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South African Government Has Capital Gains Tax In Sight

by Amanda Banks,, London

18 May 2001

The South African National Assembly gave the thumbs up to the Taxation Laws Amendment Bill this week, bringing the capital gains tax (CGT) one step closer to fruition. Due to take effect on October 1, 2001, the Bill has been the source of a great deal of controversy in recent months.

Tax expert, Professor Kevin Mitchell, has claimed that the tax will result in a huge burden for both taxpayers and the South African Revenue Service (SARS). He argued: 'Despite the exclusions which include many personal-use assets, the first R1m of a primary residence and an annual exclusion of R10 000, the Bill will nevertheless affect most taxpayers. It would have been far simpler if the legislation only applied to assets acquired after 1 October 2001, as the value of the asset then acquired would be known and it would not be necessary to embark on a valuation exercise.'

The South African Chamber Of Business (Sacob) has argued that the tax will deter direct investment into the country, claiming the tax 'has a notorious reputation for its low yield and high opportunity costs arising from distortions it creates in the economy ... [it is] a notoriously inefficient generator of net revenue. Capital gains tax has become a discredited tax, both as a revenue-collection mechanism and as an economic instrument. Many countries would not introduce [it] if they had the luxury of tax redesign.' Sacob, representing over 40,000 South African businesses, also predicted that the tax is likely to result in a 'locking-in effect' which means that the realisation of assets would be held off indefinitely thus affecting the flow of capital and reducing the country's fiscal revenue.

In an attempt to cope with this issue, the government decided to delay the introduction of the CGT from April to October to allow the country's financial institutions time to prepare their systems and the Association of Unit Trusts played its part by launching a successful campaign on behalf of investors to ensure that they would only have to pay CGT at the point of realisation of their investments.

Those in favour of the CGT were - surprise, surprise - the International Monetary Fund (IMF) and the South African government. Earlier this year the IMF applauded the decision to introduce the tax in the anticipation that it would help eliminate tax avoidance strategies, promote better equity and make certain that the most wealthy people paid their fair share of taxes. And Ms Barbara Hogan, chairman of the portfolio committee on finance, told the National Assembly that although the tax would result in a further administrative burden for SARS and the taxpayers, it was 'absolutely justifiable' for reasons of fairness and would bring South Africa's taxation system into line with most other countries.


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