Exodus of South Africa’s high earners may limit scope for tax increases

The continued loss of skilled and high earners in South Africa could seriously hinder the government’s ability to raise income taxes. South Africa has been among the emerging market economies most negatively impacted by Covid-19, with a GDP growth contraction of 7.2% and a 14% of GDP budget deficit, lifting government gross debt to 80.3% of GDP by March 2021.

High-income South Africans are increasingly looking for homes abroad through residency and citizenship programmes and increased emigration could complicate government plans to raise an additional ZAR40 billion in revenue over the next four years.

A fourth-quarter estate agent survey by FirstRand’s First National Bank reports that more than one-fifth of all the houses valued at ZAR2.6 million (US$176,939) or above that were put on the market by the end of last year was because owners were looking to move abroad.

For every high-net worth person that emigrates, an average of ZAR1.2 million in income taxes is lost from the system, on top of the spending, VAT and economic activity that they generate. This could further erode the tax base in a country where fewer than 14 million individuals in a working-age population of 39 million are registered taxpayers and where those earning more than ZAR1 million a year pay 40.2% of all personal income levies.

While no ‘solidarity tax’ was announced by Finance minister Tito Mboweni in his 2021 Budget Speech, National Treasury has indicated that it will assess the viability of a future wealth tax as it collects more data in the coming months.

“Following the recommendations of the Davis Tax Committee, SARS will focus on consolidating wealth data for taxpayers through third-party information,” Treasury said in its 2021 budget review. “This will assist in broadening the tax base, improving tax compliance and assessing the feasibility of a wealth tax.”

Chairperson of the Tax Review Committee, Judge Dennis Davis, has said that the South African Revenue Service (SARS) should increase lifestyle audits for wealthy South Africans. In January, he said the tax tables showed that only around 5,000 to 6,000 South Africans report taxable income of more than ZAR5 million, and that lifestyle audits on wealthy individuals could help make up this shortfall. “(This year) I am hopeful we will get some of these ‘low-hanging fruit’ back into the tax net,” he said.

Those South Africans looking to move abroad have continued to demonstrate a strong appetite for overseas property investments in 2020, despite the impact of the coronavirus pandemic, with Portugal, Mauritius and Grenada being at the top of the list.

The biggest demand from South Africans is unequivocally still for Portugal. Its programmes allow for a good hard currency investment, coupled with the ability to acquire EU residency opportunities for your family, enabling dependents to cast their net further afield when considering studying or working in Europe. It also offers the ultimate goal of EU citizenship.

There had also been a significant increase in enquiries from South Africans for property offering residency in Mauritius, where the entry level price for residency has fallen from US$500,000 to US$375,000. Mauritius offers ease of access, ease of transition due to familiarity, and a large South African expat community. Grenada, meanwhile, offered a path to US residency.