Wealth Tax to fund Basic Income Grant (BIG)?
There have recently been calls for a wealth tax to fund BIG. While it is readily acknowledged that South Africa is the most unequal society in the world, The implementation of a wealth tax is not that easily achieved. The Davis Tax Committee in its final reports recommended the following:
Firstly, a comprehensive wealth tax cannot be successfully introduced until a comprehensive picture of wealth is obtained hence the recommendation for SARS to collect better information on wealth.
Secondly, a significant amount of wealth is held in retirement funds. It is hardly progressive to tax workers savings as part of a wealth tax hence the need to obtain better information on wealth and deal with the issue of retirement funds to enable the formulation of a definition of wealth that will form the basis of a workable comprehensive wealth tax.
Thirdly, precisely because the Davis Tax Committee shares the view that steps must be taken to deal with the disastrous patterns of inequality that the report recommended a significant expansion of estate duty to be implemented immediately given that estate duty is already an existing wealth tax.
SARS has started gathering the data required to make an informed decision. As per the third point above, SARS has already implemented an increased Estate Duty rate of 25% on estates over R30 000 000. This does not leave much scope for increased taxes on the existing tax base.
A recent report by Intellidex on the viability of introducing a BIG concluded as follows (for the full report see https://www.intellidex.co.za/reports/what-funding-options-are-possible-for-big/)
Much of the modelling in this paper looks at just trying to raise an additional ZAR50bn or ZAR100bn of revenue. Given the newest propositions for a BIG are more like ZAR300bn the sheer impossibility to fund this within the current tax base becomes all too apparent. This is equally true regardless of what the social wage spending option is.
A key takeaway we think here is that there is precious little room for any additional spending at all – and so what it is and why it is chosen is exceptionally important. This of course is not to say that the proceeds of reform and future higher potential growth causing the tax base to expand cannot be spent on the social wage – including even a BIG if that is the political choice (though still balancing it vs healthcare etc would be a key choice). One must be realistic however on when such tax base expansion will credibly happen.
We will keep you informed of developments in this regard.
Publication of the 2022 Draft Tax Bills for Public Comment.
The 2022 Draft Revenue Laws Amendment Bill (TLAB)contains proposed amendments dealing with the “two pot” retirement system. The proposed amendments give effect to the previous announcements made by the Minister in the February 2021 Budget Speech and November 2021 Medium Term Budget Policy Statement. These amendments also follow a discussion document published by National Treasury for public comment on 15 December 2021, titled “Encouraging South African households to save more for retirement”.
The 2022 Draft TLAB and 2022 draft TALAB contain the remainder of the tax announcements made in Chapter 4 and Annexure C of the 2022 Budget Review, which are legislatively more complicated and require greater consultation with the public. Key proposals included in the 2022 Draft Tax Administration Laws Amendment Bill (TLAB )are the following;
- Progressive increase in the carbon tax rate for 2023 to 2030;
- Vaping: Taxation of electronic nicotine and non-nicotine delivery systems;
- Extension of the Research and Development tax incentive sunset date;
- Impact of IFRS17 insurance contracts on the taxation of insurers;
- Reviewing the debtor’s allowance provisions to limit the impact on lay by arrangements.
- Advance rulings under the Customs and Excise Act;
- Imposition of understatement penalty for employment tax incentives improperly claimed;
- Addressing tax compliance status system abuse;
Your Will & Your Fixed Property.
When planning your estate it is important to know the ramifications of any bequests one may make. Below we table issues relating to fixed property.
- If the testator bequeathed their immovable property to their surviving spouse (either by way of Last Will and Testament or by intestate succession), the following taxation consequences are applicable:
- Estate duty – There is no estate duty payable on all property accruing to a surviving spouse [Section 4q of the Estate Duty Act (no. 45 of 1955)];
- Transfer duty: There is no transfer duty payable;
- Capital Gains Tax (CGT) consequences: fixed property bequeathed to asurviving spouse do not incur capital gains tax, as this will be subject to roll-over relief;
- If an estate planner bequeaths fixed property to an heir or legatee in his Will, no transfer duty will be payable. In fact, any immovable property left to an heir or beneficiary is exempt from transfer duty as per Section 9(1)(e)(i) of the Transfer Duty Act (no. 40 of 1949). This exemption extends to any heir or beneficiary regardless of their relationship to the deceased testator;
- If the value of his estate is more than R3,5 million, estate duty will become payable on the balance in excess of R3,5 million. Sufficient cash should be made available to pay this duty in order to avoid selling any fixed property;
- If the property is subject to a mortgage bond, and the property is left as a specific bequest, the estate planner may wish to secure the bond by life insurance, the proceeds of which would clear the debt on his death, or could make the bequest subject to a carefully worded bequest price;
- A fixed property bequeathed to a number of heirs in equal shares, may give rise to impracticalities due to the indivisibility of the bequest. This may result in a redistribution agreement being drawn up between the heirs;
- There may be specific provisions in an estate planner’s antenuptial contract in regard to fixed property, which may override the estate planner’s wishes in terms of the Will;
- There is a portable R3.5 million estate duty deduction between spouses;
- Where agricultural property is bequeathed, the testator needs to be aware of Section 3 of the Subdivision of Agricultural Land Act (no.70 of 1970), which prevents the subdivision of agricultural land, and such land being registered in undivided shares in more than one person’s name. This is especially relevant when the testator is considering bequeathing agricultural land to more than one beneficiary;
Retirement Reform: Draft Legislation for the Two-Pot System
The amendments enable South Africans to also save for non-retirement purposes (e.g. emergencies) via their retirement funds, whilst preserving more of their savings for retirement. These amendments aim to encourage members to preserve their retirement savings by making it more flexible to accommodate unforeseen pressures that members face during the span of their working life. It makes it possible for workers not to resign from their employment merely to access their retirement funds and would have assisted members during a crisis like the COVID-19 pandemic, when many employees faced reduced salaries or were not paid at all during that time.
Government is of the view that the two-pot system option will present a better balance between ensuring preservation of retirement savings and allowing some withdrawals through a savings vehicle incorporated into the retirement funds.
The proposal is for retirement funds to direct one-third of their retirement contributions to a savings pot and two-thirds preserved in a retirement pot. Pre-implementation date vested rights will be preserved. Offering of the savings pot will be subject to fund rules i.e., will not be compulsory, meaning that a member may opt out of the savings pot. A minimum of R2 000 may be withdrawn in a 12-month cycle, with no conditions attached to withdrawals from the savings pot, subject to fund charges and tax. No pre-retirement withdrawals will be permissible from the retirement pot. Transfers of the savings and retirement pots between funds is allowed.
The proposed 2023 implementation date is optimistic, because fund rules need to be changed, there will be systems changes within retirement funds to enable the two-pot system and SARS also needs to create capacity to cater for the new pots and track withdrawals. Furthermore, retirement funds must train employees, educate fund members about the reform and its implication.
We will keep you updated with regards to this draft legislation.
Sincerely,