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Spectre of crippling wealth tax is laid to rest - for now
The next Katz Commission recommendations, due out later this month, are likely to take a softer line than many have been anticipating, writes LEIGH ROBERTS
HARD-HIT individual taxpayers can breathe a sigh of relief: the threat of punitive wealth taxes is receding as capital gains tax is put on the back burner and estate duty is set to remain in its present form. The next report of the Katz Commission of Inquiry into Taxation, which is due out at the end of this month, is likely to take a softer than expected stance on the much-feared wealth tax. Wealth tax incorporates a capital gains tax, which taxes the profit a taxpayer makes when he or she sells assets like shares and property, as well as estate duty (capital transfer tax) which imposes tax on a deceased estate. South Africa does not have a capital gains tax, but has a 25% estate duty. There have long been fears that a capital gains tax will be introduced and that estate duty will be given more bite. But it is to be hoped that these concerns can be laid to rest: developments in the country have precipitated a new attitude to wealth tax among prominent tax consultants. "Living in South Africa is stressful enough and a punitive wealth tax may be the proverbial straw that breaks the taxpayers' back," says Anthony Chait, senior tax partner at Fisher Hoffman Sithole. The crime epidemic, a huge increase in emigration which is shrinking South Africa's skills base, and the opening up of exchange controls which could lead to flight of capital are all causes for concern. And then there's the rapidly declining level of tax morality in the country, hastened in its downturn because taxpayers receive little real return for their tax money. On top of all this, a prohibitive wealth tax may be perceived to be yet another factor discouraging people from keeping their wealth in the rainbow nation. Willem Cronje, an independent tax consultant, says a heavy tax on the wealthy will encourage mobility of skills and capital, and this will be self-defeating. "The way for the poor is not to take money away from the rich directly, but to have reasonable rates of tax and encourage them to invest their wealth to create jobs and a growing economy, and so earn an indirect benefit," he says. A developing country typically has much lower tax rates than an developed country, says Cronje, because low rates encourage citizens to save, which results in more money being invested in the economy. In fast-growing Malaysia for instance, 47% of the national product each year is saved. Compare this to South Africa where only 16% of the national product is invested - a fact which is reflected in our unimpressive growth rate of 3%. Cronje's view on capital gains tax and estate duty is that it is not sensible to have both in a developing country such as South Africa "If capital gains tax is brought in, then estate duty ought to be scrapped." He says a capital gains tax is not on the cards right now, but it may be on the back burner. Chait's view on estate duty is that the current rate of 25% is too high. He says a lower rate will be more appropriate - perhaps even more effective - because of the fact that "a low rate reduces the incentive to indulge in tax avoidance". Chait cites, as an example, that far more Secondary Tax on Companies is being collected at the lower rate of 12,5% than at the previous 25% level. On the issue of whether the R1-million estate duty rebate will be lowered to catch more taxpayers, Chait's opinion is that the rebate should remain where it is - and even possibly be increased - to take into account inflation: the rebate has remained at this level since its introduction in March 1988. Des Kruger, tax partner at Deloitte & Touche, says it will be more equitable to have a progressive tax rate for estate duty instead of the current flat rate, with the existing rate being reached at a higher threshold. If the Katz Commission recommends a clampdown to close the loophole of interest-free loans to trusts as a device to save on estate duty, this will affect the existing estate plans of individuals. Another point of issue, suggests Kruger, is whether the generous spouse deferral provisions (which push the estate duty liability to the second-dying spouse) will continue in their present form. The report of the Katz Commission is highly influential because its recommendations are discussed at parliamentary level, where if they are accepted, they become the laws under which taxpayers live.
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