Personal taxes: Lingering pains for the golden tax goose has been saved
Personal taxes: Lingering pains for the golden tax goose
Published: 5 February 2021
As we embark on 2021, many South African taxpayers eagerly await the delivery of the 2021/22 National Budget Speech. All eyes will be on the Minister of Finance, who this year again will need to walk a tightrope, as he seeks to navigate the country’s treacherous tax and spending landscape in order to stimulate inclusive economic growth; while at the same time ensuring that already over-burdened South African taxpayers are not unduly burdened with further tax hikes to boost tax collections.
Whilst a gross revenue collection shortfall of more than R300 billion was forecasted for this fiscal year, based on recent information, we are hopeful that this shortfall will decrease – at a time when South Africa is in desperate need of a buoyant revenue base to meet its many challenges.
The COVID-19 pandemic has certainly placed the importance of tax collections and specifically the role of tax authorities and tax policy makers firmly in the spotlight, as the lockdowns compelled governments across the continent to not only implement a range of fiscal relief measures to support its citizens and businesses, but also to expand its future role in looking for sound, alternative avenues to increase tax collections.
The golden goose
In South Africa, taxpayers continue to feel the lingering fiscal pains on their disposable incomes and the South African Revenue Service (SARS) 2020 Tax Statistics report (which was published during December 2020) again highlights the continued fragility of the South African revenue collection ecosystem. Our country remains heavily reliant on a relatively small base of taxpayers to generate the majority of the country’s revenue collections.
Overall, the report showed that the 2019/20 fiscal year recorded the largest revenue shortfall to budget estimates since 2009/10, and of the R1 355.8 billion revenue collected, personal income taxes continue to be the main contributor to our country’s tax coffers, contributing a total of 39% of the total tax revenues.
Notably, whilst 6.3 million taxpayers were expected to submit tax returns for the 2019 tax year, only 4.3 million (approximately 68%) had been assessed (based on data available at the end of October 2020). Of these 4.3 million individuals, 1.8 million individuals earned taxable income in excess of R350 000 (and 1.1 million earned taxable income in excess of R500 000 - the taxable income threshold for submission of tax returns). These individuals contributed 78% of the total personal income tax collected.
These statistics again confirm that a very small percentage of the South African population is financing the country’s tax bill and that the “man-on-the-street” is paying a significant amount of tax (both direct taxes, such as personal income tax as well as indirect taxes, such as VAT).
Whilst these statistics should be viewed within the context of South Africa’s progressive income tax system (where the wealthy contributes a greater proportion towards supporting the state than the poor, and hence the more you earn, the higher tax you should pay), these taxpayers seem to be bearing a disproportionate share of the country’s tax burden, in return for limited services from the state, which is not a sustainable position.
A solidarity tax?
Against this backdrop, it would seem unlikely, given the current economic environment and the small tax base, that the maximum marginal tax rate would be further increased (it was increased from 41% to 45% for the 2018 tax year). This would also be in line with findings that an increase in the top marginal tax rate would not yield substantial additional tax revenues for the country.
That said, this does not rule out the possibility that alternative measures could be introduced to generate additional revenue for the fiscal coffers in order to combat the impact of the pandemic. There has been widespread speculation that a once off wealth tax, in the form of a so-called “solidarity tax” may be introduced for a limited period of time on high income earners to assist with increasing revenue collections.
The possible introduction of a wealth tax has been mooted for many years in South Africa, and whilst globally many countries have moved away from the idea of a wealth tax (for various reasons), recently it seems to have gained popularity as a tax policy again, notably in the US and the UK.
One of the main issues underlying the wealth tax debate in South Africa is the significant inequality in the income levels between the rich and the poor. The South African debate is further fuelled by the perception that there seems to be a number of very wealthy individuals in South Africa, and the question is whether these individuals are paying their fair share of taxes in the country?
In the World Wealth report issued last year, it was noted that the size of the high net worth individual population in Africa increased by 6.1% in 2019, while wealth increased by 6.5% to US$ 1.7 trillion. South Africa leads the charge on the continent, having the highest number of high net worth individuals.
