A research report submitted to the Faculty of Commerce, Law and Management in partial fulfilment of the requirements for the degree of Master of Commerce in the field of Taxation An analysis: the possible consequences of a potential wealth tax on immovable property in South Africa Applicant: Alberta Ignatova Student Number: 0707056M Supervisor: Prof Maeve Kolitz Head of Programme: Prof A P De Koker Head of School: Prof N Padia Degree: Master of Commerce (Specialising in Taxation) Date: 29 March 2019 Abstract The Davis Tax Committee issued a media statement on 25 April 2017, calling for written submissions on the introduction of a possible wealth tax in South Africa (Davis Tax Committee, 2017, p 1). The discussion of a potential wealth tax came two months after an increase applying to the top income tax bracket for individuals by 4% to 45%, resulting in an effective capital gains tax rate for individuals of 18% (ENS Africa, n.d. par 2). This should be seen on the back of the capital gains tax increase of nearly five percentage points from 13.32% in the 2014 year of assessment to 18% in 2017 (ENS Africa, n.d. par 2). The Davis Tax Committee had been tasked to review South Africa’s tax system and had consequently launched a public debate on one of the most controversial possible moves on its agenda, wealth tax (Reuters, 2017, par 1). There is an ongoing debate among South Africans on whether the government should implement such a tax to lessen the glaring inequality in Africa’s most industrialised economy (Reuters, 2017, par 2). South Africa is grappling with weak economic growth and unemployment of more than 25% and the minority still controls a disproportionately big share of the economy (Reuters, 2017, par 9). The public debate on wealth taxes often focuses on redistribution of land, and consequently one of the potential forms of wealth tax could be a wealth tax on property (Davis Tax Committee, 2017, p 1). As taxes on land and property have both fiscal and non-fiscal effects, it is therefore useful to analyse the possible positive and possible negative impact of the potential wealth tax on immovable property on the revenue authority, and taxpayers. The aim of this research report is to analyse the possible consequences of the potential wealth tax specifically with a focus on immovable property. Firstly, consideration will be given to what the possible definition of immovable property could be. Secondly, the potential types of wealth tax on immovable property will be analysed together with existing wealth taxes imposed by the Income Tax Act 58 of 1962 (the Act), municipal legislation (Municipal Property Rates Act, 2004), Estate Duty Act (Estate Duty Act 45 of 1955) and Transfer Duty Act (Transfer Duty Act 40 of 1949). Thereafter the research will consist of an objective analysis of the possible positive and possible negative consequences of the potential wealth tax on immovable property. Key words: Wealth tax, possible, immovable property, consequences, positive, negative 1 | P a g e Declaration I declare that this research report is my own unaided work. It is submitted in partial fulfilment of the requirements for the degree of Master of Commerce (specialising in Taxation) at the University of the Witwatersrand, Johannesburg. It has not been submitted before for any other degree or examination at any other university. ____________________ Alberta Ignatova 2 | P a g e TABLE OF CONTENTS Abstract 1 Declaration 2 Chapter 1: Introduction 1.1: Background 5 1.2: Objective of the research 11 1.2.1: Research statement 11 1.2.2: Sub problems 11 1.2.3: Significance of the study 11 1.2.4: Delimitations of the research 11 1.2.5: Research Method 12 1.2.6: Chapter Outline 12 Chapter 2: Potential definition of immovable property for the purposes of this research 2.1: Introduction 15 2.2: Income Tax Act 58 of 1962 17 2.3: Double Tax Agreements 18 2.4: Capital gains tax Guide Issue 7 19 2.5: The Deeds Registries Act 20 2.6: The Municipal Property Rates Act 21 2.7: Dictionary of Legal Words and Phrases 22 2.8: Ex Parte The Master of The Supreme Court 1906 TS 563 23 2.9: Administration of Estates Act 66 of 1965 24 2.10: Conclusion 24 Chapter 3: An analysis of the definition of wealth tax and what existing South African taxes meet this definition 3.1: What is wealth tax 26 3.2: Estate duty 28 3.3: Transfer duty 30 3.4: Donations tax 32 3.5: Property rates 33 3.6: Capital gains tax 34 3.7: Conclusion 35 3 | P a g e Chapter 4: An analysis of what the form of the potential wealth tax on immovable property could be 4.1: Introduction 36 4.2: Forms of a potential wealth tax 37 4.2.1: Area-based