Implementation of capital gains tax (CGT), scheduled for April 1, may be postponed if business can persuade the Minister of Finance that it needs more time to get ready.
In a statement to Parliament's finance committees this week, Finance Minister Trevor Manuel said: "One of the concerns coming through in the comments on the draft capital gains tax legislation is that business will not be ready to implement the tax on April 1 2001. This is a concern that I can appreciate."
He said more information was needed on what steps businesses had been taken to prepare for the tax and what remained to be done.
"We don't want to introduce it on April 1 if the financial institutions can't get systems in place to ensure that the tax works," Maria Ramos, the director-general of the National Treasury, said. "But we need evidence of the time needed."
At the same time Ramos made it clear that the government would not backtrack on the tax itself.
"We are talking about making changes, not about whether or not to have this legislation E CGT is on the table, to be introduced by Parliament. As far as the effective date is concerned, we want comments."
The implementation of the tax will force financial services companies, such as banks and unit trust companies, to create new administrative systems to capture individual capital gains.
CGT, described by Ramos as a "wicket-keeper" tax designed to pick up income which would otherwise slip past the taxman, will apply to capital gains made after April 1 - or whenever the tax is implemented. Capital gains - whether from the sale of property, shares, unit trusts or other assets which fall within the tax net - made before implementation date will not be taxed.
The first R10 000 of total capital gains will be exempt from tax; one quarter of the rest will be taxable for individuals; and the gains will be taxed as part of normal income tax, at an individual's marginal tax rate. So the most you can be taxed on a capital gain of R1 000, if you pay the top marginal income tax rate of 42 percent, is R105 (42 percent of one quarter of R1 000).
"The CGT is not a wealth tax," Ramos said. "It is a tax on income. The objective is not to tax wealth but to introduce equivalence between different forms of income."
Manuel said the fact that capital gains, as opposed to income, were exempt at the moment:
* Was "fundamentally unfair" to the ordinary salary or wage earner whose income is fully taxed;
* Encouraged the wealthy and business to engage in tax avoidance schemes to convert taxable income into untaxable capital gains; and
* Distorted the economy by artificially boosting the after-tax returns of capital gains.
Both Ramos and Manuel dismissed calls for indexation to prevent taxpayers paying tax on an increase in the value of assets which is due only to inflation, not to any real rise in the asset's value. They said indexation would be too complex to administer.
"We would need different inflation rates for different classes of assets. We have decided to rather go for a low rate," Ramos said.
She said the combination of the low tax rate (25 percent of the gain) and the exemption of the first R10 000 of capital gains offset the possible impact of inflation.
The new tax will collect about R1 to R2 billion a year in time - not much compared to current tax collections of about R216 billion - and the annual operating costs were estimated at R100 million a year, Pravin Gordhan, the head of the SA Revenue Service, said.
Gordhan said the new tax would combat erosion of the country's taxable income.
Other forms of income, from wages and salaries to fringe benefits and share options, were all taxed in one way or another. Dividends were taxed at company level.
"What's so unique about a capital gain that should set it apart in the way we treat it?"
One fifth of the legal cases between SARS and taxpayers in the special tax courts are about the definition of revenue and capital gains, he said.
Gordhan said South Africa had a history of poor tax compliance for three reasons:
* The majority of the population did not know much about tax;
* The "sanctions-busting mindset" of South African business had not disappeared; and
* The country's business had a culture of aggressive tax planning and brinkmanship.
"Criminal evasion of tax and customs duty is still a pivotal issue," Gordhan said.
He said some sportspeople and businessmen had become adept at converting taxable employment income into untaxed restraint of trade agreements. This sort of tax dodging was one of the reasons for implementing CGT, he added, noting that the simplicity of the legislation in future would depend on tax advisers.
"If they concoct schemes we must expect additions to CGT every year or so to combat schemes which have come up during the previous year."
"National Treasury's goal is to lower the rate by broadening the base," Ramos said. "The CGT is an essential ingredient for broadening the base."