Cape Town - Rich people not complying with tax laws will face the music, Finance Minister Pravin Gordhan warned on Monday.
In written reply to a parliamentary question, he said the amount of R50bn reported in the media as being owed by high net worth individuals (HNWI) was an estimate of gross income rather than tax, and was based on statistical extrapolation of third-party data.
“An accurate estimate of the potential tax liability of this group is not possible as each case is unique,” he said.
For example, in some instances income might be held in trusts, companies, or other structures, while in other cases the income might have been derived from dividends or capital growth rather than remuneration, and therefore qualifies for a lower rate of taxation.
That being said, the SA Revenue Service (Sars) is taking steps to improve compliance among HNWI. These include establishing a dedicated unit to handle the tax affairs of the HNWI segment. Improvements in compliance with the tax laws will be a focus area for Sars this year.
Sars is using its own data and data from third parties to identify failure to register as a taxpayer, undeclared income, and a variety of other forms of non-compliance.
Gordhan said Sars has also commenced audits and investigations on a number of wealthy individuals and their associated entities, such as trusts and companies.
Given the complexity of tax affairs of many HNWIs, audits and investigations in this segment usually require a substantial and extended commitment of resources.
One such case involving over R200m in tax and over R400m in additional tax involved litigation in multiple jurisdictions and stretched for over a decade.
HNWIs are often internationally mobile, with assets and activities in other jurisdictions which demand a greater level of international cooperation.
South Africa currently has 70 double taxation agreements and five tax information exchange agreements in force that provide for the exchange of information with other jurisdictions, he said.
Sars has also commenced joint audits with jurisdictions like Botswana, the United Kingdom and the United States with respect to HNWIs.
“The legislative framework has been modified to limit arbitrage opportunities and close loopholes.
"As examples, the higher CGT (capital gains tax) and dividend tax rates have helped narrow the arbitrage gaps between normal income and capital gains and between the income derived in an individual’s hands and through a corporate entity.
“As noted earlier, the information reported on by the media was based on a statistical extrapolation which indicated that there could be up to 9 300 individuals in South Africa who meet the Sars criteria for registration as a HNWI.
“This appears at odds with Sars' current registration of 2 300 HNWI,” he said.
Sars is conducting follow-up research and risk assessment to identify actual cases of non-compliance, including failure to register as a taxpayer.
Where non-compliance is established action is taken, including registration of the individual, imposing any tax outstanding, additional tax (understatement penalties) of up to 200%, and interest on outstanding amounts.
Administrative penalties for failing to submit income tax returns could also be imposed.
“Collection efforts to recover the taxes payable, within the timeframes set by law, have begun on cases that have been finalised. Where appropriate, individuals could also face criminal charges,” Gordhan said.