Wealth Taxes I: Conceptual Frame

The fourth and fifth will deal with international experience, the sixth with land taxes and the seventh with lessons for South Africa.

Introduction

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.

The difference between wealth and income

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.

The various forms of wealth

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.

The difference between tax on wealth, tax on wealth transfers, tax on income from wealth and capital gains tax

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.

The difference between annual wealth taxes and a capital levy

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.

The forms of taxes on wealth and wealth transfers

1. Estate duty
   Estate duty is levied against the estate of a deceased individual before the transfer of any estate assets.
2. Transfer duty
   Transfer duty is a tax levied on the value of any real property acquired by any person by way of a transaction or in any other way.
3. Donations tax
   Donations tax is levied on the value of assets transferred by donation. It is most often levied against the donor but if the donor fails to pay the, the donee may become liable. Donations are the form of wealth transfer are likely to be tax deductible.
4. Gift tax
   Gift tax is levied on the value of assets transferred by an individual (during his/her lifetime/inter vivo) or entity to another individual or entity (excluding charities). The individual or entity making the transfer receives either no remuneration or remuneration below the asset’s market value. Gift tax can be levied against the person or entity giving the gift or the receiver of the gift.  Gifts are generally taxed at a higher rate than donations and less likely to be tax deductible.
5. Property rates
   Property rates are levied on the value of the real property which includes land, buildings or other immovable improvements to the land which increase the value of the real estate. The tax is often assessed by local or municipal governments and mainly used by municipalities for repairing roads, building schools, or other similar services.
6. Taxes based on an annual return on assets
   Taxes based on an annual return on taxes are levied on any unrealised net asset returns for the financial year. Asset returns that are realised are levied as CGT.
7. Inheritance or estate tax
   Inheritance or estate tax is levied on the value of assets transferred by an individual upon death (testamentary transfer) via his/her estate to another individual or entity (excluding charities).  Inheritance tax can be levied against the estate or the heir.

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