Davis Tax Committee (DTC) Publishes Final Reports
- Economic growth
- Unemployment, poverty and inequality
- Small business growth
- Corporate tax base erosion and profit shifting
- Funding of tertiary education in South Africa
- Financing a National Health Insurance (NHI) for South Africa
- Second and final report on base erosion and profit shifting
- Second and final report on hard-rock mining
- Oil and gas report coupled with an IMF report on the same topic for the DTC
- Tax Administration
Funding of Tertiary Education
In principle, the DTC has confirmed that a blanket free higher education (including the wealthy) is not economically financially possible. The following key issues were noted:
- 1 in 8 children get to university, 1 in 17 graduate
- The wealthy are considerably more likely to get to university
- The richest 10% of households received 48% of governments subsidy in 2011
- Graduate unemployment is 6%
- Approximately R60 Billion extra per year would be needed for no fee higher income
Best way to eliminate or decrease financial exclusion from higher education
There are a number of models to fund higher education. The one with the largest leverage potential is a system of government-backed student loans. Given that 10% of the population own “at least 90-95% of assets”, the vast majority of South African households do not have sufficient assets or income to stand surety for their children. Thus, the financial markets play almost no role in funding higher education for the poorest 80% of students. In this context, a government-backed income-contingent loan could be a way to ensure that more/all students are not excluded on financial grounds. The key features of such a system would be:
- Leveraging existing financial infrastructure to facilitate the administration.
- Loans would be repayable once students graduate and/or find employment (bear in mind there is only 6% unemployment amongst graduates)
- The DTC does not deal comprehensively with the fact that only 50% of all students graduate. Clearly those who do not graduate will still have to repay their loans, but in all probability there will be a high level of default from these students.
- Financial Leveraging. Using the traditional bank lending model of roughly R1 deposits for approximately R4 of loans, a student “lending fund” of around R40 billion could be created by a deposit of R10 billion.
Conclusion, Recommendations & Tax Implications
The DTC recommends that a system of free education for the poorest students combined with a sliding scale of income-contingent government-backed loans for the missing-middle and full-fees for the wealthy is the best workable solution. It is estimated that R15 billion would be required per annum to be sourced as follows:
- Raising the top marginal rate of personal income tax by 1.5% would yield R5,1 Billion
- Increasing the Capital Gains Tax Inclusion rate for corporates from 80% to 100% will yield R1.4 Billion
- Increasing the Skills Development Levy would yield and additional R8.8 billion.
The budget in February 2018 promises to be very interesting indeed with all the current demands on the fiscus!
Financing a National Health Insurance (NHI) for South Africa
The large degree of uncertainty and lack of common understanding of how the NHI will be implemented and operate is of concern, given the magnitude of the proposed reform. At this stage a few pertinent observations can be made based on the draft NHI White Paper as well as the potential impact on taxes.
- There is currently substantial uncertainty about both the costs (R256 billion pa) and funding shortfall (R72 billion pa) of the NHI.
- A combination of tax instruments with as broad a base as possible would be preferable.
- Given that the NHI introduces a universal benefit, it is appropriate that its financing base be as broad as possible, in the interests of social solidarity.
- Excise taxes on alcohol, tobacco or sugar-based beverages are levied primarily to change behaviors, but high increases tend to lead to illicit trade, resulting in reduced collections, and are unlikely to fund a significant proportion of the NHI funding requirement.
- Given the considerable size of projected funding shortfalls, substantial increases in VAT or Personal Income tax and/or the introduction of a new social security tax would be required to fund the NHI.
- The magnitudes of the proposed NHI fiscal requirement are so large that they might require trade-offs with other laudable NDP programmes such as expansion of access to post school education or social security reform
- The proposed NHI, in its current format, is unlikely to be sustainable unless there is sustained economic growth.
Clearly the proposed implementation of the NHI will have severe repercussions for the fiscus and accordingly requires a substantial review before implementation can be considered.
Tax Administration – Treatment of High Net Worth Individuals (HNWIs)
SARS is in the process of setting up processes to deal with HNWIs and the DTC has been asked for their input in this regard. Whilst the bulk of the report deals with the how and the why, we would like to detail some key points of interest.
Definition of HNWIs and why they are important to SARS
The World Wealth Report defines HNWIs as individuals with net assets exceeding US$1,000,000. According to SARS the total HNWIs on the SARS HNWI register is 37 299. To determine what would be considered to be HNWIs for tax purposes in South Africa, SARS has defined the term in more detail:
- Lower affluent individuals –high income earners who earn more than R3 million per annum. There are no net asset criteria. Generally salaried employees and represent 54% (20 303) of the HNWI register
- Affluent individuals – Earn between R5 million and R7 million pa or have net assets worth more than R16 million. Represent 27% (10 217) of the HNWI register
- HNWI – Income exceeds R7 million pa or they have net assets worth more than R40 million. They represent 18% (6 545) of the HNWI register.
- Bulleted List PropertiesUltra HNWI – Have net assets exceeding R75 million. No income criteria. Less than 1% (234) on the HNWI register.
Adopting the 80:20 principle concentrating resources on identifying individuals in this category, and ensuring they are paying the right amount of tax, will undoubtedly bear fruit for tax collections. As indicated, SARS has recognised this and, in its compliance programme, launched in 2012, which included seven priority areas for compliance improvement, the first item on the list was
“Wealthy South Africans and their Trusts”.