Provincial Department of Education: Spending on First Quarter Conditional Grant, Capital Expenditure Personnel & Non-Personnel, & Taxation Laws Amendment Bills, 2009

NCOP Finance

15 September 2009
Chairperson: Mr C De Beer (ANC; Northern Cape)
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Meeting Summary

In the morning session, National Treasury briefed the Committee on provincial spending in the Departments of Education. The provincial spending was low across the country whilst projected spending was deemed to be too high. The key areas in this regard were goods and services, learner-teacher material and the National Schools Nutrition grant. National Treasury was most concerned with Limpopo’s projected spending of R1.3 billion. Underspending was a concern with regard to Limpopo, KwaZulu Natal, Gauteng and the Northern Cape. KwaZulu Natal and the Eastern Cape had injected extra funding for their HIV/AIDS Life Skills training grants.

Each of the provincial departments then briefed the Committee on their spending in the first quarter. Mpumalanga had spent 43% of the total budget during the current financial year. It had overspent on its personnel and this impacted severely on its payment of service providers. This also resulted in delivery grinding to a virtual halt as service providers stopped supplying the Department. Accruals were given priority, hence the current low expenditure rate. Spending on the HIV/AIDS grant was low due to the impact of accruals. The current cost of the meal for learners, at R1.50, was brought under scrutiny and the Committee enquired about the possibility of increasing it for the benefit of learners and suppliers. The reliability of data and monitoring systems was a concern for the Committee.

The Limpopo Department of Education stressed that understaffing and undercapacity were two of the biggest problems impacting on expenditure on both grants. Supply chain management and capacity at senior level hampered the delivery of goods and services. The projection for future expenditure at R1.3 billion was a worst case scenario forecast. There were concerns over how and when key positions would be filled. The committee was also concerned over the high projection for future expenditure. Underspending on both grants was still regarded as inadequate.

All grants and allocated funds were spent in total by the Department of Education in the Northern Cape. Funds were transferred directly to schools. The late submission of the business plan by the Department and its impact on service delivery was brought into question.

There were contradictions between the Preferential Procurement Policy Framework Act and Supply Chain Management for the Department of Education in KwaZulu Natal. A court ruling on this matter had been pronounced and the Department would follow it. Additional spending was incurred over and above what was allocated for the HIV/AIDS Life Skills grant. Underspending was an issue for the Committee, and a breakdown of costs was requested. It was stated that cash flow problems from the previous financial year presented new challenges during the current one. Accruals were hampering service delivery. The apparent contradiction between the statements that spending was in accordance with the business plan, yet was low, was questioned. Clarity was also sought on teacher development in the province.

In the afternoon session, National Treasury and South African Revenue Services briefed the Committee on the main elements of the Taxation Laws Amendment Bills 2009. The main policy objectives were to raise sufficient revenue as the economy slowed down, to boost household confidence by personal income tax relief, to support mining and the private sector investment, and to protect the environment for future generations. It was noted that there would generally be savings for the benefit of the lower middle income group. The presentation covered the changes in personal tax and provisional tax, the changes to the deductibles for medical aid schemes, the scrapping of the deemed kilometer allowance and the introduction of log books for all business travel claims, and changes to the pre-retirement fund withdrawal taxations on retrenchment. Learnership allowances were being simplified to encourage employers to set them up. Proposals were made for estate duty and the R2.5 deduction would be transferable between spouses. The new claims in respect of Certified Emission Reductions (sale of carbon credits) were set out. Emissions rates had been added on to certain vehicles. Cost of improvements being deductible on leased government land were also explained. New provisions were also now included in relation to liquidation of residence companies. There were further exemptions in respect of purchase of shelf companies. New rules were also introduced for controlled foreign companies and the foreign business establishment definition. It was explained that some proposals relating to film incentives were placed on hold, as this system had been used for tax evasion in the past. The “Pay now, argue later” principle had been upheld by the Courts, but SARS would be paying interest in the event that rulings went against it. A two-tiered approach was adopted to provisional tax. Members asked several questions for clarity, around the fuel levy, the emissions principles, how the tax tables would work, whether the changes in respect of medical aid amounts would impact on the tax revenue, the keeping of log books in respect of motor vehicle usage, and the “clean break” principle of divorce.

