SARS is after the wealthy – how having a trust may help

Today, the top 10% own about 85% of total wealth, the top 1% own 55%, and the top 0.1% own close to a third. The South African top 1% share has fluctuated between 50% and 55% since 1993, while it has remained below 45% in Russia and the US and below 30% in China, France, and the UK. The top 0.01% (about 3 560 individuals) own about 15% of household wealth, which is greater than the share of wealth owned by the bottom 90% of the population as a whole (32 million individuals). The average wealth of the poorest 50% is negative, as the total value of the debts they owe exceeds the market value of the assets they own. Our government has been imposing steadily higher taxes for decades. Currently, personal Income Tax (39,1%), Value Added Tax (26,5%) and Corporate Income Tax (16,4%) constitute the largest shares of tax revenues. Those in the top three brackets represent one third of the total personal Income Tax base.
 
In 2017, the then Finance Minister Pravin Gordhan imposed a wealth tax by increasing the maximum marginal rate (the rate of tax that applies to the top income bracket) from 41% to 45%. At the same time he also targeted the rich by increasing the withholding tax on dividends from 15% to 20%, and limited the adjustments between the tax brackets (which lead to people paying more tax when their salaries rise with inflation). Although SARS expected to collect R 23 billion extra in 2018 as a result of these measures, they actually collected R 20.4 billion less than expected in personal tax in that year. A contributing factor was the flight of capital out of South Africa by the rich. According to the New World Wealth’s Africa a total of 4 200 high net-worth individuals have left the country over the last decade. It appears if the wealthy population continues to decline with an estimated 1 900 millionaires leaving since 2020. Depending on government’s strategy this number may grow.
 
In the opening paragraphs of the Davis Tax Committee’s Wealth Tax Report of March 2018, it is stressed that a wealth tax is not the most viable instrument to address inequality. It, however, states that a wealth tax offers support in the redistribution agenda, and that wealth must be a legitimate tax base given the high levels of inequality. The report states that improved accounting for assets and interstate cooperation need to be addressed before a wealth tax can become viable. The report further states that all taxpayers and beneficial owners of wealth (which includes control of trusts and beneficiaries thereof) that are required to submit an income tax return must be required to include the market value of all readily ascertainable wealth in a revised tax return for the 2020 year of assessment. Taxpayers should also be required to disclose the existence of other forms of wealth where the market value is not readily available (such as membership of defined benefit retirement funds, shares in private companies, intellectual property, and personal assets above a basic threshold). To accommodate this it was recommended that non-disclosure penalties of the Tax Administration Act be revised. It would then be easy to reconcile each taxpayers reported income with their assets. For the time being however, the report recommends an increase in Estate Duty (an existing wealth tax) that should be enhanced instead of taxing wealth more generally.
 
Despite the flight of capital, comments made by the National Treasury in its Budget Review document this year indicates that it still plans to target wealthy taxpayers. The document states that the rebuilding of SARS is evident in improved revenue collection and compliance trends. It further states that over the past year, SARS has recruited an additional 490 staff across various levels and skills areas, and has invested R 430 million in refreshing and modernising its ICT infrastructure. This increased capacity was also noted in the webinar that SARS presented on 29 July 2021 called Trust and Tax obligations, wherein they made it clear that there is a great focus on trust tax compliance and their increased capacity. So gone are the days where people will get away with sloppy trust administration. In the document SARS confirmed that the dedicated new unit focused on high‐wealth individuals is taking shape. Provisional taxpayers with business interests are already required to declare their assets (based on their cost) and liabilities in their tax returns each year. To assist with the detection of non‐compliance or fraud through the existence of unexplained wealth, it is proposed that all provisional taxpayers with assets above R 50 million be required to declare specified assets and liabilities at market values in their 2023 tax returns. The additional information will also help in determining the levels and structure of wealth holdings as recommended by the Davis Tax Committee. This is in line with the proposals made in the 2018 report.
 
Sources of wealth tax:
·       Cash and savings - The after-tax interest rate earned on savings is already below the inflation rate, so an additional wealth tax will reduce the effective rate of return, disincentivise people to save, and cause retired people to become dependent on the state.

·       Listed investments and collective investment schemes – Already heavily taxed due to the combined emphasis on Capital Gains Tax and Dividends Tax since 2001.

·       Retirement funds – Although a substantial portion of
South Africa’s wealth is held in retirement funds (a large percentage lower income earners) it cannot be excluded; however it will come with administrative complexity unless imposed at a flat rate on gross assets. This will however also impact on the poor, as much as it impacts on the wealthy and therefor not be effective as a wealth tax.

·       Immovable property - Properties in South Africa are already heavily taxed, such as Transfer Duty, VAT, Capital Gains Tax and municipal rates. It may, however, be easier to implement a wealth tax based on property holdings, even though it may pose practical difficulties such as liquidity to pay, valuation methods used, the impact on recipients of a land redistribution programme, etc.
 
·       A recurrent tax on net wealth – It is clear that SARS (through its collection of data strategy), as discussed above, is getting a clear handle on net wealth per individual. It remains to be seen what will transpire from this.
 
Where does it leave estate planners who may have created trusts?
Although wealth taxes are often viewed unfavourably, especially in developing countries, mainly due to implementation challenges and the threat of capital flight discussed above, South Africa is relatively well placed as it already has, and continues to develop, third-party reporting systems, such as CRS. Capital flight could be limited through a range of policies, such as tying tax payments to citizenship, or implementation of an exit tax. Government also seems to drive a political agenda to focus on the wealthy, regardless of negative consequences.
 
High net-worth individuals are, therefore, left with no option but to get their affairs in order. That includes the administration and compliance of trusts. In the 2021 webinar SARS stated that they know who you are, where you are and where to find you. As discussed above, the Davis Tax Committee recommended that beneficial owners of wealth (which includes control of trusts and beneficiaries thereof) should disclose their wealth. So no more hiding behind non-disclosure and non-compliance with tax obligations.
 
Government is, however, constantly reminded by various professional bodies of the adverse consequences of wealth taxation such as capital migration, disincentives to save, and the effect on entrepreneurship and employment. Income streams arising from wealth are today taxed on a far wider base than 20 years ago, so it has become necessary to take stock of recent developments and the existing tax base. The tax-to-GDP ratio (tax collected as % of total value of goods produced and services provided in a country during one year) is estimated to be 24.7% in 2021/22 rising to 25% in 2024/25. South Africa’s tax-to-GDP ratio in 2019 (26.2%) was higher than the average (16.6%) of the 30 African countries. Civil society group Outa published a paper on a tax ceiling and concluded that 18.6% is an appropriate tax-to-GDP ratio for South Africa. This is much less than the projected numbers.
 
Even though government may relook taxing the wealthy to avoid the adverse consequences, given the fact that the Davis Tax Committee recommended the focus to initially be on increasing Estate Duty (also a wealth tax) collections, and the fact that capital flight may be traced and taxed as well, going forward, a trust may have a more important place again in estate planning in South Africa.