On 25 April 2017 the Davis Tax Committee (DTC) released a media statement calling for written submissions on the possible introduction of wealth taxes in South Africa.
This is a contentious topic, coming at a time when government is calling for “radical economic transformation”. We are, understandably, receiving many queries from clients as to the impact and appropriate changes, if indeed any, which may be implemented on existing planning and structures in order to appropriately maintain and achieve their intended long-term purpose and integrity.
It may seem that government is taking a more hardline approach to economic transformation than was previously evident and this view is supported by the recent controversial changing of the guard at National Treasury. However, you may recall that the second DTC report on estate duty, which was released in August 2016, proposed that a further investigation be conducted into implementing wealth taxes in South Africa. This was to be addressed in a separate report from the DTC, due for release later in 2016. We noted at the time that this was contrary to a recommendation in the first report not to introduce a separate wealth tax. Our previous communications on this are available here and here.
The report by the DTC on wealth taxes was not published in late 2016, so we presume that the DTC now intends to focus on this element, hence the release of the latest media statement.
It should be noted that the 25 April 2017 statement is a call by the DTC for written submissions on the desirability and feasibility of the following possible forms of wealth tax:
A land tax.
A national tax on the value of property (over and above municipal rates).
An annual wealth tax.
At this stage it is not part of any formal legislative process.
The media release also notes:
Written submissions are to be made to the DTC by 31 May 2017.
The written submissions will be followed by public hearings or oral submissions in June.
Only then will the DTC most likely compile and publish a report on wealth taxes which can be expected to be similar to the previous reports published on various taxes. Depending on the findings of the DTC, Treasury may introduce draft legislation in this regard, after which the legislative process would have to be followed. As you know, the legislative process begins when draft legislation is published for public comment, after which parliamentary hearings are held. This is followed by the publication of a final draft before the law is enacted.
A concern for us is that, specifically with the introduction of section 7C, Treasury seems to have ignored or even acted contrary to the DTC’s recommendations regarding the treatment of loans to trusts. In the first DTC report on estate duty, it was recommended that transfer pricing rules would not be extended to interest-free loans made to local trusts, in other words, that an interest rate not be attributed to such loans. Later, comments made by the DTC were that large interest-free loans in trusts would possibly lead to the trust being attacked in terms of the existing estate duty anti-avoidance provisions which will be bolstered (section 3 (3) of the Estate Duty Act), rather than dealt with in terms of the Income Tax Act. This attack would presumably be on the basis that a planner with a large credit loan account, which can be called up at any time, is effectively in control of the trust. The introduction of section 7C flies in the face of both these recommendations.
Therefore, there are no guarantees that the anticipated DTC report on wealth taxes will necessarily clarify how or when wealth tax legislation may be introduced. On the back of this we are adopting a “do nothing-status quo” approach to all existing planning and structures. However, this media statement is only the start of the process. It is certainly too early for us to speculate on exactly what the implications may be. That being said, we are mindful of the fact that this is an area of concern. We are looking at being involved in the process and keeping close to developments.
At this juncture, it is telling to make note of the introduction to this year’s Budget Speech in order to remind ourselves of the focus that was at the centre of the Budget which then-Minister of Finance, Pravin Gordhan, presented. The speech went as follows:
These are our realities. They mirror the stresses of poverty and vulnerability in many developing countries, and the inequality between rich and poor throughout the world.
Even in the developed world, there are serious fault lines and uncertainty:
Citizens lack of trust in elites.
Globalisation benefitting a few.
Stagnant and falling incomes of the middle class.
These, among other factors, are also driving a case for radical transformation of economic models, and a call for inclusive growth.
The recent media statement also makes the following statement: “The DTC has adopted an approach that is participatory and consultative. This will provide for wide engagement with all stakeholders. Special dialogue sessions are arranged on an ongoing basis to take into account a diversity of interests and opinions.”
We hope that the conciliatory tone of both the 2017 Budget and the DTC is adopted by Treasury during this process, particularly given the current inflammatory and divisive rhetoric which engulfs news headlines in South Africa on a daily basis.
Issued by Citadel Investment Services