Meeting report

First quarter spending: Provincial Departments of Education
Presentation by National Treasury

Mr Edgar Sishi, Director, National Treasury, gave a presentation to the Committee in which he noted that the spending in the first quarter of the current financial year was at 25.5% out of a total of R30 billion. There was projected overspending of R1.6 billion in four provinces. This related to personnel spending. There were some issues of reliability, in particular with regard to the Limpopo province. KwaZulu Natal (KZN) and the North West had the lowest rates of spending. Gauteng and Mpumalanga had the highest rates of expenditure because of accruals from the previous financial year, for example last year’s unpaid invoices. Projected overspending would be monitored, as it was too high. Spending on goods and services was quite low. Last year this raised concern over what National Treasury was doing in the rollout for learner and teacher support material. Five provinces were projecting underspending of R262 million in their goods and services budget, which included learner- teacher material, whilst expenditure on human resources was unusually high.

Capital spending was at 29%, having increased by 110% from last year. Capital spending rates were very high at the moment with the exception of Mpumalanga and Gauteng. The Free State and the Northern Province had the highest expenditure rates. Limpopo’s projection of R1.3 billion, which was very high, was being closely monitored as National Treasury (NT or Treasury) had some questions about the reliability of this figure. Mpumalanga was projecting an underspending figure of R174 million. Spending for the Public Ordinary Schools programme was currently at 25.5%. Half of the provinces were spending relatively rapidly. Overall there looked to be fairly normal spending but the projected spending for the end of the year presented suspect figures, with Limpopo projecting overspending at just under R1.4 billion in public schools alone. The Eastern Cape projected overspending of R182 million whilst Mpumalanga projected underspending of R153 million.

Spending on personnel was currently sitting at 24%. North-West, KwaZulu Natal and the Western Cape appeared to be underspending. Figures were usually different from the second quarter onwards. The capital expenditure rate varied significantly between provinces, 17.5% had been spent in Mpumalanga as opposed to 57.5% in the Free State. The rate of spending for goods and services was low, particularly in Limpopo, where spending was as low as 14.5%. The spending for goods and services in the Northern Cape was at 27.5%.

Just under 95% was spent on the HIV/AIDS Life Skills grant. The Eastern Cape and KwaZulu Natal figures suggested that the provinces were not accounting for their expenditure relative to what was transferred to them, as their figures were at 103%, which was impossible to spend. The grant was purpose specific and thus provinces had to report just on the money that was transferred. It was clear that the two provinces put in their own money, and this co-funding should have been reflected separately. Limpopo had the lowest spending on the grant; there was an amount of R6.1 million which was withheld because there were capacity issues with staff having left and the re-skilling not being done.

The spending on the National School Nutrition Programme (NSNP) grant was poor. Part of the problem was that in the middle of the year there was an additional grant that was given and some provinces did not have the capacity to spend this money.

Five provinces were spending less than 15% on the HIV/AIDS grant. The others were also spending less than 25%. Only 56% of already transferred funds had been spent on the grant by the end of the first quarter. The Limpopo province had spent less than 40% of already received funds. The funds for the Northern Cape were withheld because of the late submission of their business plan. By July there had been no overall improvement with spending sitting at under 18%. Overall, the spending by provinces on what they already had went down from 56% to 30%. There were problems in this regard particularly with regards to Limpopo, KwaZulu Natal, Gauteng and the Northern Cape. The Free State, KwaZulu Natal and Mpumalanga had shown positive signs regarding the HIV/AIDS programme grant. Limpopo’s spending was better than the previous year. New staff had been appointed in the province. There was an issue in Mpumalanga of non-payment of service providers, and this was strange since there had been underspending. There was a change of business plans in some provinces to accommodate greater support for educators.

The Chairperson thanked Mr Sishi and commented that if there was a problem in delivering teacher support material and spending was low, then he wondered what was going on in the class rooms.

