Judge Dennis Davis: SA's super rich likely not bitter over tax hike but …

2017-02-27 06:01 - Adiel Ismail
Judge Dennis Davis

Cape Town - Amid fears of South Africans skipping the country over the new tax rate for individuals earning over R1.5m, Judge Dennis Davis reckons these high income earners likely have no qualms with the hike.

However, their gripe is probably with how the tax funds are used, said Judge Davis, who is the chair of the Davis Tax Committee, at a KPMG event discussing the National Budget Speech.  

“I’m sure that most people don’t mind to pay the new 45% bracket, but at the same time, I’m certain that you also wish for the money allocated to do specific work, to actually do specific work and not enrich the elite few."

READ: Budget 2017: The wealthy will pay more

In his Budget Speech on Wednesday, Gordhan announced government’s decision to institute a top tax bracket whereby individuals who earn more than R1.5m would be taxed at a rate of 45%. The previous top rate was 41%.

There are approximately 100 000 people in the country who earn R1.5m and would be able to pay the tax.

CALL OUT: Are you impacted by the new tax? Share your views with us.

Judge Davis said South Africa urgently needs a system of integrity and accountability.

“We can’t have transformation without growth – we can’t have growth without transformation. Clearly the one cannot exist without the other.

"However, we need some measure of economic, political and fiscal stability to have the two work together."

Judge Davis admitted that there’s no difficulty with policy, but there is a need for experience and capacity to implement complex legislation.

INFOGRAPHIC: All your tax tables

He noted that value added tax (VAT) needs to be on the table, but noted that the distribution of the money collected through it will have to be monitored for proper allocation.

“Some economists have suggested VAT on luxury goods, but I don’t think that this is the ideal route to go because the compliance gap will dramatically increase,” said Judge Davis.

Lew Geffen, chairperson of Lew Geffen Sotheby’s International Realty, said the tax doesn't bode well for the residential property sector.

“We’re immensely grateful there was no increase in VAT, but the new super tax bracket of 45% for individuals who earn more than R1.5m isn’t good news for the upper end of the residential property sector."

Given the R28bn revenue gap that Gordhan needed to plug, tax expert and director of legislation at Sage, Rob Cooper, was not surprised by the rise in the top marginal income tax rate.

'Helping to reduce inequality'

"As a form of wealth tax, it’s more politically acceptable than a VAT increase; like the National Minimum Wage, it also has a redistributive effect that could help reduce inequality."

However, given that high-income earners in South Africa already carry a heavy tax burden, Cooper cautioned that government should be careful about adding too much more to it in the next budget.

"There is a balance to be struck between collecting a fair share from the wealthy and taxing them so heavily that tax avoidance or moving overseas becomes attractive options to them," he explained.

'Aggressive top tax'

Doelie Lessing from Werksmans Attorneys, who described the new rate as "aggressive", was also concerned about the wealthy skipping the country.

"We hope this is not the start of a trend of very high taxes on wealthier individuals, many of whom are mobile and can choose to live anywhere in the world," she said.

Werksmans also expressed disappointment at the increase in withholding tax on dividends from 15% to 20%, which Lessing said is effectively a penalty on the fruits of investing. "We need to encourage saving and investment, not penalise it."

She said the rise in the annual Tax Free Saving Allowance to R33 000 is welcome, but it should have been raised even higher to offset higher dividend taxes and further encourage saving."

Cooper said while the rise on tax on dividends could discourage savers, it could also affect pensioners who depend on income from dividends.

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