In a wide-ranging interview with the SA Revenue Service Commissioner Edward Kieswetter, we discovered the taxman’s plan to target high-net-worth individuals while also widening the tax-paying net.
South African Revenue Service (SARS) Commissioner Edward Kieswetter and his team at SARS have been hard at work rebuilding to improve revenue collection and widen the taxpayer net, bringing a surplus R189-billion to the budget at a time when South Africa has never needed it more.
Over the past year alone, SARS recruited an additional 490 staff (also contributing to sorely needed job creation) and invested R430-million in its information and communications technology infrastructure.
New unit for the ‘superwealthy’
A key part of the SARS renewal has been the setting up of a new unit specifically to focus on wealthy individuals.
The definition of “wealthy” for this division has not been firmed up yet but SARS is starting at the top and the first tranche of taxpayers to come under scrutiny will be those with a net asset value of R75-million and higher, Kieswetter tells DM168.
This will be reviewed as the division scales up.
According to the Tax Statistics 2021 report released by SARS, just 0.6% of individuals fell into the taxable income group of R1.5-million and higher, with a taxable income share of 10.7% and a tax liability share of 22.4%.
Kieswetter says there are three issues that the “superwealthy” unit will be investigating:
The nature of income: “In most of these cases, a balance sheet reveals more than a salary slip.” He points out that, whereas ordinary South Africans have a single salary slip, these superwealthy individuals derive income from salaries, investments and assets, and their income is structured differently.
Onshore/offshore financial arrangements: These could include international bank accounts or assets held offshore. SARS wants to see a full statement of assets and liabilities.
Ownership structures: Assets are often held via a legal structure such as a company or a trust or even a special-purpose vehicle (SPV). An SPV is a subsidiary company formed for a specific business purpose or activity.
Kieswetter says, for now, the new division will be focused on “improving visibility” and gaining a holistic view of these taxpayers’ assets and income. He says the intentions are threefold:
• To provide certainty and clarity so that taxpayers in this bracket fully understand their tax obligations. • To ease compliance so that they are able to pay tax with the least amount of fuss. • To strengthen SARS’s ability to respond and have a clear view of what we are dealing with.
“For honest taxpayers, this new division will help simplify their taxes and make things easier, but where we suspect dishonesty, SARS will come down hard and be vigilant for any potential corruption or attempts to hide assets,” he says.
For tax refunds, the taxman is showing turnaround times of three weeks or less in more cases than not.
At least 5.3 million people were tax-compliant this year, duly submitting their tax returns and, of those, 3.4 million claimed a refund with a cumulative value of R30-billion.
Kieswetter says, to date, two-thirds or R20-billion has been refunded to taxpayers and, of those, 85% was refunded within 21 days.
Kieswetter’s strong, no-nonsense approach harks back to the days of former SARS commissioner Pravin Gordhan, who ran SARS like a well-oiled machine and clamped down on offenders, improving compliance to its highest level.
“We are getting serious about enforcement and verification,” he says. About 19% of personal income tax returns were selected for verification and six out of every 10 cases selected for verification had an outcome in favour of SARS. “That means, if we had not gone through the verification procedure, those taxpayers would have received refunds unlawfully,” he says.
And those efforts have paid off in improving compliance, where Kieswetter reports that the needle has shifted from 62% to 65%.
Small to medium-sized businesses proved to be the engine burner of the economy, bringing in more revenue than large corporates, with VAT bringing in R384-billion, compared with corporate income tax at R318-billion. For the 2020⁄21 year, there were 880,553 registered VAT vendors, but only 50.9% were active. Of these, the majority (79.3%) were companies or close corporations.
VAT refunds counted for the most significant component of total refunds at R266-billion for just less than 3.5 million VAT returns. This highlights the massive contribution that would be possible if the remaining 50% of registered VAT vendors became active taxpayers. Kieswetter says, to broaden the taxpayer base, SARS is looking at all aspects of the supply chain, from manufacturers to distributors and retailers.
The government is also taking steps to encourage the growth of small businesses. This includes a R15-billion redesigned loan guarantee scheme to help small businesses post-Covid and a second equity-linked loan guarantee scheme that will launch in April, with initial support from development finance institutions. Regarding turnaround times, SARS has already paid out 652,000 VAT refunds to the value of about R212-billion and, of that, 75% was paid out within 21 days.
Clampdown on fraud
Kieswetter says SARS’s initial refund verification process prevented R30-billion worth of fraudulent refunds from going out. “Sometimes, the process may take longer than 21 days but preventing fraud and saving the country money justifies the work we do,” he adds.
For personal tax verification, this could be as simple as a phone call or email requesting supporting documentation from taxpayers. Kieswetter says most of the time taxpayers submit the supporting documentation and the refund is paid over, but when red flags are raised SARS will launch an investigation.
Shrinkage of the taxpayer net
Between 2003 and 2012, the number of personal income tax (PIT) taxpayers grew by 7%.
Angelika Goliger, chief economist at business advisory firm EY, says that, since 2012, there has been a 2.1% decline in the number of taxpayers, as per SARS data.
“This is particularly worrying as there were only 5.2 million individual taxpayers in 2020. These 5.2 million individuals, (representing approximately 9% of the population), contribute 40% of South Africa’s total tax revenue. Breaking it down further, about 20% of individual taxpayers contributed to three-quarters of personal income tax revenue in 2020,” she explains.
For 2021⁄22, personal income tax grew to R910-billion from R718-billion the previous year. The tax statistics for 2021 show that individual taxpayers, big business and small to medium businesses accounted for 81.9% of the total tax revenue.
Over the past five years the contribution by individual taxpayers to the total tax revenue has shown a steady increase, moving from 37.2% in 2016⁄17 to 39.1% in 2020⁄21. Although tax revenue is increasing, it seems to be coming off a dwindling taxpayer base.
Goliger says there are at least two reasons for this trend. The first is a weak economy, which has reduced the ability of firms to grow, increase salaries and hire people.
“The outlook for South Africa’s economy is expected to remain muted (GDP is expected to grow between 1.4% and 1.8% by 2023) and the unemployment rate has remained at untenable levels – so this trend is likely to persist,” she says.
The second reason is the emigration of skilled South Africans, Goliger says. The UK, Australia and the Netherlands, for example, have all registered strong growth in the number of South African immigrants in recent years. International investment migration advisory firm Henley & Partners says there has been a 40% rise in South Africans seeking real estate globally in the last year.
This raises serious questions about the sustainability of the tax base. Unfortunately, the unemployment scenario does not help. SA’s unemployment rate from April to June 2021 was a staggering 48.9%, albeit on the back of Covid-19 lockdowns and retrenchments. However, high unemployment has been the bane of the country for decades. According to Statista, the unemployment rate was 30.2% in 1999, lifting to 33.47% in 2002 before falling to 22.43 % in 2008, at which point it started climbing again.
Goliga says in the medium to long term, a growing economy is the most significant factor when it comes to sustainably growing tax revenue. She points to the International Monetary Fund, which recently showed that implementing the economic reform and fiscal consolidation agenda could result in SA’s GDP growth reaching 3.6% by 2025, compared with their baseline view of 1.4%.
Between 2017 and 2020, the government has introduced several measures in an attempt to broaden the tax base.
Tax policy measures introduced and implemented over this period include retirement reform from the 2017 tax year, the increase in the effective capital gains tax rates, changes to fringe benefits on vehicles, increases in marginal tax rates as well as partial adjustment for fiscal drag.
Although SARS has improved tax compliance and increased revenue collection, the road to widening the taxpayer net remains a long one, but it is a crucial step towards a sustainable South African balance sheet. DM168