Mr B Mashile (Mpumalanga, ANC) referred to slide 11 and asked for clarity on those provinces that had not spent 100% of the allocated budget. He asked for clarity on the comment in the slide which read “Nevertheless a significant need appears evident in the Eastern Cape and KZN”. He asked when Treasury made transfers in a particular quarter.

Mr Sishi apologised for the formatting of the slide and said that all points related to the HIV/AIDS life skills grant. The observation was meant to convey that for the HIV/AIDS life skills grant, the Eastern Cape and KwaZulu Natal had put in extra funds, over and above what was allocated. Transfers were made to balance with what the provinces needed and what was available. Transfers were normally made in the first month of a quarter.

Presentation by Mpumalanga Education Department
Ms M Mhlabane, Head of Department, Mpumalanga Department of Education, informed Committee Members that 43% of the total budget had been spent during the current financial year. Capital expenditure was at R102 million. R1.8 billion had been spent on the compensation of employees and goods and services were at R423 million. 20% had been spent on the NSNP grant and 18% on the HIV/AIDS grant thus far. Expenditure on infrastructure was currently at 39%. The Department had overspent by R414 million on its personnel, and this resulted in the non-payment of service providers. This also resulted in accruals of R239 million. The accruals had an impact on expenditure during the first quarter. In order to deal with the accruals the Department filled its vacant posts, particularly in administration. Delegations had to be withdrawn, particularly for goods and services.

The Department had received R229 million for the National Schools Nutrition Programme grant, for the first quarter, where it had planned to spend R3.7 million but only R1.6 million had been spent. The challenges faced by the Department resulted from the previous financial year. A R10 million budget had been set aside for the HIV/AIDS grant. Accruals from the previous financial year formed part of the main challenges that the Department had faced. The objective of having 600 empowered educators was achieved, and R577 000 had been spent on this. The Department had planned to turn 150 schools into modes of care and support, but only 45 were converted. A target of 800 learners was set to enable learners to be empowered on a peer support platform.  640 were empowered. R705 000 had been spent. 150 School Management Teams (SMTs) were empowered during the first quarter at a cost of R174 thousand.

Three open discussions on HIV/AIDS were held between parents and learners, and the expenditure for this was R202 thousand. Nineteen schools were monitored and supported and a further fifteen were evaluated. This cost R91 000 and R68 000 respectively. One school out of a planned three had begun construction which was currently at 40%. Monitoring systems had been put in place to monitor the grants but more regional officials were needed to ensure that the projects and the grants were respectively implemented and spent accordingly. Quarterly meetings were held with the service providers to ensure that learners were fed and that invoices were submitted on time. The Department would ensure that the thirty-day rule would be observed as stipulated by the Public Finance Management Act (PFMA). The Department had limited resources in order to conduct effective monitoring, so there were a lot of vacant posts for inspectors and these would be prioritised to ensure effective monitoring and evaluation. The key challenges were infrastructure, delay in payment of service providers, delay in services, inaccurate reports and inadequate capacity.

The Chairperson referred to slide 6 and pointed out that Treasury had a figure of 14.8% whilst the Department’s document listed it as 18%, and he asked for an explanation for these contrasting figures.

Mr Mashile asked what the Mpumalanga Education Department’s views were when it came to saving on costs incurred. He asked if the value of the meal that was given to children was adequate or whether it should be improved. The infrastructure of farm schools in Mpumalanga was old and scholar transport in these areas was very poor or in some instances non-existent, so he asked how the Deportment had handled Integrated Development Plan processes in the municipalities.
Mr M Makhubela (Limpopo, COPE) requested that in future presentations should be done with each Department in the chamber and then members could interact with them.

Mr T Chaane (North West, ANC) remarked that the presentation had been too rapid. He asked what the reasons were behind the rate of underspending. He enquired what the Department was doing in order to improve its monitoring systems, and what the Department’s reflections on its monitoring mechanisms were, in order to ensure that money was well spent and there was a greater return on quality.

