Proposal to change how income gets taxed in South Africa

 ·26 Aug 2022

The Organisation for Economic Co-operation and Development (OECD) has recommended that South Africa’s small tax base be barred from certain deductions to address inequality in the country and that the tax base be expanded.

The OECD is an intergovernmental organisation with 38 member countries that conducts research into the financial systems and outcomes of certain countries to then make recommendations on how they could improve.

In the latest OECD Economic Survey for South Africa 2022, it added that the country’s progressive personal income tax schedule is undermined by deductions that largely benefit high-income earners.

“Overall, tax rates are already high or comparable to OECD levels, but there is a wide range of tax provisions and exemptions that reduce effective tax rates significantly below statutory tax rates.”

The OECD said that despite bonuses, overtime and other employee benefits being covered by personal income tax, there is a gap in that a significant share of realised capital gains is not included in the personal income tax base.

A point of contention for the organisation is that tax allowances and deductibles such as travel allowances, share options and medical aid paid on behalf of an employee all undermine the progressiveness of the tax system because higher income earners end up facing lower effective tax rates than middle-income earners.

The OECD added that tax allowances and deductions in the current tax system limit the capacity of the tax actually received. Even with high tax rates for the wealthy, the after-tax income remains high as a result of the skewed market income distribution.

It added that dividends and the first R23,800 of local interest earned should be considered to fall under personal income tax.

 

The OECD recommended that broadening South Africa’s personal income tax base would improve progressivity.

Taxes on personal income are the most important source of revenue; however, the personal tax base is narrow. In 2020, the number of taxpayers was 5.2 million compared to 11.3 million in the formal sector, said the OECD.

“As the top marginal rate was increased from 41% to 45%, options could be considered to broaden the tax base from below as an integral part of a reform that broadens the tax base for higher income earners.”

The OECD added that there could also be a slight lowering of the minim income tax threshold to include some people earning between the minimum wage and the current income tax threshold.

Almost half of the workers earn around the national minimum wage, while a small minority benefits from very high incomes. This income distribution profile makes it difficult to set up a personal income tax rate that reduces income inequalities significantly without resorting to very high marginal tax rates.

Reforming personal income tax in South Africa has to strike a balance between reducing inequalities and preserving work incentives for middle to high-income earners, said the OECD.

Wealth tax

To combat inequality and fund the basic income grant in South Africa, a wealth tax target high-income earners has been mentioned by industry figureheads.

According to investors and tax experts at PSG and Allan Gray, the move by the South African Revenue Service (SARS) to renew its focus on wealthy individuals’ tax compliance and specific assets – is likely laying the foundations for a wealth tax.

Tax manager at Allan Gray, Komil Gordhan said that the requirement from SARS that the assets be declared at market value indicates that the taxman is trying to gauge how the value of these assets has increased and show where opportunities for tax revenue can come from.

At a recent policy conference, the ruling party ANC, indicated that key members of the ruling party continue to favour some form of a wealth tax to fund a basic income grant.

The target should ideally be the top 5% of high net worth individuals, and estates with significant assets, said Mmamoloko Kubayi, the party’s head of economic transformation.

The proposal, first mooted at the ANC’s national conference in 2017, called for an appropriately structured wealth tax, possibly linked to a land tax, to promote equity and raise revenue.


Read: 4 scenarios for South Africa’s economy

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