National Treasury and South African Revenue Services briefed the Committee on the Taxation Laws Amendment Bill 2009. The introductory remarks covered the full process of the Bills and tax policy objectives. In the review of the process of the Bills, particular mention was made of the dates for public hearings, being 24 June 2009 and the 26 June deadline for comments.
The South African Revenue Services (SARS) and National Treasury's tax proposals were outlined in the categories of rates and thresholds, individuals, businesses, international, special entities and indirect taxes. Also included were other tax proposals on the electricity levy implementation, the delay in implementation of Mineral and Petroleum Royalties Act, the general fuel levy, excise duties on tobacco and alcoholic beverages, the introduction of a tax on incandescent light bulbs and ad valorem duties on motor vehicles.
Tax revenue trends revealed the impact of the global economic slowdown. Early indications at the end of May 2009 were that collection was already down by R8 billion on the expected revenue for 2009/10. Given the much steeper slowdown in economic growth in this fiscal year, actual tax revenues would be significantly lower than the February Budget projections.
Proposals under the heading of thresholds covered medical scheme contributions, tax-free interest and provisional tax for taxpayers over 65. Under travel allowances, the deemed kilometre method would be repealed. Proposals regarding pre-retirement lump sum benefits and post-retirement lump sum benefits were discussed. Minor beneficiary funds had originally been a response to the Fidentia scandal and improvements in the treatment of these funds were discussed. The simplification of learnership allowances was noted, as were the proposals on portable spousal reductions. Several greening initiatives were outlined and included proposals on certified emissions reductions, claims for energy efficiency and adjustments in the ad valorem emissions tax rate on motor vehicles. The changes in treatment of dividends tax referred to a 10% rate for shareholders, pre-sale dividend stripping, deemed dividends and share distributions.
The Committee was briefed on the arrangements around international sub-marine telecommunications cables, improvements on leased government land and the extension of tax-free liquidation, winding up or de-registration of exclusive residence companies.
The presenters, turning to the issue of corporates, outlined the proposals on shelf companies, Venture Capital Companies (VCCs), Controlled Foreign Companies (CFCs) and foreign portfolio dividends. Several changes were made to support Public Benefit Organisations (PBOs). They also addressed the refinement of film incentives and the treatment of employees' tax and provisional tax, and alignment of the Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF) contribution with employees' tax. Changes to the indirect tax treatment of share block companies interest were presented.
With regard to internal administration of SARS, the proposal was announced to use biometric information for Value Added Tax (VAT) registration to combat fraud. SARS also proposed changes to their treatment of interest, allocations to payments, settlement of debts, and additional powers for the Commissioner, regarding customs modernisation.
Members queried the exemption of agricultural trusts, the progress on the development of the funding sources for the proposed national health insurance (NHI) programme and the possibility of SARS operating under a more austere budget. They questioned the rationale for delaying the implementation of the Mineral and Petroleum Royalties Act, and the State learnership programme monitoring. Members expressed concern that refinement of film incentives disadvantaged film artists. Although the SARS tax collection infrastructure was noted, the Committee felt that more could be done to improve tax and penalty collection. Members wondered about the availability of financial education to the more rural communities in South Africa and the progress made on Trade Test Centres in the provinces. An explanation on the difference in treatment between the initial cost and maintenance of the international telecommunications sub-marine cables was requested. Members asked, with reference to the land redistribution comments in the State of the Nation Address, how the proposals on the use of government land contributed to this aim. Members felt that pre-retirement withdrawals would be more appropriately dealt with on a case-by-case basis. Finally they asked how the Bill could be used in future to address the negative effects of the global economic crisis and the resulting recession in the South African economy, and whether there was a willingness on the part of the National Treasury and SARS to do this.
Taxation Laws Amendment Bill 2009: National Treasury (NT) and South African Revenue Services (SARS) briefing
Mr Ismail Momoniat, Deputy Director-General: Intergovernmental Relations, National Treasury, reported that the current Taxation Laws Amendment Bill (the Bill) being tabled gave effect to the proposals made in the 2009 Budget. All the proposals were also contained in Chapter 4 of the Budget Review - Annexure C.
The tax revenue trends revealed the impact of the global economic slowdown and South Africa's recession. Actual tax collected in 2008/9 was recorded at R625 billion, which was R16.9 billion below the original February 2008 projection. Early indications as at the end of May 2009 were that collection was already down by R8 billion on the expected revenue for 2009/10. Given the much steeper slowdown in economic growth in this fiscal year, actual tax revenues would be significantly lower than the February Budget projections.
Mr Cecil Morden, Chief Director: Economic Tax Analysis, National Treasury, reported that the changes in thresholds on tax-free interest were part of a policy to promote savings. This was a general increase in the tax-free interest ceiling with additional adjustments on foreign dividends and capital gains tax (CGT).