Mr R Lees (KwaZulu Natal, DA) said that there were no plans from the Department on how overspending would be dealt with. He enquired whether expenditure on goods and services was seasonal, and commented that if the expenditure for the 2008/09 period was 100%, but included accruals, then the figures were inaccurately recorded for 2008/09. Accrued expenses should be reflected in the period when they had accrued.

Ms Makhubela stated that the figures would be investigated and the Department would liaise with Treasury and the Provincial Department. She admitted that service delivery and the quality of education were affected by underspending. The Department would look closely at underspending in infrastructure. This was a serious issue. Scholar transport was another serious issue and the Department would come up with a boarding school strategy. The Department was not participating in the IDP processes.

Ms J Bezuidenhout, Acting Chief Financial Officer, Mpumalanga Department of Education, responded to the accruals issue by stating that there was a severe cash flow problem during October 2009. R414 million was overspent. Equitable share funds and conditional grant funds were utilised to pay salaries. The Department then stopped all payments, which was the reason why there was R3 million overspending and not R292 million overspending.

Ms L Moyane, Deputy Director General, Mpumalanga Department of Education said that 640 000 learners were classified as deserving when it came to the feeding scheme. 574 000 had been fed in the past. Some learners had to be removed from the feeding scheme due to the inclusion of learners from secondary schools. The cost of a meal was R1.50 for primary schools and R2.00 for secondary schools. The challenge facing the Department was the quintile sytem used by the National Department of Education, which was deemed not to benefit the poor. The quintile processes were currently under review. R1.50 covered the cost of the meal whilst also facilitating for the requirements stipulated in the menu. It was important to maintain the standard of the feeding scheme.

Mr C Kajeni, Director, Mpumalanga Department of Education, elaborated on the monitoring process. The high turnover rate at the inspectorate level had been a problem, but there were currently new inspectors at regional level. Inspectors went on site to see if there were viable projects being undertaken. They also looked at the quality of work being done at a particular project site. Monitoring went beyond checking whether there was compliance and it also included inspectors ensuring that standards were acceptable.

Ms Bezuidenhout noted that accruals impacted in two ways. Accruals were paid for the previous financial year, and service providers started to refuse to provide services due to non-payment.

Ms Regina Mhaule, MEC for Education, Mpumalanga, said that the Department had started paying the outstanding accruals from the previous financial period, and the non-provision of services from service providers had improved. The backlog of accruals had resulted in underspending during the current financial period. Planning in the provinces would be informed by the IDP of the municipalities. The Department would work with the Department of Social Development and the Department of Human Settlements to provide a suitable home for long distance scholars.

Mr Sishi added that the Department and Treasury would look at the contrasting figures in order to make any necessary adjustments. Most provinces had underspent throughout the year and this was a serious concern. Part of the problem was that the management of personnel was difficult, and this impacted on the accruals. The issue of accruals was that there was a lack of cash management and proper auditing. The HIV/AIDS grant needed clarity regarding the non-payment of service providers.
Mr Theuns Tredoux, Acting Chief Financial Officer, National Department of Education, commented that there were data problems between the Provincial and National departments. The issue of underspending would be looked at very closely by both his Department and National Treasury. The number of accruals was also a concern. The level of service could be lower than what was presented as HIV/AIDS grant expenditure was certainly lower.

Mr Chaane requested that provinces at the meeting, who had their MECs present, should do their presentations first.

Presentation by Limpopo Education Department
Rev Zwo Nevhutalu, HOD, Limpopo Department of Education, drew the Committees’ attention to the activities during the first quarter. In the second quarter monitoring activities were intensified. The Department had very limited capacity, having only two managers who monitored close to 4 015 schools. To correct this, curriculum advisors were utilised. R8.9 million had been committed for training and development. Learner support materials should have been already delivered, but there were delays due to some supply chain management issues. The selection of the material had been made and the deliveries would follow. The province was grossly under-managed and understaffed, especially at senior management level. Appointments would be made soon. The budget for education personnel was complicated. Projections were only done for the provision of a worst case scenario. The Department was trying to reduce the R1.3 billion projection through the reduction of expenditure for goods and services.

