A summary of this committee meeting is not yet available.
FINANCE PORTFOLIO & SELECT COMMITTEE: JOINT MEETING
1 February 2001
DRAFT TAXATION LAWS AMENDMENT BILL: HEARINGS
Chairperson: Ms. B. Hogan
Documents handed out:
National Treasury slide presentation
Grant Thornton Kessel Feinstein submission
Chamber of Mines submission
The National Treasury spoke to issues that had recurred in the submissions made to Parliament concerning the introduction of Capital Gains Tax. They explained their rationale for taxing capital gains tax, its structure, how it will affect economic activity as well as looking at the advantages and disadvantages of inflation indexing.
Grant Thornton Kessel Feinstein recommended that Capital Gains Tax should not be passed by Parliament. They pointed out that since only 25 to 50 percent of the gain is subject to tax, the incentive to convert income into capital as a tax avoidance measure remains as strong as ever. He stressed on the point that although private sector consultants such as himself ought to be receptive of new tax legislation, considering the new opportunities to charge fees to their clients, the private sector tax consultants are adamant that capital gains tax is not appropriate for South Africa
The Chamber of Mines argued against capital gains tax (CGT), saying that South Africa, as an emerging market, has low levels of savings and economic growth that CGT would undermine. It argued that the CGT harms low earners more than high earners and has a negative effect on venture capital and small business. The Chamber asserted that other countries are either not introducing CGT at all, or are reviewing existing CGT policies.
Mr Martin Groete addressed the following issues:
Rationale For Taxing Capital Gains Tax In South Africa
There are fundamental structural weaknesses in South Africa’s tax system. The current, often distorted composition of national tax revenue indicated inequity. Capital gains tax (CGT) will eliminate tax incentives. Tax arbitrage opportunities would be minimized over time as would tax avoidance practices in the corporate sector. CGT would widen the income tax base, secure the existing base by limiting tax avoidance activities, improve equity and reduce investment distortions. Mr Groete indicated that his office has received the support of the International Monetary Fund (IMF) regarding the extension of the tax base.
International trends in taxing on the basis of the comprehensive income concept
A majority of tax jurisdictions accept the "comprehensive income" concept as the ideal tax base. It means that the total sum of all revenue streams should be included in the income tax base as it constitutes increases in the purchasing power of the taxpayer. Both developed and developing countries have introduced CGT systems:
- In Africa, 68% of the countries have capital gains tax provisions.
- In Asia and Asian Pacific Region, only 21 out of 46 countries have no capital gains tax provisions, 54% elected to tax capital gains but sometimes on only a limited asset class, such as real property (i.e. fixed assets).
- In the Americas, only 2 countries out of 19 jurisdictions have excluded capital gains provisions.
- In the Caribbean & Middle East, 12 out of 22 jurisdictions opted against the introduction of capital gains tax provisions.
- In Europe, 31 jurisdictions tax capital gains. Scandinavian countries have brought down their corporate tax rate to 28%.
Capital Gains And Tax Equity
Capital gains legislation will give effect to horizontal and vertical equity principles. Horizontal equity stipulates that individuals in similar economic circumstances should bear similar tax burdens regardless of the form the accretion of economic power takes. Vertical equity demands that taxpayers with a greater ability to pay taxes should bear a greater burden of taxation. The high level of economic inequality in South Africa has meant that the introduction of capital gains is absolutely necessary.
Capital gains and economic efficiency
Excluding capital gains from the income tax base is a structural weakness in the income tax system which leads to tax avoidance and the misallocation of productive investment resources. The absence of CGT makes it easier for taxpayers to convert ordinary taxable income into tax-free capital gains – hence its introduction was indispensable. It was stressed that CGT will improve the allocation of investment funds.
Capital gains tax and simplicity
Mr Groete indicated that the contrary argument against CGT was that given restricted financial resources it would be difficult to enforce or implement capital gains tax. However, he suggested that given the high level of income inequality in South Africa, the inclusion of capital gains tax should be seen as absolutely necessary.
