Taxation in South Africa

Overview

Taxation in South Africa is a complex and multifaceted system that plays a crucial role in the country’s fiscal policy and economic development. The South African Revenue Service (SARS) is the primary body responsible for the collection of taxes, ensuring compliance with tax laws, and facilitating legitimate trade while protecting the economy and society. The tax system in South Africa is designed to be progressive, with higher income earners contributing a larger proportion of their income to taxes. This system aims to reduce income inequality and fund essential public services such as healthcare, education, and infrastructure development.

The South African tax system has evolved significantly over the years. Prior to 2001, the system was “source-based,” meaning income was taxed in the country where it originated. However, since January 2001, the system has been “residence-based,” where taxpayers residing in South Africa are taxed on their worldwide income, regardless of its source. Non-residents are only subject to domestic taxes. This shift has had significant implications for South African taxpayers, particularly those with international income streams.

Tax Revenue and GDP

In the 2018/19 financial year, SARS collected R1,287.7 billion (equivalent to US$86.4 billion) in tax revenue, representing a 5.8% increase from the previous fiscal year. The tax-to-GDP ratio for the 2018/19 financial year was 26.2%, slightly higher than the 25.9% recorded in 2017/18. The cost of collecting tax revenue has remained relatively constant, decreasing slightly from 0.93% of total revenue in 2016/17 to 0.89% in 2017/18, and further improving to 0.84% in the 2018/19 financial year.

Three provinces contributed significantly to the total tax revenue: Gauteng (49.0%), Western Cape (15.5%), and KwaZulu-Natal (13.3%). The provinces with the smallest contributions were the Northern Cape (1.3%), followed by Free State (3.2%) and North West (3.3%).

Taxpayer Demographics

As of 31 March 2019, the tax register of SARS had over 26 million entries, excluding suspended cases, estates, and entities with unknown addresses. Individuals made up 79% of the entries, with an aggregate income of R1.7 trillion. The tax register increased to more than 27 million entries in 2020.

In 2019, out of 22.1 million individual taxpayers, only 6.6 million (31%) were expected to submit tax returns. In 2020, the number of individual taxpayers increased to 22.9 million, but the number expected to submit tax returns fell to 6.3 million (27.5%). Furthermore, in 2019, only 4.9 million taxpayers (23%) submitted returns and were assessed. Of the assessed taxpayers, only 882,000 (18%) owed SARS some tax, 11.3% had a zero assessment, and 70.7% received refunds. Of the 4.9 million assessed taxpayers, 1.9 million (40.2%) were from the Gauteng province, and 1.3 million (27.3%) were in the 35–44 age bracket.

Categories of Tax

Taxes in South Africa can be broadly categorized into direct and indirect taxes. Direct taxes are imposed on individuals, trusts, deceased estates, companies, and close corporations. Indirect taxes are collected by an intermediary from the person who bears the ultimate economic burden of the tax. In the 2017/18 financial year, SARS collected R1,216 billion in taxes, with 93% (or R1,133 billion) coming from taxes on personal and company income and profits, and taxes on domestic goods and services.

Direct Taxes

Direct taxes include income tax, payroll and workforce taxes, property taxes, and other taxes on income and profits. In the 2017/18 financial year, SARS collected R711.7 billion from income and profits taxes, accounting for 58.5% of total revenue.

Personal Income Tax

Personal income tax is South Africa’s largest source of revenue. In 2017/18, it contributed 38.1% of the total tax revenue. The personal income tax system is progressive, with tax rates ranging from 18% to 45%. The tax threshold for individuals below the age of 65 is R78,150, meaning anyone earning less than this amount pays no income tax.

Company Income Tax

Company income tax is levied at a rate of 28% on the taxable income of companies. In the 2017/18 financial year, SARS collected R220.2 billion from companies. Certain companies qualify as small business corporations, with a lower tax rate applicable to them.

Dividends Tax

Dividends tax is a policy tax imposed by the government to encourage companies to retain profits instead of distributing dividends. It is a 20% tax on the receipt of dividends given by companies and close corporations. Prior to 1 April 2012, this tax was known as the Secondary Tax on Companies and was a 10% tax on the net dividend distributed by companies and close corporations.

Capital Gains Tax

Capital gains tax (CGT) was introduced on 1 October 2001 and is effectively charged by adding a percentage of the increase in value of an asset, disposed of for more than its base cost, to the taxpayer’s taxable income. For individuals, deceased estates, and special trusts, 40% of the net gain exceeding R40,000 is added to their taxable income. For companies, close corporations, and trusts, 80% is added.

Indirect Taxes

Indirect taxes include value-added tax (VAT), specific excise duties, ad valorem excise duties, fuel levy, environmental taxes, and other taxes on goods and services. In the 2017/18 financial year, SARS collected R422.2 billion from domestic taxes on goods and services, accounting for 34.7% of total revenue.

Value-Added Tax (VAT)

VAT is a broad tax on the supply of goods and services, charged upon purchase. It is compulsory for a business to register for VAT when the value of taxable supplies in a 12-month period exceeds or is expected to exceed R1 million. VAT in South Africa currently stands at 15% as of 1 April 2018.

Fuel Levy

The fuel levy is a tax payable by licensed manufacturers of petroleum products within South Africa. In April 2018, the fuel levy was R3.37 per litre, representing 23.7% of the price of 93 octane fuel (inland). The Road Accident Fund (RAF) contribution to the fuel price was R1.93 or 13.6%.

Environmental Taxes

Environmental taxes are intended to modify the behavior of citizens and encourage more sustainable practices. These include taxes on CO2 emissions from motor vehicles, electricity levies, health promotion levies on sugary beverages, incandescent light bulb levies, international air passenger departure taxes, plastic bag levies, and tyre levies.

Tax Administration and Compliance

The Tax Administration Act of 2011 deals with offences regarding tax. A person commits an offence if they fail to submit a tax return or document to SARS, fail to issue a document to a person as needed, fail to register or amend a registration, keep records as needed by SARS, knowingly submit a false tax certificate or statement, or refuse or neglect to take an oath or make a solemn declaration. A person convicted of these offences may be liable to a fine or imprisonment not exceeding two years.

Tax Loopholes and Avoidance

Various tax loopholes have been identified by SARS over the years and have been successfully closed. These include cross-border mismatches, insurance payments and interest exemptions, interest cost allocation for finance operations, transfer pricing, and certain classes of preference and guaranteed shares.

Policy Changes and Recent Developments

Recent policy changes in South Africa’s tax system include adjustments to tax thresholds and rebates, changes to the taxation of foreign income for South African residents working overseas, and the introduction of new environmental taxes. The 2020/21 budget saw several adjustments to tax thresholds and rebates, aimed at providing relief to taxpayers and stimulating economic growth.

Centenary of Income Tax

In 2014, South Africa marked the centenary of the introduction of income tax in the country. The Income Tax Act of 1914, tabled by General Jan Smuts in his capacity as Minister of Finance, introduced income tax in the Union of South Africa. The University of Cape Town celebrated this milestone with a conference and publication of papers presented, reflecting on the evolution and impact of income tax in South Africa over the past century.