Mr Rees asked how successful “top slicing” would be for the Department if on paper the figure was still R1.3 billion. He requested reassurance on this matter.

Mr Mashile asked what the plans were to overcome supply chain issues.

Mr Chaane asked what the real reasons were behind underspending and non-payment, and requested a response from the Department regarding issues raised by Treasury regarding capacity.

Mr T Harris (Western Cape, DA) referred to slide 3.2 and asked why there was a difference in the pattern for the expenditure trend this year as opposed to last year. The activities listed in Slide 3.3 were very few, and he asked why this was the case, especially for the HIV/AIDS grant.

Mr Makhubela stated that more monitors should be appointed and asked when this would be done.

Mr Dickson Masemola, MEC for Education, Limpopo, agreed that expenditure for the HIV/AIDS grant was not up to standard. He also admitted to a lack of capacity within the Department. Efforts were being made to appoint people in the districts, and three would be employed, as well as a further 80 that would work under them. He was confident that there would be improvement. There were preliminary results that suggested a cutting of costs amounting to R500 million due to top slicing. This could be achieved without compromising schools. He re-emphasised the point that the R1.3 billion projected figure was a worst case scenario.

Mr Nevhutalu added that the top slicing initiative would reduce overexpenditure. The province had made a case to Treasury for an amount of R434 million that it believed it was owed. The Department was still awaiting a response. Understaffing at management level was a serious setback. The organisational structure had been reviewed and the Department was employing people. Positions had been advertised for supply chain management positions. The issue was being attended to by the Department to such an extent that there have been no impacts on service delivery. Appointments relating to the HIV/AIDS programme would be made during the current quarter. The impact of the outlined activities was in accordance with the approved business plan at national level.

Mr Sishi added that Limpopo spent more on personnel than any other province in the country and this maybe suggested that the problem was with the way Human Resources personnel were moved around. The management of this was problematic.

Mr Tredoux commented that the capacity issue was a problem especially with regards to the spending on the HIV/AIDS grant. Posts were filled previously, and there was an improvement during the last financial period. Monitoring was a serious issue and there was a lack of resources such as vehicles that made it virtually impossible to monitor everybody.

Presentation by Northern Cape Education Department
Mr T Pharasi, Head of Policy and Planning, Northern Cape Department of Education, said that the Department had overspent its budget. Cost containment began in July 2008. Rendering of services had ground to a halt as payments for accruals were being made. The capacity to deliver goods and services and the performance of the conditional grants would be affected, due to cost containment.

Mr W Oosthuizen, Acting Chief Financial Officer, Northern Cape Department of Education, informed Committee Members that all grants had been spent fully, except for infrastructure. The HIV/AIDS grant was fully spent. 172 educators were trained in Life Skills education. 15 333 persons were reached for the advocacy programme. 90 schools had been monitored. 193 learners were trained for peer education. The challenges facing the Life Skills education was the capturing of data, the fact that there was no Life Skills coordinator, pregnancies and financial constraints. There was a monitoring tool to monitor Life Skills education at schools and this was continuous. Expenditure on the HIV/AIDS grant was currently at 5%. The reason for the underperformance of this grant was that the first transfer only took place on 21 May.. Programmes thus started late. He noted that the final totals on slide 3 contained some errors, and he corrected them.

The Chairperson asked if the monitoring tool was the same throughout all provinces and asked if the Department of Education was working with the Department of Health in this regard. If payments were received on the 27/05/2008 and the financial period began in April, he asked what officials were doing during this time.

Mr Harris asked why the payment was made late, at what date the Department was expecting to receive the money, and what kind of budgetary increases would have been expected by the Department to address supply chain constraints.

Mr Makhubela asked when the Life Skills coordinator would be employed, and what was the reason for Life Skills training for Further Education and Training Colleges.

Mr Mashile asked what would happen if the conditional grant was not spent and it went back to Treasury, and what the Department’s views were of this. He also asked why the business plan was late if, as the report said, there were monthly meetings.

Mr Chaane asked what the reasons behind underspending were.