Mr Franz Tomasek, General Manager: Legislative Policy, South African Revenue Services (SARS) discussed the threshold on provisional tax for taxpayers over 65 years of age. This was aimed at reducing the paperwork for pensioners and the liability created on assessment.
Mr Morden noted that an important point on the threshold medical scheme contributions was the conversion of the deduction into a credit to provide better equity in terms of the deduction.
The concept of fringe benefit tax free medical scheme contributions would be removed.
He noted that the bulk of claims for travel allowance deductions were calculated on the deemed-kilometre method. This pointed to a problem in the system. In response National Treasury now proposed that the deemed kilometre method be repealed. This was a more equitable system for those who genuinely used their vehicles for business purposes.
Mr Keith Engel, Director: Legislative Oversight and Policy Co-ordination, National Treasury, discussed retirement savings, specifically pre-retirement lump sum benefits and post-retirement lump sum benefits. He pointed out that the post-retirement benefits were more generous compared to the rates on pre-retirement withdrawals. This was a method of mildly discouraging pre-retirement withdrawals. Other retirement issues discussed were the payout of employer pension surpluses and employer-provided post-retirement medical aid.
The proposal on beneficiary funds for minors was sparked by the Fidentia scandal, as a measure to protect minor beneficiaries and orphans. Subsequently a special fund was created under supervision of the Financial Services Board (FSB). To simplify administration, movement to the special fund would be taxed but the growth and the payout of those funds would be tax-free. The financial industry was on board with this change.
Mr Morden reported the simplification of learnership allowances. He also dealt with the change to the spouses’ deduction for estate duty purposes. In respect of environmental matters, the greening proposals were embodied in certified emissions reductions, claims for energy efficiency and adjustments in the ad valorem emissions tax rate on motor vehicles.
The points highlighted on the new dividends tax (STC conversion) were that a 10% tax rate would fall on shareholders, along with a number of exemptions, and the imposition of a withholding obligation on the company payer (or a regulated intermediary). The additional proposals on dividend tax covered pre-sale dividend stripping, deemed dividends and share distributions.
It was noted that “rollover treatment” for telecommunications licence conversion meant that the licence conversion was not taxable, and any gains or losses would be deferred until the sale of the new licence.
In relation to international sub-marine telecommunication cables, there had been a proposal for a 5% deduction (per annum) for the initial cost of acquiring the cable, and a 5% deduction (per annum) on the premium paid for an Indefeasible Rights of Use (IRU) contract.
The proposal for improvements on leased government land was designed to reduce avoidance schemes and remove a discouraging factor – the exempt-lessor prohibition - in private infrastructure development on municipal land.
There were also proposals around the extension of tax-free liquidation, winding up or de-registration of exclusive residence companies.
Mr Engel explained that shelf companies were a way of circumventing the Department of Trade and Industry (dti) company registration processes. As this created difficulties, there was therefore a new proposal that the anti-multiple shareholding prohibition would not apply during the period that a shelf company was inactive or dormant.
Mr Morden referred to Venture Capital Companies (VCC). Several proposals were made to remove some of the cumbersome aspects of the system
Mr Engel clarified that a Controlled Foreign Company (CFC) was a foreign subsidiary of a South African company, and the proposals here were aimed at balancing a reduction of the risks of avoidance and use of transfer pricing with also helping CFCs stay competitive. The conversion of the CFC ruling exemption covered the Clarification of Foreign Business Establishment definition and the merger of high-taxed CFC rulings into objective legislation.
The proposals on foreign portfolio dividends were aimed at equalising treatment for South African and foreign dividends. South African dividends would now be subject to tax and this tax would also apply to foreign dividends. This was done as the current situation created a preference for foreign shares over South African shares.
Mr Tomasek reported on the proposals for a tax exemption for Public Benefit Organisations (PBOs), such as Agricultural Trusts that performed transformation services for emerging farmers. An exemption would also apply to contributions made to the FSB Consumer Education Foundation. Retrospective approval for PBOs and clubs and the elimination of provisional tax for PBOs and clubs were also proposed.
The refinement of film incentives encompassed assistance to the dti film grants, in the form of a tax-free assignment to the film owner, and a 100% immediate write-off of legitimate film costs.
With regard to the indirect tax treatment of share block companies, SARS proposed that the definition of “property” in the Transfer Duty Act be expanded to include shares in a share block company.
In relation to interest, SARS proposed that interest would now be paid if the taxpayer was refunded as a result of an objection. The switch from the use of simple to the use of compound interest was proposed, as were new criteria for allocations to payments and changes to SARS' settlement procedure.
Changes were proposed to the treatment of employees' tax and provisional tax due to the concern that less sophisticated taxpayers may not always be able to accurately estimate their taxable income for the second provisional payment.
The proposal for the alignment of the Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF) contributions with employees' tax was discussed.
