South African wealth tax warning

The 2025 Budget Speech will likely result in significant changes to existing ‘wealth taxes’ in South Africa, such as donations tax, estate duty, and capital gains tax. 

It may also see the introduction of a fit-for-purpose wealth tax targeting rich South Africans to generate additional government revenue. 

This is feedback from Old Mutual’s head of tax, Nazrien Kader, who outlined what the insurance giant expects from the Finance Minister’s Budget Speech on 19 February. 

Kader explained that the speech is becoming increasingly difficult for the minister as there is less space for spending to be cut each year and revenue to be raised in a stagnant economy. 

Old Mutual’s research indicates that Finance Minister Enoch Godongwana could be faced with revenue that underperforms estimates by R22.3 billion. 

Tax collections from individuals continued their upward trend, increasing by 13.2% for the fiscal year to December 2024 compared to December 2023. 

However, corporate income tax and VAT have been relatively flat, with corporate income tax reflecting a reduction of 0.4% while VAT collections presented an increase of just 1.2%. 

Overall, this is the primary reason for the National Treasury projecting an undershoot of 2024 budget estimates by R22.3 billion in 2024/25.

This presents a significant challenge for the Finance Minister as additional funds will have to be raised from other sources or spending cut further, which would be politically unpopular. 

Thus, while it is unlikely that the National Treasury will introduce any new taxes, existing taxes are likely to be tinkered with.

The usual lower-than-inflationary adjustments to the individual tax brackets can be more or less guaranteed. Major changes may come with regard to a wealth tax in South Africa. 

In an address to members of Parliament last year, the National Treasury confirmed that it is exploring the feasibility of a wealth tax. 

The debate endures with advocacy groups pushing for early implementation and economists cautioning that such a tax on wealth could risk driving taxpayers away through emigration and tax planning strategies. 

Kader said Old Mutual expects the National Treasury to tinker with existing ‘wealth taxes’ in the current regime. 

These include donations tax (currently 25%), estate duty (dual rate of 20% on the first R30m and 25% thereafter) and the capital gains tax inclusion rate for individuals (currently 40%).

The introduction of a wealth tax could have potentially disastrous consequences for the South African economy. 

A wealth tax has populist appeal, but it has many problems, including being difficult to execute, damaging the economy, and raising little revenue.

Minerals Council chief economist Hugo Pienaar said there are only 133,000 super-wealthy South Africans with a taxable income of over R1.5 million.

Trying to raise R45 billion for basic income grants from 133,000 wealthy taxpayers will require an exorbitantly high tax.

Such a high tax will encourage many wealthy individuals to leave South Africa and move their businesses to tax-friendly countries.

Furthermore, these individuals already shoulder a hefty tax burden as South Africa has a progressive tax system. 

The most heavily taxed South Africans already have to pay over 45% of their income, and a wealth tax would only add to this burden. 

Free Market Foundation associate Nicholas Woode-Smith explained that only three million people pay 90% of all personal income tax. 

This means that tax revenue is highly vulnerable to external shocks or individuals changing their tax residency as it is not broad-based.

These three million South Africans are also heavily burdened with taxes on savings and investment and on most purchases they make. 

“We’re taxed for working. Our employers are taxed for allowing us to work. We’re taxed when we commute to work through the fuel levy. We’re taxed when we die, and our heirs are taxed again,” Woode-Smith said. 

“High-income earners already pay more tax than anyone else. That’s how percentages work. Even if a millionaire were to pay a 10% tax, they would still be paying more than the vast majority of South Africans,” he said.  

“A sliding scale tax rate, often called a progressive tax rate, is unequal and unfair and belies a complete misunderstanding of basic mathematics”.

This is merely a mechanism for the government to extract more wealth from their citizens than is fair and actively pushes the highest taxpayers to either minimise their tax burden or emigrate, he said.