Encouragingly, the SARS tax statistics report does however show that the personal income tax concentration curves (which measures the degree of inequality in the tax base over time) for taxable income for the tax periods 2016 and 2019 (based on assessed taxpayers), depict an improvement in the distribution of taxable income amongst SA taxpayers. This is largely due to
tax policy measures that were implemented to broaden the tax base and increase the progressivity of the personal income tax system.
Nonetheless, it remains a key priority for our fiscus that high net worth individuals bring all their income (local and offshore, in particular income routed via offshore trusts) into the South African tax net and that they pay their fair share of taxes. That said, it has previously been noted that the level of filing compliance by high net worth individuals in South Africa was very high.
The obvious advantages of introducing a wealth tax in SA are that it will increase
fiscal revenue and, at the same time, it would be seen as a measure to reduce the inequality in income levels between the rich and the poor (a key discourse
currently in South Africa).
The challenge in South Africa of imposing a wealth tax (or once off solidarity tax)
is that we already have a small and fragile tax base of high net worth South Africans, and the introduction of such a tax may well provide further impetus
to increasing the number of individuals emigrating from South Africa.
Last year an organisation “Millionaires for humanity” issued an open letter to governments across the world (signed by 83 members), calling on governments to raise taxes on wealthy millionaires, such as themselves (“Immediately, Substantially and Permanently”) in order to help the world recover from the pandemic. Whilst an altruistic and noble gesture, implementation of such a request will present its own challenges.
All is not lost though, as there are indeed various other measures available to our tax authority to raise revenues - a key measure being enhancing SARS’ digital capabilities to increase revenue collections - and it has already made many meaningful strides on its digital transformation journey.
SARS recently presented its strategic plan for 2020/21 – 2024/25, which notes a vision to build “a smart modern SARS, with unquestionable integrity, trusted and admired”.
The plan sets out a strategic intent “to follow the internationally recognized approach of Voluntary Compliance” and translates this intent into a list of strategic objectives, including:
- modernising SARS’ systems to provide digital and streamlined online services, thereby making it easy for taxpayers to comply with their tax obligations – making it easy for taxpayers to understand what tax to pay, when to pay and how to pay it, combined with making non-compliance difficult and costly to taxpayers would have a direct impact on revenue collections. The self-assessment process that was recently introduced by SARS goes a long way to achieving the ultimate goal of voluntary compliance by taxpayers.
- working with stakeholders to improve the tax ecosystem and compliance. SARS has many valuable data points on taxpayers and these could be mined using digital technologies and by leveraging off stakeholders to detect non-compliance and increase compliance amongst all taxpayers; from the taxpayer who has simple tax affairs to those who have sophisticated tax schemes.
- rebuilding staff and system capacities. The taxpayer’s user experience in dealing with their tax affairs and ensuring they are tax compliant can be improved (not only when dealing with SARS via e-filing, but also when dealing with SARS telephonically or in person).
- building public trust and confidence in the tax administration system. SARS was once the crown jewel of revenue authorities on the continent. Tax administration and governance issues at SARS in the past resulted in below-target revenue collections as well as inefficiencies. SARS is now slowly emerging from this dark cloud, but much must still be done to improve public confidence and taxpayer morality.
The vigorous pursuit of the above objectives will go a long way in assisting SARS to generate the additional revenue needed to meet its revenue collection targets.
The World Economic Forum’s 2021 Davos Great Reset Initiative amongst others, calls for governments to improve coordination (for example in tax, regulatory, and fiscal policy) and to implement reforms that promote more equitable outcomes. SARS is well-positioned to play a key role in this regard. It can leverage its many data points on taxpayers (subject to safeguarding data security and taxpayer confidentiality), and collaborate with other stakeholders and government departments; such as for example the Department of Social Development, the Department of Health, the Department of Employment & Labour etc. to assist them with more meaningful decision-making for the benefit of all South Africans.
A budget that supports South Africa’s future, should go further than just tax increases. Whilst the main component of our revenue base will always be tax revenues, tax is certainly not the only solution. Key parts of the solution must also include enhancing and leveraging SARS digital capabilities, expenditure cuts, curbing the size of the civil service, reducing policy uncertainty, creating jobs and focusing on state-owned entities. No doubt, the fiscal pain continues to linger for South Africa’s golden goose...