Major red flags for taxpayers in South Africa

Tax revenue collected by the government has doubled over the past decade, beating out inflation and South Africa’s personal income tax base.

According to an analysis by Daily Investor, South Africa’s personal income tax base is expanding slowly while the government is collecting more revenue from personal income tax.

This has raised concerns about the sustainability of the current system. The data revealed that South Africa’s tax base has grown by less than 16% over the past decade, while the revenue from personal income tax has more than doubled.

Interestingly, while the number of personal income taxpayers increased, the total number of registered taxpayers decreased by almost 7% between 2014 and 2024.

PwC tax partner Professor Osman Mollagee recently outlined the problems with South Africa’s shrinking tax base. 

Mollagee noted only a small percentage of South Africans are responsible for paying over 90% of all personal income tax and criticized the 2024 Budget for failing to address the shrinking tax base and the challenge of generating more revenue from fewer people.

The 2024 Budget showed that the number of personal income taxpayers in South Africa declined to 7.12 million in 2023, compared to 7.45 million the previous year.

According to Mollagee, the tax base in South Africa is even more concentrated than what was outlined by the National Treasury.

To add to the problem, Godongwana announced during this year’s Budget Speech that the government will not adjust personal tax brackets for inflation, which is expected to run at 4.9% this year.

The lack of adjustment of tax tables and tax deduction limits for inflation results in a phenomenon called ‘bracket creep’.

It causes taxpayers to pay more, resulting in increased revenue for the government without hiking the tax rates.

This strategy is used to help fill the widening deficit. South Africa’s personal income tax base is expected to grow to 7.41 million in 2024, which is only a 15.43% increase from a decade ago.

However, it is worth noting that the government’s personal income tax revenue has increased by 109% over the same period – outstripping inflation by 48.4% over the same period.

The South African government is facing the challenge of generating more revenue from a stagnant tax base.

This challenge is becoming more concerning as a growing number of taxpayers are leaving the country, thereby reducing the tax base and posing a threat to the government’s future revenue.

Beatrie Gouws and David Warneke, BDO tax specialists, have pointed out that high-income earners are increasingly discontented with excessive taxation, which they feel stifles entrepreneurship and undermines economic growth.

Many high-earning individuals are choosing to leave their home countries due to high taxes and other factors.

For instance, the 2024 BRICS Wealth Report revealed that South Africa had 37,400 US dollar millionaires (including 102 centi-millionaires and five billionaires) at the end of 2023, which was a 20% reduction from 2013.

According to data provided by SARS, South Africa has lost around 9,350 US-dollar millionaires in the last ten years.

The data also shows that between 2017 and 2021, over 32,000 people ended their tax residency in South Africa.

Out of those individuals, approximately 2,700 earned more than R500,000 annually, while 1,100 earned more than R1 million annually.

If a growing number of wealthy individuals in South Africa decide to leave the country, it will result in a significant loss of tax revenue for the government.

This, in turn, may lead to a decrease in the quality and availability of public services for citizens.

The situation is worsened by the fact that the country’s tax system is heavily reliant on a small group of affluent taxpayers, who contribute the majority of the country’s tax revenue.

Below are graphs showing the meagre growth of personal income taxpayers over the past 10 years, compared to the immense growth of government tax revenue – provided by Daily Investor.

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