Many wealthy taxpayers are leaving SA due to increasingly high taxes

Many wealthy taxpayers are leaving SA due to increasingly high taxes and after Budget 2024, they will scrutinise the fine print of tax legislation and consider the possibility of the introduction of NHI, while weighing the implications for their financial portfolios and long-term wealth accumulation strategies, to decide if it is worth it to stick around or not.

Beatrie Gouws, tax director and Prof David Warneke, tax partner at BDO, say top-tier taxpayers have historically borne the brunt of tax hikes and policy changes aimed at redistributing wealth and bolstering social programmes.

However, in recent years, Warneke points out, there has been a growing sentiment of discontent among high-income earners, who argue that excessive taxation stifles entrepreneurship and undermines economic growth.

Another growing concern for the health of the economy is the number of top tier earners who are simply choosing to emigrate, among many other reasons, due to increasingly high taxes, he says.

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Reports and data show that many dollar millionaires have left

According to the 2024 Brics Wealth Report, many super wealthy individuals are leaving South Africa. The report highlighted that South Africa was home to 37 400 US-dollar millionaires, including 102 centi-millionaires and five billionaires, at the end of 2023, a 20% decline from 2013.

Gouws says this means that South Africa has lost approximately 9 350 US-dollar millionaires over the past 10 years, although this is also due to the devaluation of the rand against the dollar over this period.

Tax statistics from Sars also show that more than 32 000 people ended their tax residency in South Africa between 2017 and 2021. About 2 700 of them earned more than R500 000 per year and 1 100 earned more than R1 million annually.

“If an increasing number of South Africa’s richest people leave the country, the number of the relatively few taxpayers who pay tax will decline. This includes South Africans who have been living outside of the country for many years who, if they cease their South African tax residency, will no longer pay tax in the country on income earned from a non-South African source,” Warneke says.

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Budget 2024’s taxes will bite payers of personal income tax

Although Budget 2024 was hailed from all over as a solid one that showed fiscal consolidation as well as fiscal discipline, some budget delineation, particularly regarding taxes, will affect South Africans from all walks of life across the spectrum of income brackets.

From the affluent elite to the struggling masses, every level of society will be affected by the allocations and adjustments Minister of Finance, Enoch Godongwana, announced.

Gouws and Warneke say South Africans breathed a collective sigh of relief as the 2024 budget avoided any rate increases for income tax for the current fiscal year. It only dawned on them afterwards that while there were no rate increases, the tax tables were not adjusted for inflation either, which means different scenarios for different taxpayers across the top, middle and bottom tiers.

Gouws points out that government traditionally adjusts tax thresholds every year to counteract the effects of inflation.

“However, for 2024, these thresholds stay the same and this means the possibility of bracket creep for earners other than those at the highest tax rate.”

This means that tax payers in the other tiers below the top tier may be pushed into a new tax bracket and pay relatively more in tax although tax rates were not increased. Individuals are expected to pay R16 billion more in tax during the 2024/2025 fiscal year.

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Middle tier pay some of the highest personal income tax in the world

Middle-tier taxpayers are next on the socio-economic ladder. They are a diverse cohort made up of salaried professionals, small business owners and aspiring entrepreneurs who are confronted with some of the highest effective personal income tax burdens in the world, Warneke says.

“For this demographic, the budget speech represents a delicate balancing act between growth aspirations and the realities of fiscal constraints and economic uncertainty. Unlike top-tier earners, those in the middle typically lack not only a savings safety net, but also the resources to legally structure their affairs in the most tax efficient manner, leaving them much more susceptible to the direct impacts of budgetary decisions.”

Gouws says while top-tier taxpayers are not as negatively affected by bracket creep on a percentage basis, the middle- and lower-tier taxpayers should keep a keen eye out for the possible effect of an annual salary increase on their tax rate and their take-home pay.

“Unfortunately, government did not insulate any taxpayers from the effect of inflation on the personal income tax they pay.”

And it does not stop at personal income tax. Gouws says middle-tier will furthermore feel the effects of the increase in so-called ‘rats and mice taxes’, taxes on items such as plastic bags, light bulbs and sin taxes.

“If we add up all these indirect taxes, calculate the amount per rand that earners will pay and compare this with what these earners were paying in 2023, the difference will be surprising. With personal income tax as a proportion of total revenue collected increasing by 2% in 2024 compared to 2023 and with around 5% of the population paying around 92% of personal income tax, the ripple effects will be a reduction in spend from these earners because they are going to have substantially fewer rands in their pockets”

Therefore, Gouws says, economic growth will essentially continue to decline, with the middle-tier left with even less money to spend.

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Not even any relief for lower-tier earners

Warneke says the move to provide no relief to lower-tier earners was surprising, particularly in an election year.

“Inflationary and in tough years, even below-inflationary adjustments were normally provided for these individuals, which also indirectly affects their dependents.

“Unlike their wealthier fellow citizens, bottom-tier taxpayers have very little financial resilience or buffers to cushion the economic blows of increased taxes, leaving them disproportionately vulnerable to the effects of budgetary decisions.”

Gouws also finds it concerning that there could be the most unsuspecting victims of bracket creep in the lower tier who previously fell below the thresholds for paying personal income tax, but after an annual salary increase finds themselves unexpectedly in the company of the personal income taxpayers.

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Is it worth it to do this to taxpayers for so little revenue?

The R16.3 billion extra that will be extracted in personal income tax for 2024/2025 and the knock-on effects, which will be R17.3 billion in 2025/2026 and R18.6 billion in 2026/2027, seems a drop in the ocean when considering a R1.8 trillion budget.

Warneke and Gouws then ask the question: “Was this increase necessary at all, especially considering that households are under immense pressure and the country’s income tax burden is one of the highest among middle income earners in the world?”