A tax system should not be overly difficult for the revenue authorities to administer nor impose onerous compliance burdens on the taxpayers. In South Africa, tax has become extremely complicated because a number of anti-avoidance provisions have been necessary in addressing tax avoidance schemes.
The capital vs revenue distinctions – could more certainty be created?
Mr Groete said a rule distinguishing between capital and revenue, is needed. He referred to the Katz Commission Report which noted that the capital gains debate involved two related issues, which are (a) whether capital gains should be taxed, and
(b) whether capital gains should be subject to the same rate of tax as ordinary revenue.
He reiterated the National Treasury’s stance, which provides that capital gains should ideally be taxed in full as a rand of gain is equal to any other rand of economic gain or accretion in revenue. He noted that preferential treatment of capital gains erodes the redistributive impact of a progressive income tax system and, further, that preferential treatment of these gains is a primary reason for the complexities in any income tax system as anti-avoidance rules need to be drafted.
More importantly, National Treasury is concerned that the present distinction between capital gains versus ordinary revenue makes little economic sense. The distinction between capital gains and ordinary revenue has no real economic rationale. It does not matter, as case law suggests, that the intention of the taxpayer should be central to the inquiry.
The Structure Of Proposed Capital Gains Tax
Mr Groete suggested that in an ideal and comprehensive tax system, capital gains should be taxed fully as other forms of income or profits. Furthermore, any preferential treatment of capital gains will still create the same opportunities for tax arbitrage and avoidance which will be fully exploited by the well-advised and wealthy taxpayers.
The structure of the proposed capital gains tax will also trigger a constant design of new anti-avoidance measures, adding to the complexity of the current draft legislation. This is an unavoidable trade-off which most jurisdictions have to make. In addition, he said that National Treasury would like to reiterate its policy preference for minimal use of tax incentives and overall reduction of income tax as it reduces distortions and fraudulent tax practices.
Capital Gains Tax And Economic Activity
Critics of CGT have often suggested that taxing capital gains will undermine economic efficiency and have a deleterious effect on South Africa’s economic performance. However, international experience has suggested that the introduction of CGT will not impact negatively on economic growth, and that the majority of the economies with robust growth performances tax capital gains.
Capital gains tax and saving
Before the introduction of capital gains tax, saving in South Africa declined from 27.1% of GDP (1979 to 1984) to 16.1% of GDP (1994 to 1998). International experience has revealed that the introduction of CGT should not aggravate this trend. In fact, the absence of CGT in the past does not seem to have influenced the level of saving much, if one considers that South Africa’s saving rate is lower than many countries that do have taxes on capital gains. Furthermore, OECD studies prove that the effect of taxation on household saving is ambiguous due to offsetting income and substitution effects.
Capital gains tax, investments and economic growth
The impact of CGT on investments and economic growth must be analyzed in three steps:
- The effect of capital gains tax on the cost of capital
- The elasticity of investment spending with respect to changes in the cost of capital
- The effect of investment on economic growth.
Further, he illustrated that the user cost of capital has two components:
The economic depreciation rate of the tangible capital asset, and
The financial (opportunity) cost of investment, which measures the financial return foregone by sinking money into project rather than investing it in money or capital markets.
Capital gains tax and risk-taking
CGT is often argued to limit risk taking and entreprenuership. A tax on capital gains lowers the after tax return from a high-risk project. However, by allowing deductions for capital losses, the potential loss for the project is reduced, which reduces the variability of returns from any high risk investment project, making the investments more attractive. The ultimate effects of CGT on risk taking depends on:
- the risk profile of the investment
- the degree of risk aversion by the investor, and finally
- the extent of the investor’s portfolio diversifications for offsetting capital losses against other taxable gains.
Capital Gains: Inflation Indexing – Focus
Inflation can affect virtually every aspect of the tax system, including the personal and corporate tax system. Inflation can affect tax liability in the following manner:
- by eroding the amounts expressed in national currency, e.g. depreciation allowances based on historical cost.
