Dodging tax big time? SARS is coming for you
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If you live in a R20 million mansion in Sandton, own a holiday home on the coast and drive an Italian sports car but declare an annual taxable income of the average working-class Joe, the SA Revenue Service (SARS) has you in its sights. In fact, SARS is more intent on collecting what it is rightfully theirs from wealthy tax dodgers than imposing the dreaded “wealth tax” on South Africans.
This is the view of Judge Dennis Davis, who headed the Davis Tax Committee and who has joined SARS more permanently as a consultant. He recently spoke at two seminars on wealth and taxation: “The future of financial wealth in South Africa: factors to consider,” hosted by Nedbank Private Wealth, and “The future of taxation in South Africa” in PSG’S Think Big webinar series.
Davis says his committee looked at ways of closing the tax gap in South Africa: the difference between how much could ideally be collected through existing taxes and how much is actually collected. This has the potential to bring in much more for the state than new or higher taxes.
“There is very little scope for tax increases in South Africa. Reference is made in the Budget Review to a study which found that you actually impair economic growth if you get your tax increases wrong. So the only real way to increase revenue is more efficient collection,” he says.
Several “holes” were identified in collection: tax evasion by high-net worth individuals, customs fraud, corporate tax evasion and “massive manipulation of the value-added tax system”.
Davis says the extra R3 billion allocated to SARS in the February Budget will go a long way in rebuilding SARS’ IT capability and funding “boots on the ground” – legal and accounting professionals.
WHO IS BEING TARGETED?
Davis says people who are generally tax compliant will not be hounded for “a couple of thousand rands here or there”. The people of interest are those whose lavish lifestyles are incongruent with the amount of tax they are paying.
“If you look at the tax figures, only about 5 000 people have a taxable income of R5m or more. And that makes no sense to me, because if you drive through Bryanston, Bishopscourt or similar neighbourhoods and count the houses … you have to be earning significant sums of money to be able to afford houses like that.
“We did a study the other day where a whole lot of people with very fancy Ferraris parked outside a hotel. A colleague at SARS took the registration numbers of 26 of these Ferraris and correlated them with the taxable income the owners provided on their returns. It turns out that none of these people returned a taxable income of more than R400 000 a year.
“People say to me that I want to tackle them. I don’t, and neither does SARS want to tackle people who drive Ferraris but reflect their proper taxable income. But you can’t have a country where people are doing this.”
He believes we should investigate and prosecute where needed. Making an example out of a few prominent individuals, and ultimately having them end up in jail, would be an effective deterrent.
Davis says there are good reasons for taxing the wealthy in South Africa. “If you look at the Gini coefficient, which measures inequality of wealth, we are, together with Brazil, the most unequal society on Earth. And that presents a number of problems: it undermines the legitimacy of the economic system, and it provides a lot of scope for populists.
“However, that does not mean you automatically plunge into a wealth tax. Apart from first having to define what you mean by wealth – is it defined by income or assets? – you need a knowledge of the asset base: of what it is that people own in the country. And we are nowhere near that.”
Another consideration is whether the tax base – the small number of individuals on whom such a tax would be imposed – would bring in enough revenue to warrant its implementation.
Davis says an existing tax, estate duty, which is essentially a wealth tax, is a far better route to address inequality. Currently, estate duty brings in about R8bn a year. Davis says it is curious that the government has overlooked this tax. While estate duty could be reduced for middle-class South Africans, it could be aggressively stepped up on the wealthy. “If we can steer the debate more in that direction, it would be a much more fruitful form of inquiry,” he says.
This would go hand in hand with anti-avoidance measures against the use of trusts to bypass estate duty.
“The other thing that always comes up when we talk about tax collection is the issue of state corruption,” says Davis. “I would like to think that the vast majority of South Africans understand the levels of inequality in our country and will gladly pay tax to help bridge the divide, provided the money goes towards the upliftment of the people who really need it.
“Therein lies a big problem. As the extent of state corruption is revealed, people are more likely to say: ‘Why should I hand over my money to the government; it’s just going to be stolen?’
“The only way to change that mindset is through improved service delivery,” Davis says.
Despite the challenges, he believes the direction Sars has taken under Commissioner Edward Kieswetter is positive for South Africa.