While a general wealth tax was not announced in the 2021 Budget, taxpayers need to brace for a more targeted approach to tax collection, says Chris Potgieter, managing director at Old Mutual Wealth Trust Company.
“The National Treasury will be investing an extra R3 billion to expand specialised audit and investigative skills at SARS, including modernising IT infrastructure and investing in artificial intelligence (AI) and data analytics.
“This will allow SARS to cut through vast swathes of data to pinpoint errors, red flag problem areas and help tighten up compliance in general,” he said.
According to the National Budget speech delivered by finance minister Tito Mboweni last week, complex tax structures of wealthy South Africans are set to come under scrutiny as tax avoidance is tackled more aggressively.
Potgieter’s advice to individuals is to get their tax affairs in order.
“While AI is not a new phenomenon, it has advanced rapidly over the last decade. Although there are still many debates around AI’s pros and cons, its use in the fight against tax evasion instead of implementing a broad wealth tax is positive,” he said.
A large proportion of the auditors’ time is spent collecting and analysing data. “Treasury has realised it needs to be practical while improving its own capacity to target clear tax evasion cases, which are slipping through the cracks,” said Potgieter.
Generally, sectors such as government, wholesale trade, and natural resources are least advanced in AI deployment. “This move by SARS is a welcomed pre-emptive step to ensure fair and effective tax collection and an indicator of the structured, data-driven approach to tackling this issue.
“This investment will also allow for greater participation by SARS in global tax compliance initiatives that seek to clamp down on base erosion and profit shifting, among other tax avoidance techniques,” said Potgieter.
Other governance failures at the institution are, meanwhile, being addressed. The Large Business Centre is being re-established, and operational policies related to VAT refunds, settlements and debt collection contracts are also being amended.
In another move to target improved revenue collection, minister Mboweni mentioned that the Davis Tax Committee’s insights would also be leveraged. In line with these recommendations, SARS will focus on consolidating wealth data for taxpayers through third‐party information.
“SARS will now have more resources to do targeted lifestyle audits and to use alternative sources of information to look into discrepancies between spending and declared tax income,” said Potgieter.
“This may include using the national vehicle register (eNaTIS system) as well as property registers to assess wealth and then compare that to what an individual has disclosed and effectively this could be a potential trigger event for a full audit.”
“As a whole, through the absence of significant tax hikes, adjustments to the public sector wage bill and a drop in the corporate tax rate, Budget 2021/22 supports economic recovery and provides a boost of confidence,” Potgieter said.
“Execution risk remains, especially with regards to the wage bill and SOEs, but this budget will go some way to counter excessive pessimism about South Africa as we continue to rebuild the country post-2020.”
Tax policy proposals
A company whose year of assessment commences on or after 1 April 2022 will see their corporate income tax rate lowered to 27%, noted Jashwin Baijoo, legal manager, Africa Tax and Compliance at Tax Consulting South Africa.
While many will benefit from this measure, other businesses have been hit hard by lockdowns, with some even dipping into PAYE withholdings to pay workers.
“I would strongly advise that such firms not see it as a means to dig themselves out, but seek legal counsel promptly to clean the slate with SARS and enjoy this benefit as a compliant business,” said Baijoo.
Personal income tax brackets will be increased by 5%, pushing them ahead of the inflation rate. This will result in R2.2 billion in tax relief, most of which will be enjoyed by lower and mid-income earners. Medical tax credits will also receive an inflationary adjustment and the minimum value for paid up retirement annuities will be increased.
On the down side, fuel levies increase by 27 cents per litre, with 15 cents of that going to the general fuel levy, 11 cents to the Road Accident Fund and 1 cent to the new carbon fuel levy.
There is also an 8% increase in excise duties on alcohol and tobacco. According to minister Mboweni, consumers react to price increases by buying less. This will in turn help reduce the negative social and health impact of these products.
“I believe this increase will in fact encourage consumers to turn more to illicit trade, resulting in a loss of reasonable taxes that would otherwise be realised,” said Baijoo. His comment relates to a recent report from Tax Justice SA which estimates that two out of every three cigarettes are bought illicitly. Likewise, organised crime will enjoy a major boost in illegal alcohol sales.
Pressure to collect
While the tax relief measures are welcome, the pressure on SARS to collect more revenues has never been greater. Expected taxes of R1.21 trillion for 2020/21 are R213 billion less than projected last year. According to the minister, it is the largest tax shortfall on record.
This means SARS has to pull out both its magnifying glass and fine-tooth comb to find more money. The new-look SARS has set aside paper forms and spreadsheets in favour of advanced information systems, data analytics and machine learning capabilities, said Baijoo.
The tax authority has renewed its focus on the abuse of transfer pricing, tax base erosion and tax crime. So far, it has recovered several billion rand for its efforts.
There’s also a new dedicated unit to “improve compliance of individuals with wealth and complex financial arrangements”.
“We are seeing an incredible increase in SARS tax recovery activity, with some clients receiving demands for amounts as low as R5,000,” said Baijoo. In the past, it would have overlooked such trivial takings, but the modernised SARS cannot be that fussy.
So it appears that better-off taxpayers are at greater risk and will need both legal protection and compliance assurance to ensure they remain on the right side of the law.
SARS has already identified such high wealth individuals and will be contacting them during April 2021. “We advise them to engage a reputable tax consultancy with a strong legal component,” said Baijoo.