Mr Gunda asked why, if money was given to schools, service providers were receiving late payments.

Mr Pharasi responded that the main reason behind underspending was the late submission of the business plan. Schools had contracts with local suppliers. The transfer of funds to schools was closely monitored. The Health Advisory committee was inter-departmental and it dealt with issues of feeding for children infected with HIV/AIDS. The Department of Social Services was addressing the issue of poverty through grants. Most programmes for capacity building picked up after the second financial period, essentially when it was holidays. In the business plan there was a request to increase the R1.50 feeding cost.

Mr Oosthuizen added that the Northern Cape implemented its feeding scheme a long time ago. The late submission of the business plan was also due to the fact that secondary schools were also part of the feeding scheme and there needed to be adjustments in order for them to be accommodated in the business plan. Service providers were not prepared to continue with services for programmes when others had not been paid for. The reasons behind underspending were due to accruals and unpaid service providers.

Mr Mashile commented that the issue of raising the R1.50 was because of service providers who would not be available in the long run. If conditional grants were not spent accordingly, this was indicative of a deviation from the national policy.

Mr Sishi also added that provinces were aware of policies in place, it was difficult to understand why there were continued delays. If a province performed poorly then the National Department could take certain measures against it. There was still a lack of clarity regarding underspending. Most of the spending should have taken place in July, but this had not been the case. National Treasury was concerned with the administration of both grants in the Northern Cape. The HIV/AIDS and National School Nutritional grant had been withheld from the province, as requested by the National Department. There had been a litany of problems and the National Department issued a request for an extension, which was granted by Treasury. Both Northern Cape and KwaZulu Natal continued to delay.

The Chairperson commented that on the ground there were huge problems. Service delivery was a serious issue. He enquired exactly what was the nature of those problems.

Ms N Ntwambi (Western Cape, ANC) requested consideration of an increase in transportation grants as well as on the R1.50 food cost per child.

Mr Gunda asked how long it took for the schools to receive the transfer of funds from the Department.

Mr Tredoux said that the Director General had stated that national objectives would not be compromised. The national unit provided provinces with a monitoring framework and each province had the ability to adjust this. The HIV/AIDS business plan was submitted late, thus there was a delay in making transfers. There was a specific transfer schedule approved by National Treasury, and usually the first transfer was done during the first two weeks of the first quarter. The transfer that was withheld was done with due process.

KwaZulu-Natal Education Department presentation
Ms R Mcuma, Chief Financial Officer, KwaZulu Natal Department of Education, explained that the expenditure on HIV/AIDS was at 15% by the end of June 2009. A huge section of the budget was intended for training. The Department had 36 coordinators, split as three per district. It also monitored the expenditure of the budget. There were contradictions between the Preferential Procurement Policy Framework Act (PPPFA) and the Supplier Chain Management (SCM) regulatory framework.

Mr Mashile asked why other provinces were not raising the PPPFA and SCM matter.

Mr Chaane asked if there was a reason provided for low spending on HIV/AIDS.

Ms Mcuma responded that in regard to the PPPFA matter, there was a court ruling that set aside the contract based on functionality. The head of the implementing Department had to ensure that service delivery occurred. The Department would work with the Department of Public Works and other implementing agents.

Mr Mashile asked or an explanation regarding over expenditure.

Mr Chaane asked for a breakdown of what the money was used for during July for the training of teachers.

Ms Mcuma responded that the Department had spent its allocated budget well, and the only issue would be how it spent its own co-funding initiative.

The Acting Manager, Department of Education, KwaZulu Natal, responded that advocacy for educators, inspectors and the schools in general was undertaken. Manuals were given to educators during training. Monitoring visits at schools was costly.

Mr Tredoux said that KwaZulu Natal had one of the more stable HIV/AIDS expenditures. KZN was one of the few provinces that had additional funding from its own initiative.

