Would Nene consider a wealth tax?

This followed after French economist Thomas Piketty mooted the idea as one of the measures to reduce inequality in South Africa during his recent visit to the country.

Piketty’s views have been criticised on many fronts, but his suggestions around a wealth tax seem to have struck a chord with the ANC and Cosatu, even if at this point it may only be something they believe should be considered.

Which bodes the question: Is the introduction of a wealth tax something finance minister Nhlanhla Nene would have pondered when he takes to the podium to deliver his Medium-Term Budget Policy Statement (MTBPS) in Parliament on Wednesday?

Without doubt, Nene will be under significant pressure. Since his budget speech in February, the economic growth outlook has deteriorated significantly and he will likely be forced to (again) revise his projection lower from 2% to around 1.5% for 2015 (in line with revisions by the World Bank, the International Monetary Fund and the Reserve Bank).

Despite shrinking in the second quarter of this year, the economy is not officially in recession (defined as two consecutive quarters of contraction). The country does however find itself in “recessionary conditions”, says Lesiba Mothata, chief economist at Investment Solutions.

Against this background, revenue collection will be under renewed pressure and with ratings agencies keeping a watchful eye Nene will find it difficult to balance the books.

Mothata says he fears Piketty has “had audience” in South Africa. Income inequality is one of the big issues plaguing the country and there may be an expression of an intention to look at a wealth tax more closely.

Yet, Piketty is probably not in the best position to truly appreciate the complexity of South Africa’s situation, he says.

A taxing issue

Although the finance minister may set the scene for tax changes to come in February, typically, tax changes are not announced during the MTBPS.

Keith Engel, deputy CEO of the South African Institute of Tax Professionals (Sait), says procedurally, it is unlikely that the minister would introduce a wealth tax on Wednesday. If such a tax were to be introduced, it will be during his February budget.

In a sense, the discussion around a wealth tax is complicated by the varied definitions used by a diverse group of stakeholders. What exactly is a wealth tax?

Engel says the phrase wealth tax is technically used for tax levied on an increase in the size of the wealth or balance sheets of taxpayers without regard to income. The other taxes are levied on gains in income generated to create the balance sheet.

“We in South Africa have a lot of redistributional taxes, even though we don’t have that many wealth taxes.”

The Davis Tax Committee’s First Interim Report on Estate Duty (published in July) states: “Despite all its faults the current Estate Duty Act, coupled with Donations Tax levied in terms of the Income Tax Act, remains the only direct tax on wealth in South Africa.”

What the ANC is really calling for is more redistributional taxes – to increase the tax burden on wealthy South Africans. Piketty is referring to wealth taxes, but also to redistribution across the board and the two issues have gotten conflated, Engel says.

The Davis Tax Committee also regards capital gains tax (CGT) “as an income tax on capital income and not a wealth tax”.

Di Seccombe, head of tax training and seminars at Mazars, says although estate duty and donations tax (both levied at 20%) are forms of wealth taxes there is no specific “wealth tax” in South Africa.

In considering other wealth tax options in its report, the Davis Committee came to the conclusion that the cost of implementation of new wealth taxes would be so great and the administrative burden so significant that it would not be a cost-effective way of collecting the additional tax the fiscus needs, she says.

The committee suggested that instead of introducing new wealth taxes at this stage, a properly structured estate duty would do a better job to tax wealth at the point of the taxpayer’s death.

Seccombe says the Committee was of the view that further types of wealth tax need to be property understood and investigated. This could not have been done by the time of the MTBPS.

The big issue stakeholders will be watching in the MTBPS is not really a wealth tax issue, but rather whether there is any hint as to tax changes that will be implemented in respect of the taxation of trusts, and although it isn’t a wealth tax, if there will be any further changes in respect of CGT.

“What we are actually waiting for out of the Medium-Term Budget Speech – potential changes in how they are going to tax trusts [and] potential changes to capital gains tax – are not wealth taxes per se.”

Seccombe says the major fear of the industry at the moment is that a fundamental change in the tax regime of trusts will be introduced along the line.

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