by a taxpayer or on capital gains arising from the disposal of an asset. A wealth tax would not be triggered by income earned or capital gains arising from the disposal of an asset. Instead it would be levied on some concept relating to the value of a person’s estate. The question arises how such person would fund the tax. The taxpayer would likely have to dispose of assets or borrow money in order to fund this new tax liability. While estate duty is a form of wealth tax, it is imposed on the death of the taxpayer when there is a deemed disposal of the relevant assets held by the deceased.
A difficulty with taxing a person on unrealised gains is that, as we all know, asset values often have a habit of going down instead of up. The recent examples of, inter alia, Steinhoff, Tongaat Hulett, EOH and African Bank all prove this point. Imagine having a significant percentage of one’s assets invested in a combination of these companies and paying wealth tax based on the listed price prior to the precipitous decline in the value of such companies.
A question also arises as to how the relevant taxpayer’s wealth arose. If a wealth tax is a tax based on notions of equity then perhaps it should make a difference whether the taxpayer, for example, built up a business empire which employed thousands of people all of whom paid employees tax, as opposed to a taxpayer who accumulated wealth by shipping jobs offshore.
An elephant in the room in relation to the concept of a wealth tax is the use of trusts. Trusts are very prevalent in common law jurisdictions such as South Africa. There are many reasons for setting up a trust. These include asset preservation, ensuring that assets are insolvency remote, allowing assets to be administered by professional trustees, and providing for distributions to various family members on a discretionary or vested basis. The question arises whether it is worth devising a complex new wealth tax if it is only to be imposed on individual taxpayers. Yet the imposition of a wealth tax on trusts would be very difficult.
Firstly, trustees hold assets for the benefit of the various beneficiaries of the trust. Certain of these beneficiaries may not meet any criteria relating to the imposition of a wealth tax. The beneficiaries may also be discretionary and may therefore not receive any distributions from the trust. The class of beneficiaries may also change over the lifetime of the trust.
In addition, trusts are sometimes used to hold business assets. Why then should a trust suffer wealth tax and not, for example, a company? It therefore seems difficult to include trusts in any wealth tax regime, but to exclude them would likely significantly reduce the efficacy of any wealth tax.
It may be that, before looking at complex new forms of taxes such as a wealth tax in South Africa, we should first look at closing the tax gap by ensuring greater levels of compliance in relation to our existing tax laws.
Martin v Kiesbeampte, Newcastle Afdeling en ’n Ander
1958 (2) SA 649 (N)
Holmes J: In this case the applicant’s affidavits were in English and his counsel addressed the Court in English. The first respondent’s affidavit was in Afrikaans and counsel for the respondents addressed the Court in Afrikaans. In which language then should the Court give judgment? One’s experience is that the winner is usually content to know merely that he has won. But the loser likes to know the reasons why he has lost. I proceed therefore to give judgment in the language of the losers.
Dit is die keerdag van ’n bevel nisi wat op 26 Maart 1958 uitgereik is. …
JANUARY-FEBRUARY 2021 2