Gauteng Education Department Presentation
The representative for the Gauteng Department of Education focused on the key areas, which were that the expenditure on the HIV/AIDS grant was at 8.4% and for the School Nutrition grant was 20%. There was money available for the capital and current expenditure for these programmes. Spending was low for the HIV/AIDS grant but spending was going according to the business plan. July spending was at 12.87% and for August it was 22.87%. This reflected that money allocated was being spent. Cash flow problems from last year resulted in problems this year. Accruals resulted in service providers not being paid, although the situation had been better this year.

Delivery for the HIV/AIDS programme was slow, the HOD was meeting with the team on a monthly basis and the programme was monitored on a monthly basis. The former Model C schools were being targeted for advocacy. The youth were targeted in order to assist others that were more vulnerable. The focus was on re-distributing current material as opposed to new material.

Mr Mashile requested clarity regarding the contradictory statement which read “Spending was low for the HIV/AIDS grant but spending was according to the business plan” He asked what the definition of commitment was for the Gauteng Department of Education. He also enquired if grants were being transferred to another implementing agent, and when was the moment of expenditure.

Mr Makhubela asked for clarity regarding teacher development.

Mr Len Davids, Acting Head of Department, Gauteng Department of Education, responded that the business plan indicated that most activity would be around July. Some learner training took place over weekends. The bulk of the educator training was during the June period. Money was transferred to districts and this was the moment of expenditure since it was one department.

The Department confirmed that commitment was when a service was contracted but not delivered as yet. Commitments would extend from June to September. The Department did not undertake transfers for both grants.

Mr Mashile commented very strongly that the grant was recurring every year and its dates could therefore be anticipated. However, the National policy was not being implemented since certain quarters were selected for expenditure and implementation.

The Chairperson asked if the programmes could not be spread over twelve months so as to include weekends.

Mr Davids responded that the bulk of activity was during the holidays but the activities were during the whole year. At certain times of the year expenditure would go up.

The morning session was adjourned.

Taxation Laws Amendment Bills 2009: briefing by National Treasury (NT) and South African Revenue Services (SARS)
Professor Keith Engel, Chief Director: Legal Tax, National Treasury, noted that the Taxation Laws Amendment Bills of 2009 were intended to give effect to tax proposals announced in the February 2009 budget. There had been informal public hearings in June, followed by formal introduction of the Bill to the Standing Committee on 1 September. The tax policy objectives were to raise sufficient revenue as the economy slowed down, to boost household confidence by personal income tax relief, to support mining and the private sector investment, and to protect the environment for future generations.

Prof Engel noted that National Treasury estimated that R13.5 billion was estimated to be lost due to inflation. Revenue was R60 billion short of expectations, due to low economic activity. Given the steeper slowdown in economic growth in this fiscal year, actual tax revenues would be significantly lower than the February budget projections. The major issue was how to make up the budget shortfall. Personal tax relief was adjusted every year. The Department was trying to exempt savings for the benefit of the lower middle income group. He showed the tables of personal income tax, which set out the main differences between the 2008/9 and 2009/10 tax years.  He noted that the threshold for tax free interest was to be increased.

Mr Franz Tomasek, General Manager: Legislation, South African Revenue Services, interjected to explain  that provisional tax was paid by those who did not earn a monthly salary. This tax was paid every six months and the current threshold was to be raised from R80 000 to R120 000. The monetary caps for tax deductible contributions to medical schemes were also to increase, and the concept of fringe benefit tax-free medical scheme contributions was to be removed.

Prof Engel explained that the purpose of a car allowance was to assist entrepreneurs and employers for their business travels. The motor vehicle allowance scheme had been subjected to fraud. The Department had been carving back the deemed kilometre allowance in response to this, and the current financial year was the last time that it would be available. The new trend was that a log book had to be kept by the individual who wanted to claim for business travel. This would help for refund purposes; it would not necessarily affect a person’s paycheck annually.