Assessment 37 4.2.2: Market Value Assessment 37 4.2.3: Rental Value Assessment 38 4.2.4: Self-Assessment 39 4.2.5: Considerations of the rate 42 4.3: Wealth tax in France 43 4.4: Wealth tax in India 46 4.5: Conclusion 49 Chapter 5: An analysis of the positive and negative consequences of a potential wealth tax on immovable property 5.1: Introduction 51 5.2: Possible positive consequences of a potential wealth tax on 51 immovable property 5.2.1: Historically favoured by economists 51 5.2.2: Additional funds for local public services 51 5.2.3: Unproductive land speculation 52 5.2.4: Revenue for tax authorities 53 5.2.5: Land price bubbles 54 5.2.6: Efficiency 54 5.3: Possible negative consequences of a potential wealth tax 55 on immovable property 5.3.1: Poor revenue raiser 55 5.3.2: The valuation issue 56 5.3.3: Compliance burden 57 5.3.4: Harmful effect on Economic Growth 58 5.3.5: Reduction in general levels of indebtedness 58 5.4: Conclusion 59 Chapter 6: Conclusion 60 Reference List 64 4 | P a g e Chapter 1: An Introduction 1.1 Background Then President Jacob Zuma called for a radical transformation of the economy following losses in local elections in 2016 partly caused by anger over deep inequality that persisted more than two decades after apartheid, while the white minority still controls a disproportionately big share of the economy (Reuters, 2017, par 8). Treasury further struggled to meet its revenue targets amid sluggish economic growth and the tax agency fell R30 billion short of its projection in the 2016 fiscal year (City Press, 2017, par 12). Tax revenue was projected to fall short of the 2017 Budget estimate by R50.8 billion in that year, the largest under-collection since the 2009 recession (City Press, 2017, par 11). With additional shortfalls expected in 2018 and 2019, the country faces a total shortfall of R209 billion in the next three years (City Press, 2017, par 11). Government is under mounting pressure to shift its focus on taxing the wealthy minority to alleviate its predicament (Webber Wenzel, 2017, par 1). In 2017, under instruction of Finance Minister Pravin Gordhan (Finance Minister at the time of the announcement), the Davis Tax Committee was tasked to investigate the possibility of a wealth tax (Davis Tax Committee, 2017, p 1). In light of the request, the Davis Tax Committee considered the following possible wealth taxes: a land tax; a national tax on the value of property, and an annual wealth tax (Davis Tax Committee, 2017, p 2). The Davis Tax Committee announced it was inviting submissions from South Africans on whether the government should implement such a tax (Davis Tax Committee, 2017, p 2) to lessen the glaring inequality in Africa's most industrialised economy (Reuters, 2017, par 2). At the time of this research report the Davis Tax Committee had finalised their report of findings on the feasibility of wealth tax in South Africa. These findings included, but were not limited to wealth tax on immovable property alone. South Africa is known for its extreme income inequality, which is one of the highest in the world. Studies show that 10% of the population earn around 55%–60% of all income, compared to only 20%-35% in more advanced economies. (Orthofer, 2016, par 1.) Tax and survey data (conducted between 2010 and 2011) has suggested that 10% of the South African population owns at least 90%–95% of all assets. This share is much higher than in advanced economies, where the richest 10% own around 50%-75% of all assets. (Orthofer, 2016, par 2.) 5 | P a g e Kloppers’ view is that post-apartheid South Africa faces a variety of challenges that emanated from the injustices caused by apartheid and that one of the earliest challenges faced by the first democratically elected government was how to address the unequal distribution of land in the country. He further comments that the South African government has shown commitment to eradicate the inequalities and injustices of the past and has initiated a comprehensive land reform programme with a strong constitutional basis, a programme consisting of three pillars namely: restitution, land redistribution and tenure security. (Kloppers, 2014, par 1.) The Davis Tax Committee also confirms that land redistribution is a pivotal element in the inequality discussion and that wealth tax is an instrument used to address the inequalities of income and wealth (Davis Tax Committee, 2018, p 14). These inequalities have resulted in the passing of the Expropriation Bill by the National Assembly, bringing to conclusion years of hard work by Parliament on this crucial draft legislation (Politicsweb, 2016, par 1).