The use of biometric information, through fingerprint identification, was proposed to combat the high levels of fictitious persons applying for Value Added Tax (VAT) registration.
An amendment was proposed which sought to facilitate the implementation of SARS' customs modernisation by empowering the Commissioner to provide the necessary regulatory framework in certain circumstances.
Dr D George (DA) referred to the amendments for agricultural trusts, as set out in Slide 46, and asked if agricultural trusts that performed services other than those mentioned would also receive an exemption.
Mr Tomasek responded that this was activity-based. It was not a blanket exemption based on the type of entity, being an agricultural trust, but rather it was based on whether or not that entity provided transformation services to emerging farmers. The approach was that SARS would isolate some generic activities for exemption. As long as the entity carrying them out was non-profit and complied with certain fiduciary rules, then the exemption would apply.
Mr Engel added that the question was probably based on a fear that some agricultural trusts would no longer be eligible for the exemption. The reason some of them were not eligible previously was actually due to the activity covered in the proposal. The Agricultural Trusts had been consulted and were fully covered.
Dr George referred to the amendments on thresholds for medical scheme contributions. To pay for the proposed National Health Insurance (NHI) scheme, four funding sources had been identified. These were: to increase the health budget from the general tax revenue, the NHI payroll levy, public sector payments for public sector workers’ private medical schemes to be rerouted through the NHI, and removal of tax deductions for medical scheme contributions. It was apparent from slide 17 that the fourth issue was now being tackled. He queried the progress on the other funding sources.
Mr Momoniat replied that the thresholds were usually adjusted annually. This regarded the convergence with credit and was more of an administrative issue. There were no national health insurance issues that served as a motivation for any of the changes.
Dr George commented that SARS had mentioned that budgets were tight and that taxpayers had to pay or SARS would have to respond. He stated that taxpayers should also receive an efficient service from SARS in return, and that SARS should also find ways to operate under a more austere budget.
Mr Momoniat replied that there had been an investigation into the SARS budget and strategic plan. The National Treasury wanted SARS to be efficient, but needed to balance this against the risk of crippling SARS to the point where they were no longer able to collect revenue effectively.
Ms N Sibhidla (ANC) queried the rationale for delaying the implementation of the Mineral and Petroleum Royalties Act.
Mr Momoniat replied that National Treasury had noted the fall in commodity prices. Consequent to this, it was expected that mining profits would be down and that there would be job losses in the mining sector. The rationale was that relief could be given to the sector by not imposing the tax. This was SARS’s and National Treasury's contribution to save jobs.
Ms Sibhidla asked if there was monitoring of the learnership programmes to check if the companies that received the incentives did in fact transfer the necessary skills to the learners. This question arose out of a flood of complaints from dissatisfied learners.
Mr Morden replied that Ms Sibhidla was probably referring to internships, which were informal arrangements. Learnerships were formal training programmes that resulted in formal certification. In order to obtain the certification, the programme had to be structured to provide the necessary skills training to the learner. Employers could only get the benefit of the incentive if the training was completed. He added that the National Treasury was gathering information on the effectiveness of the incentive.
Mr Momoniat added that that, unlike industrial incentives, learnership incentives were unique, as they incentivised one activity that could cut across industries.
Ms Z Dhlamini-Dubazana (ANC) noted that the refinement of film incentives, as set out in Slide 48, tended to focus more on the production end of making a film. She raised concern that this disadvantaged the other participants in a film, such as the actors, photographers, designers and screenwriters.
Mr Engel responded that, globally, similar incentives were in place. He noted that there was a limit to how far tax could go. Tax was chiefly a matter of financing, or getting the people with money to move that money in desired directions. It was unfortunate that the artists mentioned by Members often did not have money. The problem for them was not the tax, but rather a problem in simply getting a job. The film incentive was designed to promote local production of films, thereby providing local artists with employment. He said that there were some serious issues still on the agenda. There had been considerable tightening-up to ensure that the incentives were used for South African productions. Whether or not this funding would result in actual employment for South African artists was a matter for further analysis. The National Treasury was now asking for information to see how effective this and other incentives were.
Ms Dhlamini-Dubazana referred to SARS' tax collection infrastructure, and felt that more could be done to be thorough about tax collection and penalties, especially where corporations and State Owned Enterprises (SOEs) were concerned.
Mr Tomasek replied that every tax had its own cycle. This informed on the frequency of the review process. The annual income taxes of individuals and companies were reviewed annually. Customer relations managers at SARS would engaged with corporates frequently to keep track of their expected revenue flows and difficulties. Other types of taxes, such as Value Added Tax (VAT) and Pay As You Earn (PAYE), had shorter cycles - usually amounting to a monthly review. Customs had the shortest cycle, as it dealt with transactions at the border. These transactions were reviewed as they happened. The larger importers were reviewed on a monthly basis and SARS would use post-clearance inspections here; instead of checking everything at the border, they checked according to a risk scale on a more periodic basis. This meant that importers classified as high risk would be reviewed more frequently, while low risk importers were reviewed less frequently.
