Property & Weath

Wealth tax, complexity could be counter productive

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South Africa cannot afford a perception that it fails to tax the rich adequately. However, it is an extreme complex issue, demanding great care to avoid hurting the middle class and future high net worth individuals.

That is the crux of a submission by the Fiduciary Institute of Southern Africa (Fisa) to the Davis Tax Committee (DTC) on proposed wealth tax options.

The submission, submitted Fisa CEO, Louis van Vuren, argues that the three proposed options for a ‘wealth tax’ by the DTC – to deal with unequal distribution of wealth in SA – will be extremely complex to introduce and administer.

The three options proposed, are:

  • a land tax;
  • a national tax on the value of property (additional to municipal rates); and
  • an annual wealth tax.

Fisa arguments

It cannot be assumed that all private owners of land are wealthy individuals, and ownership of land is not a reliable proxy for wealth. There will be a need to discriminate between the wealthy and not so - wealthy land owners.

The result is that a national land tax will have to be só complex, using thresholds, that it is doubtful whether it will be an efficient source of fiscal revenue.  

For example, a very wealthy individual may own several pieces of property, which all fall under the threshold.

“An annual wealth tax will have to be extremely complex in order to target true wealth. The required level of complexity raises serious questions about the compliance and enforcement cost, as well as the ability to enforce,” the Fisa submission states.

It also argues that existing taxes in South Africa “are already highly progressive, with 3.5% of taxpayers paying 38.5% of all personal income tax, while thresholds for estate duty, donations tax, transfer duty, and CGT ensure that less affluent individuals are not affected by these taxes.”

Property enable wealth creation

There is also the danger of a land tax being counterproductive in terms addressing the issue of unequal distribution of wealth.

To exempt at least primary residences (regardless of value) would, to an extent, be in line with how it is treated different to other fixed property for purposes of Capital Gains Tax (CGT).

“The justification for such an exemption is rooted in the fact that private ownership of residential property is an enabler for wealth creation, something which is desperately needed in South Africa.

“In our view taxes do not create wealth, but consume it, and an at best alleviate the consequences of poverty.

“We submit, therefore, that a blanket tax on all private ownership of land is not appropriate,” Fisa states.

The institute suggest that the following categories of land should be excluded from future land taxes, regardless of value:

  • The normal exceptions for recreational, educational, religious, and charitable purposes, i.e. land belonging to sports clubs, schools, universities, religious groups, and all public benefit organisations (PBO’s);
  • Private land in collective use, e.g. collective farming operations. Itshould also be borne in mind that many families “club together” to purchasefarms, and own family holiday homes in a variety of structures, including trusts and companies.Although the land could have a high market value, the value per sharing individual,could be well below what could be regarded as the threshold of wealth. The result of an indiscriminate land tax, under these circumstances, will result in taxpayers outside the target group being burdened by the tax; and
  • Land used by large agricultural corporations, with many shareholders and employees may have a high value, but not belonging to any one individual who could be said to be very wealthy. To levy an annual land tax in such circumstances will place a further burden on already thin profit margins in agriculture

In general, as far as agricultural land Is concerned, it is noted that farmers “in some areas of South Africa (e.g. the Karoo) are notably asset rich and cash poor. An annual tax on land will place them in an even more serious cash squeeze.

“It should also be borne in mind that, due to the amount of land needed to farm sustainably in these areas, it is not really an option to sell off part of the land to generate sufficient cash to be able to afford and/or reduce liability for an annual land tax.”

Pressure on residential rent

If not exempted, the rent on rented property will also experience upward pressure, negatively affecting an already stretched middle class, and preventing it through legislation, could be impossible due to complexity.

Landlords of industrial and/or commercial properties, in turn, are likely to split properties into small units as legal entities, below potential threshold value, and if threshold levels are lowered to counter such practices, it will hit taxpayers who should not be subject to the tax.

To be fair, and only tax the wealthy, whatever definition for wealth is used,

an annual land tax is bound to be extremely complex.

“It is, in our view, a fact that the more complex a tax, the more the opportunities for avoidance, which raises the cost of enforcement, and reduces the net gain for the fiscus,” Fisa concludes

Similar arguments are made with regards to a national tax on the value, over and above municipal rates, and will also place an extra burden on the middle class and lead to a highly complex tax regime, creating loopholes and increase the cost of enforcement.

Fisa also note that “very few developing countries have an annual tax on wealth,

apparently with good reason. Developing countries, by their nature, need foreign

direct investment to grow and develop their economies.

“Therefore, they need to be attractive to investors to bring that desired level of foreign investment to grow and develop their economies. Extra taxes are always a potential deterrent to capital inflows.”

Conclusion

Key amongst the institutes conclusions is “… that the high level of inequality is not due to a lack of redistribution through the tax system, but more the result of lack of economic growth and the failure of the education system in South Africa to produce entrepreneurs and employable individuals.”

(To read the full submission, click here.)

Also read: South Africa urgently needs to rethink its approach to housing

by Eve van Basten

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