The R3 billion tax question

It is tough being a South African taxpayer. Those of us who keep our tax affairs in order could do little more than shrug our shoulders at the news, shared during the 2021National Budget speech, that the South African Revenue Services (SARS) would get R3 billion more to ‘rebuild’ its collection machinery. Not only do we pay for countless incapable and underperforming public sector entities; but we now have to dock up extra money so that a previously functioning SARS can clean up a mess of its own making. The question your clients will be asking is not so much whether this financial windfall will solve SARS’ revenue collection dilemma; but whether their tax affairs will come under greater scrutiny going forward.

The future of taxation

Our search for an answer led us to the latest PSG Think Big webinar, broadcast under the banner: ‘The future of taxation in South Africa’. We listened attentively as financial journalist Bruce Whitfield quizzed Judge Dennis Davis on a wide range of tax topics. The judge, widely respected for his work as head of the Davis Tax Committee, has been appointed on a one-year contract to assist SARS with the implementation of strategies aimed at closing the tax gap and ensuring that wealthy citizens pay their share. 

“Our revenue collection services are in serious trouble,” said Davis. “First, we are not seeing a level of economic growth that will allow for a revenue take that is sufficient to uplift society and, second, as evidenced by the Zondo Commission, we have experienced a serious degradation of our tax collection system”. The latter shortcoming was well-documented by the Nugent Commission of Enquiry into SARS. One of the unfortunate consequences of these failings is that SARS often comes across as being tougher on compliant taxpayers than on criminal elements in society. “The vast majority of people listening to our conversation are tax compliant; but there are many people who are evading tax,” said Davis. 

Big houses and flashy sportscars

The evidence of tax evasion is in plain sight. A simple lifestyle audit based, for example, on a sample of expensive neighbourhoods makes a mockery of the statistic that only 5000 individual taxpayers report an annual income exceeding R5 million. Judge Davis referred anecdotally to an exercise in which a forensic investigator checked the personal income tax records of 26 Ferrari owners, only to find that the highest earner among them had declared just R400 000 in income for that year. But SARS has historically struggled to bring high net worth tax evaders to book. Whitfield mentioned the decades-long battle between the revenue collector and businessman, David King, which was eventually settled in August 2013. 

Davis admitted that “putting one or two prominent people behind bars” had always been seen as a useful deterrent to tax fraud. The sense is that a successful high-level prosecution would result in improved tax compliance and successful clawback of outstanding tax revenues through an amnesty process… But there are countless challenges: “The Income Tax Act is too complicated, it is not enforced properly and SARS has, over the years, not had enough capacity to enforce its own legislation,” he said. To compound matters, advocates often employ a Stalingrad approach when defending high net worth clients, dragging matters out for years, as in the King case. 

1000s of dockets gathering dust

It would seem that SARS has been focusing on all the wrong areas. It does not make sense, for example, to repeatedly flag a compliant taxpayer for audit; nor does it make sense to chase after a mid-income business owner for minor or inconsequential shortcomings, such as expensing a private dinner. Serious crimes, meanwhile, are going unpunished with more than 1000 case files gathering dust at the National Prosecuting Authority (NPA). This explains why the last report from the Davis Tax Committee has called for tax legislation to be reconfigured and to allow SARS to implement prosecutions. 

Davis said that SARS has struggled to increase its revenue collections in line with the country’s GDP growth. The poor long-term collections track record is blamed jointly on administrative shortcomings at the institution and a declining tax morality among taxpaying citizens. Taxpayers in many municipalities are in open revolt, refusing to hand over rates and taxes due to corruption, incompetence and maladministration. The common refrain is: I am going to withhold my taxes because the state is incapable of spending it appropriately. “The more corrupt the state is, the more inefficient it becomes,” opined Davis, adding that the political sphere was dominated by “rent seekers”. There are simply too few public servants who are intent on building a society in line with the constitution. 

Illegal offshore stashes

How would Judge Davis right the ship? One option is to adopt an Al Capone strategy aimed at those who are known to be involved in corrupt activities. This strategy involves going after high profile transgressors by pressing minor charges where the chance of a successful prosecution is high. Corruption accused seem an obvious starting point for a SARS collection campaign; as does a crackdown on excessive displays of wealth. “Our job is to audit people where there are credible allegations of corruption; if I had my way there would have been a SARS person in attendance at the Zondo Commission from beginning to end,” said Davis. 

Another issue that Davis would like to explore is the role that accountants and auditors play in assisting individual taxpayers to hide wealth: “Auditors must be careful when signing off on annual tax returns; many of their clients have astounding sums of illegal money offshore”. SARS’ R3 billion budget ‘injection’ coupled with the appointment of taxation experts like Judge Davis will result in your high net worth clients’ tax affairs coming under closer scrutiny in coming years. Financial and tax advisers will have their work cut out to ensure that their clients’ tax affairs are in order in the context of the country’s complex tax environment.

Writer’s thoughts:
The PSG Think Big webinar raised concerns over perceptions that wealthy individuals might get away with paying less income tax than mid-income taxpayers. Billionaires in the US often wear their ‘zero tax’ assessment as a badge of honour; but South African taxpayers, surrounded by poverty and inequality, are unlikely to brag of similar achievements. Is there something wrong with a tax system that advantages the rich; or is this a fair / expected outcome of capitalism? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.