- by eroding the value of tax obligations if there is a delay between when the "tax event" occurs and when payment is made.
- by causing mis-measurement of the tax-base.
The methods of adjusting for inflation are the following:
- global adjustment method where the effects of inflation are comprehensively removed from the tax system.
- partial adjustment method which involves adjusting for inflation with respect to particular items of income or deduction by indexing the base cost of capital items.
- an ad hoc adjustment method, such as the application of a lower rate of tax and applying a partial exclusion.
The advantages of inflation indexing
If capital gains taxes are fully indexed for inflation, there will be consistency between the effective CGT rate and the statutory tax rate. Further, the absence of indexation could distort investment decisions when inflationary gains can potentially be subject to taxation.
The drawbacks of indexing capital gains tax
In respect of investments, there can be the creation of anomalies and distortions between gains and other forms of income. Additionally, loss limitation rules can also impact on the efficiency and effectiveness of indexation of capital gains tax.
In respect of equity, it was noted that if only capital gains are indexed, investors receiving capital gain income would be advantaged over investors receiving interest income or other fixed income streams. Further, capital gains income accrues disproportionately to wealthier members of society who would also benefit more than others do if the capital gain income they receive is fully indexed, while other capital income is not.
In respect to administrative complexity, if an asset is built up over a period of time, such as unit trusts or shares, this normally involve extensive calculations, especially when the asset is sold. Another problem lies in the question of what index to use for inflation adjustment purposes. Others have argued that using a general inflation index for all assets would lead to arbitrariness, unless the inflation related increase in the base cost of the asset on which the capital gain is realised is the same as the index chosen.
Summarizing the discussion of the effective CGT tax rate as impacted upon by inflation.
- Effective tax rate depends on real rate of return, inflation rate and holding period for which the asset is held.
- Given low proposed inclusion rate, only moderate real rates of return are required at moderate inflation of 5%.
- Effective tax rate falls as holding period increases.
- Realisation basis of taxation confers significant deferral benefits to taxpayers.
Survey of 40 countries: Do they have CGT? Do they index?
- 10 out of 31 developing countries were found to have some form of inflation indexation in their respective CGT regimes.
- Argentina and Brazil have since removed indexation as have the United Kingdom, Spain and Australia.
- Majority of countries that indexed CGT have experienced excessive inflation. The average for Brazil & Argentina (1970 and 1999) was 612% and 317% respectively.
South Africa’s average 1970and 1999 CPI is 11.4%, for 1993-99 it is 7.9%.
Mr Andrew indicated that South Africa’s yield for companies is low at 10% compared to 13% overseas. He asked if is it an avoidance issue or the state of the economy? Further South Africa is not getting much needed investment. There is a lack of appreciation of things that can affect investment decision making such as crime, unemployment etc. He commented that South Africa must not be casual about these issues not being important in the list of factors.
He noted that Mr Grote had said that National Treasury wishes to increase the inclusion rate. The justification for not indexing is that there is a low inclusion rate. Mr Andrew felt that this would affect investment planning.
In relation to tax complexity, Mr Andrew said that while SARS has made great strides, they still have many things to accomplish. His argument was that capital gains tax is going to increase the complexities of our tax system. His concern was for the medium and short-term businesses.
On horizontal equity and the issue of indexing, Mr Andrew asked if there is any tax on interest? Is there a reason why net interest income of an individual should not be treated as a capital gain? Would it not encourage equity?
In reply to the question about lower yields on corporate rates, Mr Grote said that there are many factors such as market forces that affect corporate rates. It was not easy to establish which factor it is exactly. Some sectors have used more incentives than others. He further said that corporate companies can afford experts. This is why the corporate rate has come down from 17% to 10%. In Japan they have standardized corporate rates at 19%. He indicated that a lower corporate rate will encourage investment.
