Budget 2018: Is there a hidden wealth tax?

Johannesburg - Wealthier South Africans could feel the pinch of a hidden wealth tax, with Finance Minister Malusi Gigaba announcing an increase in estate duty and higher excise taxes on luxury goods in his budget speech.

But Jenny Gordon, Alexander Forbes' head of retail legal advice, said at budget briefing in Johannesburg that the increase in ad valorem tax was not significant and in line with a progressive tax structure.

• READ: Estate duty, luxury goods tax to rise

She also believed that wealthier South Africans could benefit going back to life cover as a better way to structure an estate after death, with the higher estate duty that has to be paid now.

Ad Valorem

Gordon explained that government wanted to increase the ad valorem rates, which are already applied to some goods that are consumed mainly by wealthier households such as cosmetics, perfumes, electronics and golf balls.

These are the items that can generally be found in the duty free shops at airports.

“The associated revenue-raising potential is not significant, but it is aligned with the progressive structure of the tax system,” she said.

Effective April 1 2018, the maximum ad valorem excise duty for motor vehicles will be increased from 25% to 30%.

In addition, the ad valorem excise duty rates, now at 5% and 7%, will be increased to 7% and 9%, ensuring that households spending more on luxury goods contribute proportionately more to revenue, said Gordon.

Government will also consult on a proposal to replace the flat rate for cellphones with a progressive rate structure based on the value of the phone, Gordon explained.

Treasury said these measures will ensure that households spending more on luxury goods contribute proportionally more to revenue. 

Estate duties

In line with Davis Tax Committee recommendations, and in keeping with the progressive structure of the tax system, this year’s budget proposed to increase estate duty from 20% to 25% for estates worth R30m and more.

“To limit the staggering of donations to avoid the higher estate duty rate, any donations above R30m in one tax year will also be taxed at 25%,” the budget review stated. “Both measures will be effective from March 1 2018.”

Treasury expects the increase in estate duty to contribute R150m in additional revenue. 

Gordon believed that this alteration would force financial planners to go back to the drawing board, to reassess whether life cover was the best option for an estate.

“With the closure of so many estate duty avoidance mechanisms in the past few years, life assurance remains a viable option for many high net worth clients,” she said.

VAT impact

Commenting on the impact of the hiking VAT with one percentage point, Gordon said the wealthiest 30% of households contribute 85% of VAT revenue.

She said that South Africa’s VAT system includes 19 basic food items that are zero-rated. These include dried beans, samp, maize meal and rice.

“This system remains in place. While government has explored implementing a more progressive tax, this option is not being proposed and nor has it been recommended by the Davis Commission.”

Visit our Budget 2018 Special for all the news, views and analysis.