South Africa National Treasury warns against wealth tax proposals

While South Africa’s government of national unity attempts to finalise the 2025 budget, a fierce debate has erupted over how best to raise revenue after it become clear that other parties would not support the African National Congress (ANC) plan for a 0.5% rise in VAT.

The government of national unity was formed after May elections last year stripped the ANC of its majority for the first time since the end of apartheid in 1994, forcing it to partner with the Democratic Alliance and other smaller parties.

Populist and leftist parties in parliament, backed by advisory bodies like the Parliamentary Budget Office (PBO), have argued against the VAT hike in favour of new taxes on the wealthiest 5% of earners.

But, in its formal response to the 2025 Budget proposals in March the National Treasury stated that introducing a wealth tax would “generate limited revenue and potentially endanger South Africa’s income tax base”.

It said South Africa already had a high share of personal income tax as a percentage of GDP and a high top tax rate, both of which were much higher than other developing economies.

Similarly, it said the South Africa’s corporate income tax rate was already too high. Companies already contributed more corporate tax revenue as a share of GDP than in most other countries, deterring investment and making South Africa uncompetitive.

What about a wealth tax?

South Africa already taxes wealth, said the National Treasury. Annual tax revenue from four national taxes on wealth (excluding property rates) amounted to ZAR22 billion in 2021/22, ZAR22.6 billion in 2022/23, ZAR19.4 billion in 2023/24 and ZAR21.3 billion in 2024/25 from:

• Estate duty on all assets (financial, real estate and land).
• Donation tax on asset donations.
• Security transfer tax on all equity transfers.
• Real estate transfers through transfer duty.
• Property taxes on real estate at local level.

In addition, capital gains tax raised ZAR15.6 billion to the fiscus during 2019/20, and ZAR16.4 billion in 2020/21.

Introducing a wealth tax would generate limited revenue and potentially endanger South Africa’s income tax base. The top three income tiers will pay over 60% (ZAR488 billion) of all personal income tax in South Africa for 2025/26.

“This personal income tax base is critical for fiscal sustainability, and introducing a wealth tax could potentially erode it as high-net-worth individuals are internationally mobile. If only 10% of this tax base were to change their tax residency, South Africa could lose ZAR49 billion in income tax revenue annually, plus all the other taxes they currently contribute,” said the National Treasury.

It also said that only four countries worldwide currently imposed wealth taxes and several countries had either abandoned or significantly reduced the scope of their wealth taxes in recent years because they were ineffective.

The reasons for abolishing these wealth taxes included the high cost of collection, the administrative complexity, the risk of capital flight and the limited revenue gained from these taxes.

The National Treasury supported the proposal to raise VAT, saying that the previous VAT rate increase from 14 to 15% in 2018 did raise substantial revenue, but net VAT figure of ZAR23 billion had been significantly reduced by VAT refund payments from SARS.

Rather than adding new personal or corporate income taxes, the National Treasury suggested focusing on improving compliance, closing loopholes and strengthening existing mechanisms.