Mr Grote commented that, "our environment has caused us to be more cautious". The government’s aim is to have a broader tax base and lower tax rates. However the environment will be the deciding factor. "We cannot specifically state that the rates will not be increased in the future".
On tax complexity, Mr Tomasek (SARS) said that in order to get many people a small gain out of the system, SARS has kept capital gains as simple as possible and, that there was a need to look at the sections of the public.
With regard to equity and business distortions, Mr Tomasek said that on the payment side, interest is still claimed as a deduction at present and that this distortion is still being exploited.
Mr Engel (SARS) stated that foreign investors are not taxed on CGT in this country and that foreign investment can be attracted by lowering the tax rate. In response to the question on why interest should not be treated as capital, he said that interest is an annual income/accrual and that a capital gain is only once off. Interest is never treated as capital in any system. It is consumption and SARS is trying to get away from consumption form of taxation.
Mr Durr asked if the world was not moving towards consumption taxes? We do compare to the rest of the world. All these countries have different exclusions – so are they not comparable? He commented that the USA does not levy CGT on death and that it is moving away from Estate Duty as well. He asked if National Treasury had looked at when jurisdictions apply CGT and avoided double taxation and cascading?
Mr Grote replied that they’re not saying that they’re moving away from a broad tax, broad based consumption base of taxation, given the skewed income distribution in our country. On the second question, he said that when looking at other jurisdictions they must look at exclusions. Statistics are clear on central government and that there was a lack, however, on local and state government. Their policy is that they do not want to have double taxation.
Mr Tomasek (SARS) noted that if you reduce estate duty to compensate for double taxation, the individual structures of the taxpayer need to be amended. So the best option is to decrease estate duty.
Mr Engel (SARS) commented that income tax takes care of annual accretions. Estate duty also takes care of annual accretions and they cannot prevent these accretions. International companies do not necessarily have the right options. They have reasons for these choices. We must look at it in our own context.
Ms Taljaard (DP) asked if National Treasury have looked at the overall tax rate structure.
Mr Grote replied that RSA is the chair on the SADC committee. "We are required to hand in a memo in 2004 for the coalition on indirect taxes". "We can co-ordinate the direct tax system but it is impossible to co-ordinate the indirect tax system". South Africa was called in with other countries to eradicate problems relating to the preferent schemes in tax havens. "What is important to us is to create incentives for investment". SADC members are trying to manage disruptive forces and it is difficult to co-ordinate the rate of corporate companies.
Dr Koornhof (UDM) asked if small gains must be kicked out of the system, and how will the average man be affected by CGT? Is there a way for a person to invest his savings to get a capital gain in the future?
The Chairperson pointed out that there is an exclusion rate of R10 000 and that many people state that this is low.
Mr Grote replied that they have used R10 000 only initially. "Once the system is properly in place then we can reduce the exclusion rate".
In answer to Dr Koornhof question on what the IMF’s conclusion is of the exclusion rate, Mr Grote answered that the IMF wanted it to be R20 000. Mr Tomasek added that the IMF felt that the exclusion rates for personal use assets are too wide. The IMF wanted the corporate exclusion rate also to be higher. There are various trade offs.
The Chairperson noted that Rhodes University had a problem with the "Primary Residence Exclusion" and with discrimination. "Have you considered this?" "Is it a life time exclusion?"
Mr Tomasek answered that Canada did have the exclusion figure but had later done away with it. Mr Engel added that the problem was how could one do a lifetime audit? It was too difficult to audit.
Dr Rabie (NNP) asked is estate duty the final tax that one pays or is there a death duty?
Mr Grote answered that one is a tax on income which is CGT and another is a tax on wealth, which is estate duty.
Grant Thornton Kessel Feinstein
Mr Mazansky referred to the justification by the Ministry of Finance that Capital Gains Tax (CGT) is an effective anti-tax avoidance measure. This he says is correct in theory, however, such a result is only possible where the effective rate of CGT is the same as the rate of income tax that would otherwise have been payable. Since only 25 to 50 percent of the gain is subject to tax, the incentive to convert income into capital remains as strong as ever. Acknowledging, from a practical point of view, that it is extremely unlikely that Parliament would refuse to pass the CGT legislation, Mr Mazansky proceeded with issues relating to the legislation itself.