Ms Dhlamini-Dubazana expressed concerns about the amendments around estate duty and asked what education was available to the working classes and rural communities on these matters, taking into account that illiteracy was prevalent in these communities.
Mr Engel replied that the tax system was also not an educational system. He reiterated that it was concerned with channeling money in desired directions. The Financial Services Board (FSB) was very concerned with the issue of financial education. Provision of such education was now an exempt activity. The FSB had the skills to provide this education.
Mr Momoniat added that incentives needed to be marketed and took a long time to take effect. The people most likely to need this form of financial education were also probably low-income earners, and would as a result not have a problem with estate duty. The raising of the threshold of R3,5 million to R 7 million was mostly affect the middle to upper-income levels, and these people were likely to obtain professional financial advice. He said he was not intending in any way to reduce the issue, but rather to illustrate that there was a need for a differential approach to financial education offered to different sectors.
Mr S Radebe (ANC) redirected the question on learnerships and asked about the progress in building the Trade Test Centres in the provinces.
Mr Morden responded that the tax collection side played a limited role in South African skills development. The Skills Development Levy (SDL) incentive was a mini wage-subsidy to assist employers and encourage them to hire young unskilled people. Monitoring of this training was a line function of the Department of Labour and the Department of Higher Education. These two departments were in a better position to address this question.
Mr Radebe sought clarity on the difference between the initial cost and maintenance of the international sub-marine telecommunications cable related to its expected lifespan.
Mr Engel responded that the cables typically had a lifespan of 20 years. The useful life of the cable may be less. This meant that all the cables under discussion should fall within the period of the incentive.
Mr Tomasek replied that the maintenance and capital cost were two distinct issues. The maintenance was tax deductible on an annual basis. The incentive dealt with the initial cost of acquiring and laying the cable.
Mr Radebe referred to the references made, in the recent State of the Nation Address, to the use of government land and land redistribution, and asked for comments on this.
Mr Morden responded that the preferred approach was to facilitate development on government land. Municipalities had taken the view that they would retain the land and use it for development. Some tax barriers did exist. The tax proposals did not deal with land reform as a broader issue.
Mr E Mthethwa (ANC) noted that the bulk of the job losses thus far had affected low income earners. He pointed out that the only income option that was often available was the retirement fund. He also thought the tax brackets unreasonable, in regard to pre-retirement withdrawals. He asked if pre-retirement withdrawals would not more appropriately dealt with on a case-by-case basis.
Mr Engel responded that the tax system could not discriminate when reviewing millions of people's tax returns. There was a need to keep this process straightforward. When a person contributed to retirement he or she would receive a deduction. This was an incentive for putting the money into a retirement fund. When that person then withdrew from this fund, the withdrawal would be taxed. This could be seen as a reversal of the incentive. He pointed out that for low-income earners, there was a need to look at the graduated rates scale. This meant that lower income earners withdrew less, and consequently their taxes would be less. This acted as an automatic stabiliser. However, he said that there was a question as to how to differentiate between withdrawals as a result of job losses and withdrawals for more frivolous reasons. There was no time in the tax system to have individual interviews with taxpayers to determine the credibility of their reasons for making a pre-retirement withdrawal. One of the aims in the reform of retirement policy was to try to create a better balance in looking at the reasons for taxpayers' withdrawals. This was a regulatory issue.
Mr M Oriani-Ambrosini (IFP) asked how the Bill could be used in future to address the negative effects of the global economic crisis and the resulting recession in the South African economy. More specifically, he pointed out interventions such as making home loan payments tax deductible, and the fiscalisation of social burdens. He asked if there was a willingness to adjust the Bill according to the new economic environment.
Mr Momoniat replied that the State had to collect revenue. If no money came to the State, no money could go to the departments. Taxes were imposed on those who made profit and earned income. A job loss meant no income and consequently there was no taxation. There was no intention to change the current tax proposals. When the proposals were announced in February, there were early signs of the deteriorating global economy. He added that there was a lag before tax policy produced an effect in the larger economy, similar to the effect of interest rate (repo rate) adjustments. National Treasury also did not want to compromise the compensation of State workers or the funding to the State's planned infrastructure projects. A balance had to be struck between collecting tax, ensuring growth, preserving jobs and promoting expenditure programmes that targeted the poor.
The meeting was adjourned.
- Taxation Laws Amendment Bills 2009: National Treasury & Revenue Services briefings
- Taxation Laws Amendment Bills 2009: National Treasury & Revenue Services briefings
- Briefing by National Treasury and the South African Revenue Services (SARS) on the Draft Taxation Laws Amendment Bills, 2009
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