Is the new super tax a tax on wealth?

Keelen Snyders, Tax Trainee at BDO.

Shohana Mohan, Head of Individual and Expatriate Taxes at BDO Tax Services.

In his last Budget Speech as Finance Minister, Pravin Gordhan announced the introduction of an additional tax bracket of 45% for individuals earning more than R1.5 million per annum. Many refer to this tax bracket as a ‘wealth tax’. Is this bracket in fact intended to be a wealth tax? A wealth tax is a tax on the increase in the value of personal assets owned. The effect of the additional tax bracket is that every additional rand generated in excess of R1.5 million per annum of taxable income will be subject to tax at a rate of 45% before it is used to create any form of wealth.

Capital Gains Tax (CGT) is effectively a tax on the income generated from the sale or disposal of assets. To the extent that the CGT taxes an increase in the wealth or balance sheet of the taxpayer, and not only the capital income generated through sale or distribution, it can be said to be a tax on wealth. South Africa has for many years included some or other form of tax on wealth such as donations tax (at 20%) and estate duty (at 20%). The super tax technically would therefore not qualify as a direct tax on wealth. However, as CGT applies the progressive personal income tax rate scales, asset disposals will now become subject to the super tax rate (or some blended rate) and, as such, could be said to have introduced a tax on wealth (to an extent).

The projected R5 billion revenue that may follow from the introduction of the additional bracket may after all not materialise. Of the 18.2 million registered taxpayers in the 2016 tax year, only 4.8 million taxpayers were required to file annual income tax returns. This means only 26% of the taxpaying population fell within the income bracket exceeding R300 000 per annum.

The introduction of the additional bracket is likely to result in many individual taxpayers viewing South Africa as an unfavourable tax jurisdiction. The additional bracket may induce taxpayers to plan in order to reduce their overall tax burden in South Africa by seeking cross-border employment opportunities in more favourable tax jurisdictions. Senior executives that render services for the benefit of several entities within a group of companies may consider revisiting the concept of split contract tax planning and shifts in their tax residence position. Upon cessation of South African tax residence status, many South Africans will have the ability to invest in offshore structures that are likely to yield further growth which is unlikely to fall into the South African tax net. However, specific facts and circumstances will need to be considered should a high net worth individual opt to become non-tax resident, such as the capital gains tax ‘exit charge’.

What about South Africa’s increasing critical skills shortage? The increased tax burden on the highly skilled and experienced working population is likely to result in a further brain drain thereby placing further strain on the skills in South Africa. Also, multinationals are likely to think twice before sending their highly skilled foreign nationals (expatriate populations) to South Africa to transition skills and knowledge, given the overall tax costs to be incurred on a grossed-up tax basis.

Whether the super tax is a pure tax on income or seen as a partial tax on wealth, the imposition of this very high rate comes at a time in the history of the South African economy where it is not affordable. Weighing up the short term tax revenue gain against the severe detrimental effects which is likely to follow, the super tax is unlikely to be a super star in the tax annals of South Africa.