The fourth and fifth will deal with international experience, the sixth with land taxes and the seventh with lessons for South Africa.
The debate around wealth taxes has gathered steam globally as the gap between the rich and poor continues to grow. This brief provides descriptions of the most pertinent concepts involved.
Wealth is what one owns at a specific point in time and is measured as assets less liabilities. Income is defined as the inflow of cash one earns over a specific period (usually a tax year) and comes in the form of a salary, wages, profit, interest, endowment income, rent, etc.
Wealth comes in various forms: real estate, financial assets, business assets, pension entitlements, trust assets, objects of value and so forth. This matters because wealth taxes may be based on only some forms of wealth, or they may treat different forms of wealth differently.
A wealth tax is an annual tax levied against the market value of net assets (assets less their associated liabilities) owned by taxpayers. It can be levied against both natural and juristic persons.
A wealth transfer tax is levied on the passing of ownership of assets from one person (or entity) to another. It is imposed where there is a legal requirement for registration of the transfer, such as transfers of real estate, shares, or bonds. Examples include inheritance tax, gift tax, transfer duty and securities transfer tax (STT).
Tax on income from wealth includes taxes on dividends and net interest (interest income less interest expense) and rental income.
Capital gains tax (CGT) arises when an asset is disposed of and the proceeds exceed the asset’s original cost. For purposes of wealth tax analysis, CGT forms part of income tax.
Compared to a wealth tax, a capital levy a one-off tax on private wealth and has historically been used as an exceptional measure in an attempt to restore debt sustainability by retiring public debt.
When any of the above taxes are applied, the revenue authorities take into account their country’s unique circumstances and these result in differences rates and concessions between countries.
Charles Collocott
Researcher
charles.c@hsf.org.za