It is common cause that the South African Treasury is desperately looking for sources of income as it faces a revenue shortfall that some predict could be as high as R50bn. It needs to narrow the deficit, reduce government debt and is also looking for in excess of R100bn to bail out struggling state-owned enterprises (SOEs).
Tomorrow, when Finance Minister Malusi Gigaba delivers his first medium-term budget policy statement (MTBPS), he will have to provide an indication of where the money will come from.
High net worth individuals who have managed to build up wealth through hard work and intelligent planning, have always been soft targets. Think of things like a wealth tax, capital gains tax, property or land taxes, and the high personal taxation rates for those in upper income brackets.
In this vein there have been persistent rumours that Treasury is looking to the Public Investment Corporation (PIC) with its assets of R1.928-trillion for the R100bn to bail out the SOEs. However, PIC chief executive officer Daniel Matjila has resisted these attempts, sparking rumours that he may be replaced with a more compliant CEO. But for now, it seems the PIC will not be raided.
In addition, the governing ANC has for years been toying with the idea of a wealth tax as a means of reducing poverty. Earlier this year that led to Treasury asking the Davis Tax Committee under Judge Denis Davis for a study into the feasibility of introducing a new wealth tax. In August Judge Davis commented that a wealth tax may help to tackle inequality but would not yield much revenue. For now the proposed wealth tax probably also remains just an idea.
Former Finance Minister Pravin Gordhan in February already announced a new top personal income tax bracket of 45 per cent for individuals with taxable incomes above R1.5 million per year. That surely cannot go much higher, if at all.
So just where is the money going to come from?
Taxing wealth again looks like one of the more obvious options. It has been brought to our attention that Treasury may once again seriously be considering the possibility of increasing capital gains tax (CGT) as one possible source of increasing its revenue. Of course there are other forms of taxation: increasing sin taxes, a sugar tax, fuel taxes, and marginal increases in personal income taxation rates, among others. But these will not yield the kind of revenues the government needs right now. An increase in VAT has been discussed but the political ramifications of this make it unlikely. Thus increasing CGT remains the most probable option.
If recent history is anything to go by it seems that an increase in CGT for highest marginal rate taxpayers is definitely on the rise. In 2014/2015 it was 12% (30% inclusion rate x 40% marginal tax rate), in 2015/2016 it was 16.4% (40% inclusion rate x 41% marginal tax rate) and is currently 18% (40% inclusion rate x 45% marginal tax rate). It would not be unimaginable for the next rate to be 22.5% (50% inclusion rate x 45% marginal tax rate).
For companies and trusts, other than special trusts, the current rates are already much higher, so our concern here is more for assets held personally in the name of an individual. Already over the past four years CGT has been significantly increased on an annual basis and it is the one area that remains open to further increases, especially for individuals.
Taxing wealth in one form or another is not necessarily some doom and gloom scenario unique to South Africa – many countries do this. But we believe our clients should be aware of the possibilities and plan accordingly to protect their investments as much as possible within the parameters of the law and tax regulations.
At this stage increasing CGT remains but only one possibility, albeit a strong one, and is not yet a certainty. However, financial and tax advisers would be failing in their duty if they did not alert their clients to this possibility with a view to taking appropriate action to avoid becoming trapped in an ever increasing tax environment.
It seems quite likely that even if Minister Gigaba does not increase the CGT rates tomorrow, he may yet do so anytime in the future, the next best opportunity being his presentation of the February 2018 budget.
In view of the CGT rate trends of the past few years and the talk of these rates again possibly being hiked, Carrick believes it would be prudent to start planning for a future CGT rate increase. The choice could be to sell all, or a portion, of your assets now and crystallise your gains at the current potentially lower rate. This would rebase your CGT and also allow for further planning opportunities which include portfolio diversification as a number of clients are holding extremely concentrated equity portfolios, reinvesting the sales proceeds into tax efficient solutions and using the opportunity to externalise into hard currency to hedge against South African political risk and access international markets.
As leaders in capital and wealth management, our qualified and experienced advisers and specialists across a range of services are there to assist you with the options best suited to your goals and objectives. In addition, Carrick Wealth has also partnered with specialised tax advisers for this very purpose. Carrick clients, and particularly members of our unique, personalised Concierge service, have access to these specialist services for the best possible advice, and to ensure compliance across relevant jurisdictions.
Our advice therefore is to act now before it is too late and your investment becomes trapped by rising CGT rates. Contact Carrick to discuss your options with one of our qualified advisers at [email protected].
Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning. Carrick is also licensed in Zimbabwe and Botswana, and holds three global licences in Mauritius. Carrick at all times maintains its independence with regard to product providers and asset managers, and provides bespoke risk assessment, financial planning and other services to high net worth individuals (HNWI). Through our own qualified and experienced financial advisers, as well as through partnerships with industry leaders in the fields of foreign exchange, tax, international property, offshore bank accounts, trusts, wills and estate planning, Carrick is able to provide the highest levels of service for your financial planning and investment requirements, both offshore and domestic. This communication is intended solely for information purposes for the use of designated recipients and is not an offer, recommendation or solicitation to transact. While it is based on information available to the public and from sources believed to be reliable, Carrick makes no representation that it is accurate or complete or that any returns indicated will be achieved.