The South African Revenue Service is going through a major overhaul designed to catch errant taxpayers, Matthew Lester, a professor of taxation studies at Rhodes University, told the recent Investec Asset Management/Personal Finance world investment seminar. Bruce Cameron reports
The taxman will get you, even if it is only 10 years from now, warns Matthew Lester, a professor of taxation studies at Rhodes University.
The biggest problem for taxpayers is the globalisation of the world tax system, and the need for the finance ministry to collect more taxes to keep the level of government borrowing down to a minimum.
Finance Minister Trevor Manuel is limited in his choices to garner additional taxes, Lester says.
He can't raise the levels of income tax for individual taxpayers; he can't play with VAT because it is closely guarded by Cosatu - and a move on VAT would not be politically acceptable; and corporate taxes are guarded by the Department of Trade and Industry, which wants to attract more investments.
Manuel has doubled the skills development tax as well as the retirement fund tax, but this has not been sufficient to meet his needs. Capital Gains Tax will add very little to the coffers.
The best source of additional income is the more efficient collection of tax, with particular attention being given to those who earn more than R8 000 a month. There are 500 000 taxpayers in this category, who contribute 22 percent of the overall income.
As a result of South Africa's isolation in the 30 years leading up to the 1994 elections, the tax collection system fell into disarray, Lester says .
This situation has now changed. The SA Revenue Service (Sars) is bringing in new legislation that is already in international use, and is rapidly improving its administration systems.
Central to the more efficient collection of tax is the New Income Tax System (Nits), which "is Big Brother trying to identify all sources of capital".
The system is slowly identifying all significant assets - and who owns them. The question is then asked: What is the source of the money for ownership of this asset?
The intention is to find two types of miscreants:
- Unregistered taxpayers; and
- Registered taxpayers who are not declaring their income properly.
Lester warns that while Nits may not yet be up to full speed, and Sars does not yet have the capacity to apply and police the new legislation fully, the time will come when a full level of efficiency will be reached.
Most of the legislation has been imported from other countries.
The taxman assumes all taxpayers are innocent until proven guilty - but once proven guilty you can expect horrendous penalties including, possibly, jail sentences.
The response of South African investors has been what Lester calls the "EVKOM alternative" - "Ek vat kontant oorsee, meneer" (I'm taking my cash overseas, mister).
But Sars is hitting back with residence-based tax, through which all foreign income is taxable.
This is a not a new principle of taxation, Lester says. The taxation of income on a worldwide basis has been introduced by most countries, and this was one of the areas in which South Africa had fallen behind.
Sars is making it increasingly difficult for individuals to hide income earning assets in foreign-based companies and trusts. The job of the taxman in tracing hidden assets will be made easier by the attack on the World Trade Center on September 11.
"As far as taxpayers go it might as well have been an attack on offshore tax havens," Lester says.
In order to stop international terrorism, money flows will be tracked - with everyone from the US Federal Bureau of Investigations to South Africa's own elite police unit, the Scorpions, co-operating.
"All the revenue services around the world will be fully behind them!"
Lester says that, with residence-based tax and its provisions, many of the loopholes which had allowed investors to take assets offshore and bring back income as untaxed dividends, or merely to hold the assets offshore, are being closed. These measures include:
- The taxation of most foreign dividends;
- An attack on foreign trusts;
- A tightening up on the definition of who is a resident of South Africa, preventing people who are ordinarily resident in South Africa from side-stepping the payment of tax;
- Changes in legislation preventing what is essentially a South African owned or managed company or trust, registered offshore, from escaping the net by defining what is called a "controlled foreign entity"; and
- A looming attack on interest-free loans to trusts. Lester says interest-free loans, both to foreign and local trusts, are likely to become something of the past in the general attack on trusts.
Sars is setting out to get the donor, but if the donor cannot be caught in the tax net, then the beneficiary becomes the target. If both of those thrusts fail, then the trust itself is targeted.
Blind trusts, where an almost fictitious organisation is named as a beneficiary and the proper beneficiary is only named when the money is required, are being attacked. When the proper beneficiary is named, Sars will want to know the intention of naming the original beneficiary.
Lester says that trusts are fast becoming a dangerous and expensive vehicle. Many offshore administrators are now not interested in investing "grey" money. The result is that very high fees are being charged.
Trusts are also becoming vulnerable for another reason: in the past trusts have been established to pass on assets to the next generation withpaying estate duty.
More and more elderly people are having to join the "SKI club" - an acronym for "spend the kids' inheritance". There are "greater threats to the wealth of mom and dad, apart from tax", Lester says.
These threats include:
- Inflation, which inevitably bites into fixed incomes;
- Job expectancy, with many people being forced to retire earlier than planned;
- Life expectancy. People can expect to live longer, and will therefore require more money;
- Medical expenses. Most medical expenses, which are rapidly spiralling upwards, occur in retirement; and
- An increase in diseases associated with ageing, such as Alzheimer's and Parkinson's, which require expensive, and extensive, treatment.
Many people who had put money in trusts offshore with the idea of retiring overseas have found that desirable retirement countries do not want people over the age of 50. These people are now struggling to bring their assets back into South Africa, where they will be subject to tax.
And even people who had used local trusts to preserve assets for the next generation are increasingly going to find they need the money, rather than being able to leave it to their kids.
On top of this, the ability of many people to save is being restricted by having to support children for longer than they had expected to.
People who plan to emigrate must not think they are escaping the local tax system.
"It is no good going elsewhere. Sars is copying the rest of the world," Lester says.
Lester says that although Sars may not be applying the tax laws fully, you should not assume that it will not at some future stage start applying the laws with vigour.
Other reports from this seminar:
Foreign myths predjudice SA's status as a safe haven