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How the new wealth tax works in South Africa

In May, the Organization for Economic Co-operation and Development (OECD) released a report investigating the role of inheritance tax in addressing the effects of wealth inequality in poor countries.

The publication of the report was motivated by wealth inequality across OECD countries and the economic pressures suffered internationally as a result of the Covid-19 pandemic, said law firm Baker McKenzie.

South Africa is not an OECD member, but it complies with many OECD documents. The findings of this report have important implications for South Africa.

“According to the report, inheritance and gifts reported by the top 20% of wealthy households in OECD countries are about 50 times higher than those reported by the bottom 20% of households.

“Therefore, inheritance tax is a tool aimed at reducing this concentration of wealth and increasing equality,” said Baker McKenzie.

“The report also states that inheritance tax is easier to assess and collect than other forms of wealth tax, but currently only about 0.5% of total tax revenue is collected from inheritance, property and gift taxes. “.”

How it works in South Africa

In South Africa, inheritance tax is stipulated by laws such as the Property Management Law, the Will and Testament Law, and the Willless Inheritance Law. Inheritance beneficiaries do not pay inheritance tax on South African inherited assets. Inheritance tax is paid on the property of the deceased, which is regulated by the Property Tax Act.

Currently, real estate tax is paid at 20% for the first 30 million rants and 25% for over 30 million rants.

In 2013, the David Commission was established to consider and recommend improvements to South Africa’s tax policy framework.

In 2016, Judge Davis submitted a report containing important suggestions for changing the way real estate taxes are paid domestically.

To date, the South African Treasury has implemented only some of the Davis Commission’s recommendations, one of which was to raise the real estate tax on real estate worth more than R3 million to 25%.

Other changes proposed by the Commission include:

  • Changes to Section 4q of the Property Tax Act, including revoking the full deduction of property associated with a surviving spouse from the property of the deceased. The proposal was that this should be replaced with a substantive counterargument.
  • Donations made before death should not be exempt from donation tax.
  • The Davis Commission found that taxpayers are using trusts to reduce their income and avoid paying real estate taxes, and instead proposes a flat rate of 41% on all discretionary income of the trust. Did.
  • The Commission suggested that if there is an interest or low interest loan between the trust and the parties involved, the trust’s assets should be brought into the taxpayer’s property to meet the tax obligations.

How about a direct wealth tax?

The Davis Commission did not provide details of the potential wealth tax, but said it would investigate further on its implementation, Baker McKenzie said.

Company quoted Research from economists This shows that the unequal distribution of wealth in South Africa makes wealth tax an efficient policy to support fiscal sustainability.

Economists have estimated that the potential income that can be collected from the progressive wealth tax on the wealthiest 1% can reach R1160 billion.

The authors found that the top 10% own 86% of South Africa’s total wealth and the top 1% own 55%.

The top 0.01% (3,560 people) own about 15% of household wealth, which exceeds the share of assets owned by the bottom 90% (32 million people) of the total population.

On the other hand, the average wealth of 50% of the poorest is negative in that their debt outweighs their wealth. They said wealth inequality has been stable at extreme levels since the end of the apartheid regime.

“South Africa, alongside other parts of the world, is actively exploring ways to address the devastating economic and social impacts of the pandemic, to raise the revenue currently being researched, proposed and implemented. We offer a new and innovative way to do this, “says Baker McKenzie.

“Thus, the recommendations of the OECD Paper on Inheritance Tax may somehow be applicable in the context of South Africa, in line with the Davis Commission’s proposal.”

  • Commentary by Virusha Subban (Director) and Prenisha Govender (Associate) of law firm Baker McKenzie.

read: Mboweni and other finance ministers wrote a letter demanding a global tax – this is what it says

How the new wealth tax works in South Africa

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