Governments around the world are trying to come up with ways to mitigate the economic hit caused by national lockdowns and social distancing measures.
Some countries took a proactive approach and injected a steady flow of cash to support those affected by covid-19, while others stayed put with very minimal intervention.
But with some countries hitting record debt levels, it’s vital that governments set out plans of how to repay these massive sums.
One of the most popular routes seems to be targeting the wealthiest in society. Argentina, for example, opted to introduce a one-off contribution.
A so-called ‘wealth tax’ was heavily rumoured to be on the cards for South Africa as well. But when finance minister Tito Mboweni unveiled his budget, he announced something quite different: the creation of a HNW tax unit.
The country’s Treasury has allocated around ZAR3bn (£151m, $210m, €174m) to the South African Revenue Service (Sars) to expand its tax collection capabilities. This includes funding the HNW unit, which will target individuals and organisations that take advantage of complex financial arrangements.
But how will this impact HNW finances and their financial plans?
Paul Roper, director at VG, told International Adviser: “According to New World Wealth’s 2020 SA Wealth Report, there are approximately 38,400 millionaires or HNW individuals living in South Africa — a figure which in 2010 stood at 48,600.
“HNWIs represent less than 1% of the South African population; the top 1% owns 55% of South Africa’s personal wealth. So, for South Africa, which is the most economically unequal country in the world according to the World Bank, this diminishing slice of the pie is needed to satisfy the increasing socio-economic needs of its population.
“Sars has announced that it will be assessing wealth ‘derived from multiple sources’, and these individuals ‘employ complex, and often offshore, financial arrangements’.
“South Africa was an early adopter of the common reporting standard in terms of participating countries, having signed up in 2015. This means that information on overseas investments and trusts is already at Sars’ fingertips.
“The integrity of trust structures and investments should be considered with a focus on compliance, to ensure that this is undertaken by suitably qualified professionals, who have a comprehensive understanding of the complexities of the South African and offshore trust landscapes.
“While the UHNWIs are likely to have a dedicated team of advisers, the HNW community may not, which will drive demand for bespoke expertise.”
Add fuel to the fire
Lindsay Bateman, director of Africa and Middle East markets at Jersey-based Brooks Macdonald, believes that the introduction of a mandatory contribution from the rich would have only triggered greater emigration, and maybe the unit could be a more effective way to achieve a similar goal.
He told IA: “A wealth tax has been suggested in South Africa several times in the past, initially to help uplift the poorer elements of the community, and more recently to assist with the mounting costs associated with covid, with South Africa particularly hard hit with infection rates.
“Such taxes, however, will only add fuel to the fire of the ongoing so-called ‘brain drain’, where wealthy South Africans move abroad. This reduces the tax contribution, limits associated job creation, and diverts their local spending power elsewhere. It is interesting to note that approximately 40% of all taxes in South Africa are paid by those earning over ZAR1m per annum.
“Increasing numbers of international locations, such as Portugal, the UK, and the islands of Jersey and Guernsey, all have programmes to encourage and welcome successful entrepreneurs to relocate to their jurisdictions, recognising the value they can add to the local economy.
“The South African authorities have an unenviable task in increasing taxes derived from a shrinking base of high earners, with domestic investments largely disappointing and dependent on the local economy for their performance trajectory.”
Personal relationship vs conflict
VG’s Roper believes that this is the time to “seriously review” any financial advice wealthy individuals have received and compare it to the newly introduced measures.
But the South African taxman doesn’t seem likely to start a ‘hunt’ against HNWIs.
He added: “What I’ve ascertained is that Sars has already started making contact with people, they have dedicated individuals in place, and what clients have said to me is that it feels like your private banker calling.
“Now the nature of the relationship will be personal, you’re going to have a dedicated person just like you have your private banker and adviser.”
And if Sars can pull that off, this would create a win-win situation, Roper said, “because instead of being a relationship of conflict, it becomes a professional relationship and I think that’s an opportunity for Sars”.
What about expats?
But how does the HNW tax unit affect South African expats?
Roper doesn’t think they will have many, if any, repercussions from it.
“For expats who have already emigrated and externalised their centre of economic interest from South Africa, there is likely to be little or no impact.
“HNWIs who are resident in South African will, however, find themselves under greater scrutiny from Sars. Therefore, they should focus in on their assets and structures to ensure that these are up-to-date, properly advised and withstand scrutiny in terms of integrity and compliance.
“To the extent that this has not been an ongoing process, the announcement must catalyse a thorough review. There is a strategic risk for HNWIs if they have not been compliant previously.
“They need to be prepared and must be proactive on this. Whatever advice that they have been given has to be seriously reviewed in terms of the changed context. The law has changed, the focus has changed, perceptions have changed. It is a completely changed context.”
Will this lead to a greater number of wealthy South Africans leaving the country, then?
He continued: “Despite attempts from other countries to target HNWs for immigration, we do not predict that this scenario will catalyse a great emigration.
“Emigration is a trigger for South African capital gains tax and a person’s tax affairs will have to be current before emigration is permitted. It must be borne in mind that every destination is going to want at least some tax.”