Abstract
M.B.A.
Capital gains taxation has been a hotly debated topic in South Africa for a number of years.
The Franzsen Commission recommended its introduction in the late 1960's. When the
Minister of Finance announced the introduction of CGT in the 2000 budget speech as part of a wider tax reform, there was widespread opposition to the introduction of CGT. The study attempts to gain an understanding of the introduction of CGT in order to determine its potential effects. This research study looks at both sides of the arguments, that is, the issues raised in favour for the introduction of CGT as well as the issues raised against the
introduction of CGT.
This research study is of an exploratory nature, made up of two sections. The first section is a quantitative analysis of the literature reviewed in terms of the theories of taxation, the
main arguments in favour and against the introduction of CGT, and finally an international
comparison of CGT was conducted. The second section was conducted on taxpayers; to
gauge their opinions with regards to CGT in order to collaborate the findings to the literature reviewed.
The reasons for the introduction of CGT as stated in the 2001 budget speech:
CGT will enhance the efficiency of the income tax system by reducing the incentive to
convert ordinary income into tax-free capital income.
The equity of the tax system will be improved by ensuring that taxpayers with similar
income levels will bear a similar burden of taxation regardless of the form in which
income is received.
Additional revenue will be collected through CGT directly and indirectly through the
enhanced efficiency of the overall system. SARS estimates that, when fully operational,
CGT can raise an additional R1-2b. From the direct revenue, as well as the indirect
effect that more income tax will be collected, the introduction of CGT will support the
V government's overall tax reform policy of broadening the tax base and reducing the
rates of income tax.
The reduction of distortions of real economic activity so that risks capital is allocated
more efficiently through rules, which permit the offsetting of capital losses.
In summary the reasons for opposing the introduction of CGT:
The SA Revenue Service already has laws to prevent abuse of capital profit.
Research has shown that CGT is not international best practice, though it may be
common in developed countries. Even Federal Reserve chairman Alan Greenspan is on
record as saying that CGT goes contrary to the promotion of enterprise and the best rate
would be "zero". Most developed countries would like to dump it.
For SA to support CGT because it is widely applied in developed countries is unrealistic.
We need to note what developing countries are doing. None of those which are rapidi .y
industrialising with whom we have to compete for scarce capital have CGT.
CGT will harm Trade & Industry Minister Alec Erwin's efforts to put into place
incentives to woo investors.
The potential effects of CGT are wide and far- reaching. Some of the common potential
effects raised in the debates concerns the following: economic growth, investments, savings, risk taking, entrepreneurship and the lock-in effects.
This research findings concludes that CGT would hinder economic growth and reduce the
rate of personal savings, although the findings also suggest that the introduction of CGT
would not deter foreign investors from investing in South Africa.