Ex­perts say es­tate tax the most promis­ing of the pro­posed three

CityPress - - Business & Tenders - JUSTIN BROWN and DE­WALD VAN RENS­BURG busi­ness@city­

Huge changes are un­likely to re­sult from the Davis Tax Com­mit­tee’s in­ves­ti­ga­tion into the pos­si­bil­ity of im­pos­ing another wealth tax, given the ex­pense in­volved in ad­min­is­ter­ing such a duty and the fact that it will not bring in that much rev­enue. It was for­mer fi­nance min­is­ter Pravin Gord­han who pro­posed such an in­quiry, as the need for the state to find new sources of rev­enue be­came more press­ing.

South Africa has three forms of wealth tax: es­tate duty, trans­fer duty and do­na­tions tax. These bring in 1% of tax rev­enue.

A wealth tax, as op­posed to an in­come tax, is based on the mar­ket value of as­sets.

The Davis com­mit­tee said its in­ves­ti­ga­tions into pos­si­ble wealth tax op­tions were prompted by a “highly un­equal” dis­tri­bu­tion of wealth in the coun­try.

Kyle Mandy, the head of tax tech­ni­cal at PwC, re­ferred to the work by French econ­o­mist Thomas Piketty on wealth and in­come in­equal­ity, say­ing it had piqued lo­cal politi­cians’ in­ter­est in in­tro­duc­ing a wealth tax.

Even though the sub­ject of such a tax is highly politi­cised and emo­tion­ally charged, this lat­est leg of the com­mit­tee’s in­quiry into the rev­enue sys­tem is un­likely to pro­duce any­thing wildly trans­for­ma­tive.

The pub­lic has un­til May 31 to make sub­mis­sions to the Davis com­mit­tee re­gard­ing three new wealth taxes: a land tax; a na­tional tax on the value of prop­erty in ad­di­tion to mu­nic­i­pal rates; and an an­nual wealth tax.

In­grid Woolard, a mem­ber of this com­mit­tee and an as­so­ciate pro­fes­sor of eco­nomics at the Univer­sity of Cape Town, said: “The sim­plest form of it would mean tax­pay­ers draw­ing up an an­nual bal­ance sheet of their as­sets and li­a­bil­i­ties to get a net wealth, which then gets taxed at some per­cent­age.”

Wealth taxes can tar­get fixed prop­erty, cash in the bank, share port­fo­lios and re­tire­ment sav­ings, but would al­most cer­tainly ex­clude per­sonal ve­hi­cles or valu­able per­sonal pos­ses­sions such as jew­ellery.

Ei­ther way, the im­ple­men­ta­tion of such a tax would tend to rely on a high de­gree of vol­un­tary dec­la­ra­tion.

Woolard sug­gested that ex­pec­ta­tions that a wealth tax would sig­nif­i­cantly boost state cof­fers were un­re­al­is­tic.

“A lot of coun­tries have tried to ad­min­is­ter a wealth tax, but it is dif­fi­cult and ex­pen­sive to do,” she told City Press.

“No coun­try gets lots of rev­enue from wealth taxes.”

Mandy said coun­tries with an­nual wealth taxes in­cluded France, Ar­gentina, Uruguay and Colombia.

“An­nual wealth taxes con­tra­vene an im­por­tant tax prin­ci­ple – that tax should be levied at a time when it is most con­ve­nient for the tax­payer to pay the tax,” he added. RAND 9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 0 2013/14

“If you do not have the cash to pay the wealth tax, then it be­comes a bur­den.”

Woolard said es­tate tax, on which the Davis com­mit­tee had al­ready made its pro­nounce­ments, was the most promis­ing of the three pro­posed wealth taxes from a tax rev­enue per­spec­tive.

Last year, Judge Den­nis Davis sug­gested that a true wealth tax in South Africa would have to cover the in­come of re­tire­ment funds – some­thing South Africa abol­ished in 2007 to in­stead in­cen­tivise re­tire­ment sav­ings.

That leaves prop­erty. Tax on fixed prop­erty was mooted in the pre­vi­ous re­view of the tax sys­tem con­ducted by the Katz Com­mis­sion in 1996.

The idea had been sup­ported and was im­ple­mented – the mu­nic­i­pal prop­erty rates sys­tem, in­tro­duced in 2004, is a “land tax”.

Mandy said the Davis com­mit­tee could ex­am­ine a “full-blown” na­tional land tax only on the value of land, ex­clud­ing any im­prove­ments.

“By tax­ing land, you will force peo­ple to use land pro­duc­tively rather than land be­ing held for spec­u­la­tion. It will also make land more af­ford­able,” he said.

How­ever, a land tax would af­fect the fi­nan­cial sys­tem be­cause a prop­erty that was mort­gaged would lose value if taxed, plac­ing the banks at risk.

A land tax could also re­sult in prob­lems with val­u­a­tion, added Mandy.

“The var­i­ous mu­nic­i­pal­i­ties have dif­fer­ent val­u­a­tion method­olo­gies and dif­fer­ent val­ues at dif­fer­ent times ... Now you need to have a sin­gle val­u­a­tion roll.”

The pro­posal for a na­tional tax on the value of prop­erty, in ad­di­tion to mu­nic­i­pal rates, seemed as if this could be a surcharge on mu­nic­i­pal prop­erty rates, he added.

Trans­fer du­ties ap­pear to be the most likely tar­get for rec­om­men­da­tions by the Davis com­mit­tee. South Africa’s ex­ist­ing taxes on wealth brought in a to­tal of R16 bil­lion last year, of which R8 bil­lion covered trans­fer du­ties.

“I think trans­fer du­ties dis­tort the prop­erty mar­ket, so maybe there can be a way to re­place that with a dif­fer­ent prop­erty tax,” said Woolard.

“You would want to be very pro­gres­sive with the struc­ture. You do not want to tax a R200 000 RDP house,” said Woolard.

The prob­lem with ex­tra prop­erty taxes would be that na­tional gov­ern­ment would then start in­ter­fer­ing in the ma­jor source of funds for lo­cal gov­ern­ment.

Woolard said the Davis com­mit­tee would prob­a­bly re­port on its wealth tax rec­om­men­da­tions by as early as Septem­ber or be­fore the end of the year.

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