ALL ABOUT TRUSTS
By Phia van der Spuy
Today, the top 10% of people globally own about 85% of wealth, the top 1% own 55%, and the top 0.1% own close to a third. The South African top 1% share has fluctuated between 50% and 55% since 1993, while it has remained below 45% in Russia and the US and below 30% in China, France and the UK. The top 0.01% in South Africa (about 3 560 individuals) own about 15% of household wealth, which is greater than the wealth owned by the bottom 90% of the population as a whole. The average wealth of the poorest 50% is negative, as the value of the debts they owe exceeds the value of the assets they own.
Our government has been imposing steadily higher taxes for decades. Currently, personal income tax (39.1%), value-added tax (26.5%) and corporate income tax (16.4%) constitute the largest shares of tax revenues. Individuals in the top three brackets represent one third of the total personal income tax base.
In 2017, the then Finance Minister Pravin Gordhan imposed a wealth tax by increasing the maximum marginal rate (the rate of tax that applies to the top income bracket) from 41% to 45%. He also increased the withholding tax on dividends from 15% to 20%, and limited the adjustments between the tax brackets (which led to people paying more tax when their salaries rose with inflation).
Although SARS expected to collect R23 billion extra in 2018 as a result of these measures, they actually collected R20.4 billion less than expected in personal tax in that year. A contributing factor was the flight of capital out of South Africa by the rich. According to the New World Wealth’s Africa, 4 200 high-net-worth individuals have left the country over the last decade. It appears the wealthy population continues to decline, with an estimated 1 900 millionaires leaving since 2020. Depending on government’s strategy, this number may grow.
In the opening paragraphs of the Davis Tax Committee’s Wealth Tax Report of March 2018, it is stressed that a wealth tax is not the most viable instrument to address inequality. However, it states that a wealth tax supports the redistribution agenda, and that wealth must be a legitimate tax base given the high levels of inequality. The report states that improved accounting for assets and interstate cooperation need to be addressed before a wealth tax can become viable. It states that all taxpayers and beneficial owners of wealth (which include trusts and beneficiaries thereof) that are required to submit an income tax return should be required to include the market value of all readily ascertainable wealth. Taxpayers should also be required to disclose the existence of other forms of wealth where the market value is not readily available (such as membership of defined benefit retirement funds, shares in private companies, intellectual property, and personal assets above a basic threshold). To accommodate this it was recommended that non-disclosure penalties under the Tax Administration Act be revised. It would then be easy to reconcile each taxpayer’s reported income with their assets. For the time being, however, the report recommended an increase in estate duty – an existing wealth tax – instead of taxing wealth more generally.
Despite the flight of capital, comments made by the National Treasury in its Budget Review document this year indicates that it still plans to target wealthy taxpayers. The document states that the rebuilding of SARS is evident in improved revenue collection and compliance trends. It further states that over the past year, SARS has recruited an additional 490 staff across various levels and skills areas, and has invested R 430 million in refreshing and modernising its IT infrastructure.
Gone are the days where people will get away with sloppy trust administration. In the document SARS confirmed that the dedicated new unit focused on high‐wealth individuals is taking shape. Provisional taxpayers with business interests are already required to declare their assets (based on their cost) and liabilities in their tax returns each year, and it proposes that all provisional taxpayers with assets above R50 million be required to declare specified assets and liabilities at market values in their 2023 tax returns. The additional information will also help in determining the levels and structure of wealth holdings as recommended by the Davis Tax Committee.
Where does this leave estate planners?
Although wealth taxes are often viewed unfavourably, especially in developing countries, mainly due to implementation challenges and the threat of capital flight discussed above, South Africa is relatively well placed, as it already has, and continues to develop, third-party reporting systems. Capital flight could be limited through a range of policies, such as tying tax payments to citizenship, or implementation of an exit tax.
High-net-worth individuals are left with no option but to get their affairs in order. That includes the administration and compliance of trusts. No more hiding behind non-disclosure and non-compliance with tax obligations.
Government is constantly reminded by various professional bodies of the adverse consequences of wealth taxation, such as capital migration, disincentives to save, and the effect on entrepreneurship and employment. Income streams arising from wealth are today taxed on a far wider base than 20 years ago, so it is necessary to take stock of recent developments and the existing tax base. The tax-to-GDP ratio (tax collected as a proportion of our total value of goods produced and services provided in the country during one year) is estimated to be 24.7% in 2021/22 rising to 25% in 2024/25. South Africa’s tax-to-GDP ratio in 2019 (26.2%) was higher than the average (16.6%) of the 30 African countries. Civil society group Outa published a paper on a tax ceiling concluding that 18.6% is an appropriate tax-to-GDP ratio for the South Africa.
Even though government may relook taxing the wealthy to avoid the adverse consequences, given the fact that Davis Tax Committee recommended the focus to initially be on increasing estate duty collections and the fact that capital flight may be traced and taxed as well, a trust may have a more important place again in estate planning in South Africa going forward.
Phia van der Spuy is a Chartered Accountant with a Masters degree in tax and a registered Fiduciary Practitioner of South Africa, a Master Tax Practitioner (SA), a Trust and Estate Practitioner and the founder of Trusteeze, the provider of a digital trust solution.