South Africa has suffered a significant blow to its tax revenue, with the South African Revenue Service (SARS) confirming a loss of R3 billion in collectable taxes. This financial gap results from 38,000 taxpayers formally ending their tax residency in the country.
The recently released 2024 annual tax statistics reveal that these individuals, many of whom are high-income earners, declared their non-residency status, limiting SARS’s ability to collect income tax from them. Analyzing their taxable income and liabilities over the past decade underscores the extent of the revenue shortfall tied to these shifts in tax residency.
The Role of Taxes in South Africa’s Economy
South Africa, like most nations, relies heavily on taxes to fund its public services, infrastructure, and social programs. With taxation forming the backbone of government operations, any reduction in the tax base poses challenges to national development.
Data from the Organisation for Economic Co-operation and Development (OECD) highlights South Africa’s relatively high tax-to-GDP ratio. In 2022, the country’s ratio stood at 27.1%, surpassing the African average of 16.0% by over 11 percentage points. Notably, South Africa’s ratio has risen steadily from 24.8% in 2013, emphasizing the growing importance of taxes to the nation’s financial stability.
Personal income tax (PIT) remains the largest contributor to South Africa’s revenue, reflecting the progressive nature of the country’s tax system. Alongside corporate income tax (CIT) and value-added tax (VAT), PIT plays a critical role in ensuring the country meets its financial obligations.
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The Link Between Tax Residency and Revenue Declines
Tax residency differs from citizenship, permanent residence, or nationality. While some South Africans may live abroad, they remain liable for taxes on South African-sourced income unless they formally declare non-residency to SARS. This formal declaration is critical for taxpayers seeking to end their obligations under South African tax law.
When high-income earners cut ties with the tax system, the impact on revenue is profound. SARS data from 2014 indicates that 44,693 taxpayers declared taxable income amounting to R21.6 billion, generating R6.2 billion in taxes. By 2023, the number of taxpayers assessed had fallen to 37,584, with taxable income dropping to R9.9 billion. This shift caused tax payable to decline by nearly half, from R6.2 billion to R3.2 billion.
While some experts argue that the number of taxpayers leaving the system has slowed, largely because most wealthy individuals have already severed their ties, younger and middle-class taxpayers are now taking similar steps. This trend could further strain SARS’s ability to maintain a sustainable tax base.
Warnings of a Shrinking Tax Base
SARS Commissioner Edward Kieswetter recently acknowledged the emigration of thousands of taxpayers, noting that over 6,000 individuals left South Africa in 2023 alone. He cautioned against the long-term risks of a shrinking tax base, emphasizing that fewer taxpayers could jeopardize the country’s ability to fund critical programs.
Although non-residents are still required to pay taxes on South African-sourced income, the shift in tax residency represents a permanent loss of personal income tax contributions. For a country heavily reliant on this revenue stream, maintaining a stable tax base is essential for economic growth and stability.
As the trend of tax emigration continues, South Africa faces a pressing need to address the root causes driving individuals to cut ties with SARS, ensuring the country’s fiscal future remains secure.
