Wealth tax warning for South Africa

The National Treasury may consider a wealth tax on South Africa’s richest people as a way to help make up the R60 billion shortfall in the 2025 Budget without increasing the government’s debt burden. 

However, such a tax is unlikely to yield much additional revenue for the government as these individuals have effective strategies to minimise the amount of tax they pay and can easily financially emigrate. 

This is feedback from Melville Douglas’ head of fixed income, Mzimasi Mabece, who outlined some of the creative ways the government has tried to plug its Budget shortfall. 

Mabece explained that South Africa, like many other countries, has long benefited from borrowing at attractive rates. This enables the country to manage long-term debt with relatively low interest costs. 

However, global bond yields have risen significantly since 2022. In the US and UK, bond yields increased from less than 1% to 4.5%, while in South Africa, they surged to 10.5%. 

Over the past decade, South Africa’s economy has averaged an annual growth rate of 1%, capping tax revenue growth and making the government’s debt pile increasingly unsustainable. 

Mabece said that due to sluggish growth, rising debt service costs, and increasing spending pressures, South Africa’s borrowing requirements have grown substantially.

As a result, the country’s debt has reached a record high of 75% of GDP, with interest payments amounting to 22 cents for every rand of revenue collected. 

To minimise the crowding-out effect of these interest costs, the government has adopted creative funding strategies, such as using floating rate notes.

Given these challenges and the government’s efforts to maximise tax revenue, the state must now explore alternative sources of revenue. 

In this year’s initial Budget, Finance Minister Enoch Godongwana planned to propose increasing VAT by two percentage points to 17%. 

However, despite South Africa’s VAT rate being lower than the OECD average of 20%, the Government of National Unity (GNU) rejected the increase, prompting the minister to revise the Budget and deliver it on 12 March. 

With the VAT increase off the table, the government must consider other potential sources of tax revenue. 

Wealth tax on the cards

One option is a wealth tax, which could impact inflation, the tax base, economic growth, foreign direct investment, and capital flight. Before exploring these impacts, it is essential to define wealth tax.

The National Treasury confirmed to Parliament late last year that it has been exploring the feasibility of a wealth tax in South Africa. 

It said it would use data from SARS’ High Wealth Individual Unit to focus on the top 1% of South African taxpayers and the country’s wealthiest individuals. 

According to SARS data, to be in South Africa’s top 1% of taxpayers, an individual must earn approximately R1.95 million per year, with just over 100,000 such individuals. 

To be classified as an ultra-high net worth individual, one must have a gross wealth of R75 million or more.

Wealth tax is levied on an individual’s net asset market value, including all asset classes, both financial and non-financial (movable and immovable). 

South Africa has a narrow base of ultra-high-net-worth individuals, some of whom have financially emigrated with non-resident tax status. 

These individuals often use experienced tax practitioners to reduce their tax liabilities legally. 

Furthermore, Mabece said elements of a wealth tax already exist in the current tax regime, such as transfer duty on property, capital gains tax on realised assets, luxury car tax, and estate duty. 

New taxes aim to generate revenue for the state in the least disruptive and most effective manner. 

However, the solution to South Africa’s debt crisis should focus on fostering economic growth and ensuring efficient spending on healthcare, education, and infrastructure. In the long run, these measures will support economic prosperity for all.

The assets of the ultra-rich are highly mobile. Given the narrow base of these taxpayers and the fact that some have already externalised their tax status, any perception of additional targeting could unsettle them, potentially leading to the unwinding of their assets out of South Africa.