1.Timing of Implementation
Mr Mazansky indicated that the task given to the South African Revenue Services (SARS) was a "Herculean" one. The country as a whole would have a short period of time to deal with all this change. Furthermore the final version of the legislation is likely to be made public and passed by Parliament a mere three to four weeks before its implementation date. He expressed concern about this and submitted that this was unreasonable. He suggested that it would be unreasonable to expect taxpayers to adjust their accounting systems and records in such a short period of time. Thus he recommended that the implementation date should be delayed.
2.The threat of economic double taxation
Mr Mazansky referred to deep corporate structures, and noted that there was a strong possibility that the same gain will be subject to tax more than once, from an economic point of view. He urged that provisions should be written into the legislation to prevent this cascading of taxes, in a similar way in which a cascading secondary tax on companies (STC) is prevented as a dividend passes up through a chain of companies. If such an exemption is not granted, the problem of such a cascade is very real in South Africa, as many of the groups have deep structures and pyramid arrangements. The legislation to some extent, caters for this, however, it is not adequate. He refers to Clause 24 of the Bill that amends Section 39 of the Taxation Laws Amendment Act, 1994 to recognize that in a group rationalization any movement of assets within the group will not give rise to CGT. He points out two deficiencies in the concession:
2.1 In order to qualify for rationalization under Section 39, its main purpose must be to obtain commercial advantage and not for tax avoidance purposes. He strongly believes that this should apply even if the sole purpose of the rationalization is to make the structure more efficient as a result of the introduction of CGT. If this is seen as too broad, he opines that one can control this by giving a restricted period for such applications.
2.2 Section 39 is only available where the holding company is listed on the Stock Exchange or it has a fixed capital of more than R75 million. The Bill reduces the cap from R75 million to R50 million. This is prejudicial towards Small to Medium Businesses (SMB). Many companies would not be able to take steps that their larger counterparts could take to avoid the unforeseen consequences of tax. Therefore access to Section 39 should be made universal.
3. Applicability to non-residents
He said that the SARS contention that CGT is not payable by non-residents is not correct as it is payable in the case of immovable property. He believes this should be reconsidered as he does not see the logic in exempting everything other than immovable property. There were inadequate mechanisms to ensure that the tax is collected from non-residents when their fixed property in South Africa is sold. His view is that non-residents should be exempt from the tax on fixed property. However, if it is imperative to include it, then the mechanisms for collection of that tax and the policing of the system have to exist.
4. Residential accommodation
The Draft Bill provides that the exemption portion will not exceed R1 million. Mr Mazansky stated that many people spend numerous years in one house and if on the sale of the house, a profit of more than a million would be made, the owner will be at a disadvantage as there would be less money to reinvest. Most people do not purchase houses with cash but require mortgage bond finance. He suggested that the amount of R1 million be increased significantly and the cap be increased each year by the rate of inflation. Borrowing costs on a mortgage bond to finance the primary residence should be allowed to increase the base cost. Although legally it is clear that interest does not form part of the cost of an asset, from an economic point of view, borrowing costs should be included.
5. Donations to public benefit organisations
Item 50 of Schedule 8 states that a capital gain arising from the donation of an asset to a Public Benefit Organisation (PBO) will only be disregarded if the donation itself would qualify as a tax deduction under Section 18A. He suggested that this could lead to tax avoidance as wealthy people could donate large sums of money to PBOs and instead of realising their assets they would donate the assets to the PBO as well, thus avoid paying CGT.
At present the legislation does not exempt the sales of assets within a group. Mr Mazansky said that it is very common to transfer assets within a group at cost. This is no longer possible, in terms of Item 26 of Schedule 8, as sales between connected persons are deemed to be at market value. This triggers CGT on the seller.
