Considering that 2014 is an election year, the ANC-led Treasury put together what we believe is a fair budget. But what has become apparent to us as financial planners and specifically wealth managers is that the Davis Tax Committee (DTC), which has been established to review South Africa’s tax system, is far more important to us and our clients than the Budget.
Set up by Minister of Finance Pravin Gordhan and chaired by Judge Dennis Davis, the eight-member committee was created “to assess our tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability,” according to Gordhan. It follows similar assessments conducted by the Margo and Katz Committees in the ’80s and ’90s, and there’s no doubt that changes in both our local and global economies over the past 20 years necessitate a relook.
The outcomes of the many issues that the DTC is deliberating on will directly impact all of us and so of course our clients. We believe the Committee may well have made recommendations already, but that it was not good politics to bring them to light just before an election, particularly if they are bad news.
Of course, we are not privy to what this committee will recommend but we are aware of the issues that they are dealing with:
Abolition of Estate Duty
The actual receipts from the collection of estate duty every year are small, and make up a very low percentage of total taxes collected. For years, it has been proposed here and in many other countries such as the U.K., that it should be scrapped, as the cost of administering the tax outweighs the proceeds from collections. However, we think the political fall-out would make an abolition of estate duty unlikely.
What exactly a wealth tax would mean to South Africa is not yet known. In our view, the instituting of a higher top level tax will either encourage honest people to become dishonest or it will push entrepreneurs further away from SA. If we are to try to achieve the six percent growth in GDP that the National Plan calls for, this move would not help.
Increase in Capital Gains Tax (CGT)
This is the obvious move that SARS will make. It is relatively easy to administer, and only really targets wealthy individuals. SARS has been slowly ramping up the effectiveness of this tax already in the last few years. Last year, it increased the effective top rate from 10% to 13.3% and the effective CGT applicable to trusts to 26.6%.
In last year’s Budget, the ‘conduit principle’ of tax efficiency was under scrutiny and Finance Minister Gordhan has said that it will be further reviewed by the DCT. Currently, trusts pay income tax at a flat rate of 40% per annum. When a trust earns taxable income, it can simply distribute the income to a beneficiary during the tax year, through the application of the conduit principle. In this scenario, the beneficiary will have a lower tax rate and therefore pays less tax. Gordhan has suggested that if a trust earns money, it must pay the tax at the higher rate, and also that trusts will not be allowed to distribute the CGT liability down to the beneficiaries.
South Africans by global standards are far bigger users of trusts than other countries, so this change would be a significant one.
Tax within endowments is currently at 30%. There was a mention in this year’s budget that this issue will be reviewed. For higher rate tax payers, the use of endowments is a way of bringing down payable tax.
With many important issues being discussed by the DCT, we think that next year’s Budget is going to be a very important one for South Africa’s wealthy. We will be watching the outcomes from this committee very carefully for our clients.