls for lifestyle audits on individuals with lavish lifestyles and little declared income.

Unsustainable ratios

Dawie Roodt, chief economist of the Efficient Group, said at the Tax Faculty webinar that around 20 million people currently receive social grants, 10.5 million receive the now-extended Covid relief grant, and around two million people are employed by government

That means more than 30 million people are dependent on government for some form of income. Around 12 million people are employed in the private sector. “These kind of ratios are simply unsustainable,” he said.

According to statistics quoted by Jannie Rossouw, professor at the Wits Business School, around 608 000 individual taxpayers who earn more than R750 000 contribute 52% of all personal income tax collected.

Roodt quoted statistics that 770 companies are responsible for 63% of all the corporate income tax collections.

Personal income tax amounts to almost 40% of all tax revenue while there has been a gradual reduction in the contribution from corporate taxes and even a slight reduction in the percentage contribution from value-added tax (Vat) over the years.

“I think government is acutely aware of their reliance on individuals for the tax base,” Arendse said. The number of people registered as taxpayers has increased. However, it is concerning that the country is losing its high income earners.

“It is quite alarming how many high income earners have already left SA. It is all very well to say that we should allow work visas to bring highly skilled people into the country,” remarked Arendse.

One of SA’s biggest exports has become our taxpayers. “That is very true and very sad because I think it is not [just] the taxpayer that we lose, we lose subsequent generations as well.”