Update on South Africa’s Consideration of a Wealth Tax Regime
By Simphiwe Mili, Nolands
In 2015, the Davis Tax Committee was tasked to investigate the relevance of estate duty in the South African (“SA”) tax regime. The committee’s first interim report proposed abolishing estate duty and replacing it with a wealth tax. In 2018, the Davis Tax Committee was tasked with investigating the feasibility of a wealth tax in South Africa and this included investigating whether the wealth tax would perform better relative to estate duty. The debate between the proponents and the opponents of this tax has gained much momentum since 2018 and a specifically interesting debate is how this tax affects inheritance.
The 2019 Inequality Trends Report, published by the University of Cape Town and SALDRU, reported that the wealth Gini coeffcient is 0.94 in SA. Furthermore, the top 10% of the country possess 90% of the country’s wealth. The rise and high concentration of income and wealth at the upper end of the distribution have reinforced the call for the need to preserve or increase taxation on inheritance. International organisations such as the International Monetary Fund (2013) have recommended reinforcing property-related taxes (such as estate duty) and decreasing current taxes on earned income. Family succession and inheritance incentives have been proven to play a role in the accumulation of high capital and corporate assets. Given that estate duty is factored into tax planning, this can elicit tax avoidance or the relocation of residents, since estate duty is not levied in a number of OECD countries, while net wealth taxes have been eliminated in most countries (Förster et al. 2014).
The fact that the wealth tax also poses a great risk for tax avoidance and migration by wealthy taxpayers has been one of the major arguments for the opponents of the wealth tax in South Africa. However, when determining the burden of estate duty, it becomes less relevant to account for economic decisions made during years when the person was economically active because estate duty is only imposed after death. Therefore, most practitioners, tax experts and economists (Boadway et al. 2010; Kopzuk 2013) tend to advocate for estate duty over wealth taxation.
The burden on beneficiaries, especially on those acquiring a large inheritance in which they played no part in acquiring, is considered small, lending support to the idea of taxing inheritance. This is motivated by the premise that inheritance taxation accounts for meritocratic ideas while striving to equalise opportunities between members of individual generations (Piketty & Saez 2012). In 2016, the Davis Tax Committee ruled against abolishing estate duty and the discussion for the wealth tax is still ongoing.
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Nolands is an international auditing firm located in eleven offices in all major centres in Africa. Nolands employs almost 200 people and focuses on providing the best possible solutions for its clients. The company prides itself on being “not ordinary” and on its ability to integrate services and respond rapidly to clients’ needs.
Simphiwe Mili is a Tax Consultant at Nolands. Simphiwe holds a BCom (Hons) degree in Tax from the University of Cape Town and is currently completing her master’s in South African Income Tax at the University of Cape Town.
Published: Trust & Estate Planning Newsletter, No. 05, Spring 2020 l Photo: dsphotographycpt - stock.adobe.com