7. Attribution of gains
Referring to Items 56 to 59 of Schedule 8, he suggested that the effect of causing the capital gain of one person to be taxed in the hand of another, might result in unnecessary prejudice which he believes is not the intention. Items 56 to 59 have their counterparts in respect of income tax in Section 7 of the Act and they should apply only to the extent that Section 7 had not applied. Both were not intended to apply to the same donation. However, there was nothing in the legislation that creates any hierarchy or exclusion.
8. Estate duty
He stated that it was time to repeal estate duty legislation. Estate duty has appeal as a social tax. However, given that CGT will be payable on death, the social element of the tax is present and therefore CGT has supplanted estate duty as a social tax.
Mr K Andrew (DP) referred to Mr Mazansky’s description of CGT as an inefficient tax which will adversely affect the economy (paragraph 1.8 of the submission). Mr Andrew said that for him this was ‘’the crux of the problem’’ but those in favour of CGT simply refuted the point. He asked for a comment.
Mr Mazansky replied that he did not have the capacity to research this issue extensively. He could only comment based on his knowledge as an accountant and on what he has read and encountered. Having said this, it appears to him that where CGT was reduced in other countries the market was given a stimulus.
Mr Andrew also asked which additional administrative burdens (such as record-keeping) would be placed on SMEs (small and medium enterprises) in order for them to comply with CGT.
Mr Mazansky responded that if one was talking about a small corner shop then CGT would not impose too much of an extra burden. However in terms of the DTI (Department of Trade and Industry) definition, a medium business could be quite sizeable. In such cases the complexities will grow and it could become a burden. The extent of the burden will also be determined by what is going to be in the regulations.
Co-Chairperson D Mahlangu (ANC, Gauteng) asked whether the records held by portfolio managers would be sufficient for providing the relevant information to comply with CGT requirements.
Mr Mazansky replied that portfolio managers do possess such information but that does not mean that they keep it in the particular format in which the Commission may require it. Further they may not have the information readily available, they may have to go to lengths to ‘’dig it up’’. He noted that Clause 70B of the Bill calls for extensive detail to be submitted to SARS. This information will have to be tabulated. For most people, providing the information should not be a problem but for asset managers in companies it could be a huge problem.
Professor Engel (National Treasury) made the following comments on points made by Mr Mazansky during his submission:
- Cascading occurs when a corporate entity is subjected to tax 3 or 4 times. In South Africa corporate entities are treated as a single entity. This is why a double tax occurs. [Subsidiaries are treated as separate legal entities therefore they get taxed separately. The result is double taxation]. If the company is multi-tiered then it gets group relief [because subsidiaries are not taxed separately]. The price of being a separate legal person is double tax while the benefit which comes with being a separate legal person is that risk is limited. Rationalisation provisions could relax the cascading effect. The Treasury is looking into this.
- Real estate which is sold at a profit is a capital gain. Foreigners will be taxed on this. The sale of real estate will be taxed but the sale of shares (which is the bulk) will be exempt. The decision to do this is a policy call. He noted that there has to be a withholding mechanism.
- CGT should not have a major impact on SMEs. CGT is only triggered upon the sale of the business and they do not have so much goodwill that they will generate CGT. Hopefully the capital gain that they generate will fall under the exclusion.
Mr Andrew asked Mr Mazansky if he thought that the method of valuing a quoted share portfolio (based on the closing prices of the day before) was ‘’the most equitable’’ method.
Mr Mazansky replied that the method was convenient. However it should not be the only way to determine a valuation. An alternative should also be provided for.
Mr Andrew was concerned that there were clauses in the Bill that still had to be decided upon. He asked SARS when those clauses would be available so that there could be adequate examination of them.
SARS indicated that this was a difficult question to answer. They also noted that a response document would be provided after the close of the public hearings.
