Wealthy South Africans are leaving the country in drags, and it’s costing the country billions.
Responding to a recent parliamentary Q&A, the minister of finance said that the phenomenon of ‘mobile higher-income earners’ is well-documented and has been assessed since 2018.
To a large degree, South Africa’s personal income tax revenue relies on a smaller tax base of wealthy people.
According to the minister, a high proportion of revenue is gathered from upper-income groups – more so than many other peers in the country – as a result of both a relatively high personal income tax exemption threshold and high upper-income rates.
When questioned on the recent tax statistics provided by the South African Revenue Service (SARS) that show that thousands of South Africans have ended their tax residency in the country, the minister said that over 32,000 people had changed their residence in the period between 2017 and 2021.
Of those individuals, approximately 2,700 earned more than R500,000 per year and 1,100 earned more than R1 million per year.
In total, this amounted to R1.3 billion in assessed tax.
However, the National Treasury downplayed its effect on the overall tax base.
“While any loss in revenue is important to track and understand, it is useful to indicate the scale of the phenomenon relative to our revenue-raising capacity,” it said.
Despite the major loss in tax revenue, the Treasury said that it is aiming to raise R280.6 billion in 2023/24 from taxpayers with a taxable income greater than R1 million per annum.
The minister said it is unclear whether the country will lose or gain more revenue from personal income tax. He said restoring growth is the most reliable determinant of increased tax bases.
As it stands, the National Treasury has not considered alternative methods of making up for this loss in the tax base, with no new policy announcements or proposals that aim to prohibit or discourage taxpayers from leaving.
“From a tax perspective, the objective is to ensure that the appropriate tax is paid for any assets that are transferred abroad. Some of the measures that had been in place have become outdated as a result of exchange control reforms,” said the minister.
“As a result, the tax provisions regarding foreign remunerative work and pre-retirement pension withdrawals on cessation of tax residence have undergone significant reform in the last five years,” he added.
Over the medium term, Treasury also aims to broaden tax bases to lower tax rates, as high rates offer a stronger incentive not to comply.
Tracking the emigration of taxpayers is not officially done; therefore, it is often a complex figure to nail down.
One has to rely on immigration data from other countries, estimations or migration experts and the number of queries they have received.
Ceasing tax residency in South Africa and emigrating have the same effect, however – South Africa loses tax revenue.
The latest data from SARS shows from the tax year 2017 onwards, over 40,500 taxpayers reported that they were no longer tax residents. However, in 2021, the number of assessed taxpayers who ceased to be tax residents decreased to 32,831, which accounts for a 12.1% decrease.
Additionally, there was a significant decline in taxable income, dropping by 46.4% to R6.9 billion, and tax payable decreased by 48.5% to R1.9 billion.
SARS said these decreases in the value of taxable income and tax paid were mainly by the income group higher than R500,000 taxable income, mainly by individuals between 18 to 34 years old and mainly by males.
Despite this showing a lower but still substantial number of South Africans ceasing tax residency, Thomas Lobban, the head of cross-border individual tax at Tax Consulting SA, said that it does not paint an accurate picture.
He said that the decreasing number could be a result of taxpayers that already left but is also rooted in the taxman’s new targetted approach towards wealthy taxpayers.
SARS has been making it consistently harder to cease tax residency from South Africa despite promoting easier tax compliance. Lobban said that systems are being made difficult for expats to declare they are no longer tax residents in South Africa.
One of the most notable developments has been changes to its Tax Compliance Status Process and the new Approved International Transfer (AIT), which is replacing its traditional means of “emigration”.
The AIT now requires further documentation in support of international transfers, including statements on assets and liabilities, details of locally listed securities and specific documents showing the sources of capital invested, among others.
Tax Consulting SA said that the ongoing impact of emigration on South Africa’s tax base means that individuals contemplating leaving the country are facing growing challenges in doing so.