The ever-present talk of imposing a wealth tax on South Africans as a source of revenue has resurfaced after the National Treasury’s plan to collect an additional R58 billion mainly from higher VAT in the 2025/26 financial year, was stopped in its tracks with the postponement of the National Budget.
Business Day quoted “senior officials aligned to the ANC” within the Government of National Unity (GNU), saying a wealth tax was among the proposals at a special Cabinet meeting on Monday to boost the state coffers after coalition partners in the GNU blocked the Budget scheduled for February 19, 2025. Treasury’s proposed 2 percentage points increase in the VAT rate is believed to be the main reason for this unprecedented postponement of the Budget.
These sporadic calls for a wealth tax come despite several warnings from economists, tax experts, and political parties over the years that it is a detrimental move that may result in a surge in the brain drain from South Africa, a shrinking tax base as mobile high-net-worth individuals (HNWI) can easily emigrate and transfer their money offshore, and a slump in investor confidence.
The Davis Tax Committee back in 2018 recommended that the decision on whether to implement an annual net wealth tax cannot be made without further consideration as to the appropriate tax base (i.e. which forms of wealth to include within the scope of the tax), comprehensive data on the pattern of wealth ownership, and an evaluation as to whether the revenue generated would exceed the administrative and economic burden on taxpayers and the revenue authorities.
Leaving SA physically and financially
Statistics show many wealthy South Africans residing abroad have already finalised the formal process of financial emigration with the South African Revenue Service (Sars). By ceasing Tax Residency through financial emigration, you as a Non-Resident taxpayer protect your foreign-earned income from being taxed by Sars.
The latest Henley Private Wealth Migration Report ranks South Africa among the top 10 countries or territories globally in terms of projected net outflows of millionaires for 2024, with a projected 600 net millionaire outflow. The report classifies millionaires and HNWIs as individuals with liquid investable wealth of USD 1 million or more.
An economics professor at the North-West University, Waldo Krugell, said in his daily economic snippet, Die Ekonomie Minuut, on Spotify this Wednesday, that in the last five years, an estimated 40,000 South Africans ceased their tax residency.
Renewed talks of a possible wealth tax now that the state has to find other revenue sources, may present an opportune time for wealthy South African expatriates or those planning to emigrate, to relook at their finances and consider financial emigration, in so protecting their finances from the South African tax net while ensuring full tax compliance.
Tax experts say individual taxpayers in South Africa already carry a high Personal Income Tax burden contributing 9% of GDP, compared to around 6.7% a few years ago.
In 2023/24 the main sources of tax revenue were Personal Income Tax (37.4%), followed by VAT (25.7%), CIT (18.2%), and the other 18.7% made up of other taxes.
First things first
The residence of a taxpayer is crucial in determining their liability in South Africa for tax purposes. This makes proper cessation date planning and ensuring your tax affairs are in order with Sars, the absolute starting point in the financial emigration process. If you have not made a formal application to Sars in which you cease your tax residency, whether on a permanent or temporary basis, you may have outstanding tax obligations. Rectifying non-compliance can be even trickier and costly while abroad, and professional tax experts are best placed to guide you through this process.
Why Ceasing Tax Residency Matters
Sars treats Tax Residents and Non-Tax Residents differently when it comes to paying taxes. Among the benefits for non-tax residents are:
· You are only taxed on South African-sourced income;
· Capital Gains Tax is only levied on the disposal of fixed property and property-rich shares in South Africa (excluding South African fixed property in your name, retirement funds, and personal use assets such as vehicles and furniture);
· No worldwide tax payable, even on remittances; and
· No donations and/or estate duty tax levied.
In the draft Budget Review document, Treasury is clear that it is not keen on raising Personal Income Tax rates as a source of additional revenue, as it is likely to be inefficient as taxpayers make adjustments to reduce their tax liabilities.
Regarding a recommendation by the Standing Committees on Finance on 2024 revised and proposed fiscal framework, to possibly explore progressive tax options, including taxes on luxury items and wealth taxes, to address revenue shortfalls for 2024/25, National Treasury answered: “Sars is collecting and analysing wealth-related data through its High-Net-Worth Individuals Unit, and no final decision has yet been made on the proposal.”
Conclusion
While the country is in limbo to allow the GNU partners time to thrash out proposals and plans to boost economic growth in the Budget to be presented on 12 March, the question is whether the Treasury will keep to this “no final decision” on a wealth tax.
In light of the uncertainty, now may be the right time to act.
* Tax Consulting South Africa is an independent tax practice.
PERSONAL FINANCE