Chamber of Mines
Mr Baxter said that the Committee was aware that the Katz Commission’s report had recommended that only when the capacity problem at SARS was solved, should the CGT issue be revisited. In addition the Committee was aware that the Commonwealth Association of Tax Administrators was reluctant to advocate a CGT system for countries that had not already instituted it. The Chamber of Mines believes this is sufficient reason not to implement CGT.
The government’s primary reasons for introducing the CGT is to promote vertical and horizontal equity by preventing sophisticated taxpayers from converting otherwise taxable income into tax-free capital gains; and to conform to international taxation practice. With this underlined, the Chamber’s submission looked at the following questions:
- Should the tax policy be based on "equity issues" or on economic growth, job creation and increasing savings and investment?
- Does CGT actually promote equity?
- Who really bears the costs of CGT?
- What are the global CGT trends?
Mr Baxter stated that South Africa was an emerging market with low savings levels that could not trigger or sustain higher economic growth rates. It said that even with the sound macroeconomic policies in the new democratic era, low levels of domestic savings and investment simply cannot provide for capital formation that would result in a growth rate beyond four percent per annum. There is much research evidence that CGT undermines savings, capital formation
The Chamber of Mines said that CGT is not the correct instrument to achieve tax equity. Evidence from research suggests that the real burden of CGT falls on those who aspire to wealth, not on those who have it. The middle-to-lower income earner bears the costs of CGT and the taxation of inflation gains hurts low-income earners the most.
The Chamber said that many respected economists, such as Alan Greenspan, maintain that having no capital gains tax at all would be optimal for economic growth. It argued that completely eliminating the CGT would be fair and most efficient for the economy because the CGT imposes a multiple tax on savings and investment. By punishing such productive activity, the CGT stifles capital formation, an essential force behind economic expansion.
The Chamber said that CGT has a negative effect on venture capital and small business. Further CGT interferes with the efficient reallocation of capital by forcing people, especially those with small returns on their assets, to defer realising a capital gain that locks capital in assets. The Chamber asserted that economic growth is paramount to South Africa’s future success and the introduction of CGT will undermine this objective.
Government’s justification for the introduction of the CGT was that South Africa would be in line with international taxation practice. However global trends show that there have been significant reductions in CGT rates in the USA, Australia, Canada and UK. New Zealand, Malaysia and the Netherlands decided not to introduce CGT because compliance monitoring was too difficult and revenues too low. In Argentina, Belgium, Hong Kong and Singapore personal capital gains are not taxed.
In conclusion the Chamber said that even if the government’s fundamental premise of taxation policy was that of tax equity, the introduction of CGT would not achieve this end.
Mr B Nair (ANC) commented that despite Greenspan’s opposition to CGT, the US economy experienced growth. The introduction of CGT in Canada unlocked many resources that had previously been locked. The same, he said, will happen here in South Africa.
Mr N Nene (ANC) asked what effect CGT will have on the mining sector. Further how does the Chamber justify its claim that the CGT will harm low income earners in South Africa when this was not the case in the USA?
Mr Baxter said that in the United States in 1987 cuts in CGT rates were followed by a rise of five percent in equity growth. With mines that invest in risk undertakings, he was not sure of the effect but mines were playing a positive role in the country’s economic growth. He said there were experts working on the impact CGT may have on the mines and asked to defer the answer on the question of mines for later. On low income earners he said a cut in CGT will lower the Gini coefficient in South Africa which at present was standing at 0.58.
Mr Grote (National Treasury) commented on the link between CGT and savings and said that one could come to a different interpretation and say that low savings are due to the lack of a CGT. Prof Engels (National Treasury) commented on the dangers of selective quoting (with reference to Mr Baxter’s quotes of economists and world leaders). He also corrected Mr Baxter, saying that economic growth in the USA took off in 1993 and not in 1987.
National Treasury did not agree that low income earners bore the burden of CGT. Mr Grote pointed out that in the US the vast pool of low income earners generated only 15 percent while high income earners generated over 60 percent of tax.
The meeting was adjourned.