Pre-retirement and post retirement lump sums were subject to taxation upon withdrawal. Withdrawals over time fell under a lower bracket whilst large sum withdrawals fell under a higher level of tax. If money was withdrawn on retirement then the first R300 000 was exempt, if the money was withdrawn before retirement then only the first R22 500 was exempt. If an individual lost his or her job due to retirement or retrenchment then he or she would also have the benefit of the exemptions.
It was explained that learnership allowances were being simplified in order to encourage employers to set them up. If an employer set up a learnership for training, it would qualify to receive an additional R30 000 tax incentive. If an employee successfully completed the learnership than the employee would get an additional reduction based on the number of years. Changes to this would include a proportional allocation of the basic allowance even if the employment changed, and completing allowances would be awarded at the end.

There were also proposals in respect of estate duty; it was noted that the automatic R3.5 million deduction would be transferable between spouses.

Certified Emission Reductions (CERs) represented emission reductions verified and certified by the Department of Energy, once issued by the UN Clean Development Mechanism Board. There had been little uptake of such projects, largely because of the risks associated with these projects. It was now proposed that disposals of CERs (basically, sales of carbon credits) would be wholly exempted from income tax. Taxpayers could therefore claim an annual notional allowance for energy efficiency savings achieved in the production of income. An ad valorem emissions rate had been added on motor vehicles based on how much CO2 emissions a vehicle emitted. The aim was to discourage consumers from buying less efficient vehicles.

The presentation highlighted the changes in respect of deemed dividends, telecommunication licence conversions, and international submarine telecommunications cables.

Mr Tomasek continued to deal with improvements on leased government land. He noted that a lessee could deduct the cost of improvements on land. This prohibition undermined government’s ability to use land as a mechanism to promote infrastructure development. The prohibition would therefore no longer apply if government owned land was leased for twenty years or more.

New provisions were also now included in relation to liquidation of residence companies. If a company in liquidation distributed its assets to a natural person, the distribution would result in capital gains tax. Many people had residences registered in the names of companies, because of the previous tax benefits, but had failed to liquidate these companies during the previous window period. A further two-year window period was now being allowed.

Prof Engel said that another proposal was that shelf companies would be entitled to small business relief like any other small business; the avoidance rule would be turned off in the instance where a bigger company purchased smaller companies off the shelf. The definition of a legitimate business had been refined to make it more realistic commercially.

There had been conversion on controlled foreign companies (CFC), with clarification of the foreign business establishment definition. Anti - avoidance rules would be applicable if a company paid its taxes at a tax haven, or where rates were lower than in South Africa.

SARS also proposed that local film grants from the Department of Trade and Industry (dti) that were tax free should exclude the involvement of banks and insurers. This system had been used for tax evasion purposes in the past. All other proposals relating to the film allowance incentives were on hold. There would be further discussions with stakeholders.

Mr Tomasek informed the Committee that the ‘Pay Now Argue Later Principle’ had been confirmed by the Constitutional Court. Interest was paid if the ruling went against SARS. Interest was paid after a successful appeal had been lodged. The proposals were that payment would not be suspended by the making of an objection. Guidelines had been set up for when SARS would insist that payment be made. In view of the current uncertainty as to when the settlements may be concluded, it was proposed that the legislation be amended to clarify that settlement procedures would apply post-assessment only.

A two-tiered approach had also been adopted in respect of provisional tax. It was proposed that smaller individuals could rely on how they were assessed previously to make their estimates for provisional tax purposes. Larger tax payers could not rely on this.

The Chairperson requested clarity on the ad valorem emissions rate.

Mr Tomasek stated that vehicles with high levels of carbon emissions would be more heavily taxed upon purchase.

Mr B Mashile (ANC, Limpopo) asked how much time Committee Members had to study the Bill.

The Chairperson responded that normally three days were given for the consideration of Bills. This was a unique case and it would be the last time that a Bill would be considered in this way.

Mr Mashile noted that the Bill seemed to be addressing individuals who were in business, as opposed addressing government priorities such as rural development.

Prof Engel said that the primary focus of the changes were companies. He noted that there were laws that addressed challenges facing the poor such as land reform. The rural poor fell very low on the thresholds on the personal income tax. There was a proposal for urban development zones to encourage investment there. The tax system was trying to provide relief for the lower income earners.

Mr Mashile asked if people who were being assisted by government for land claims were subject to current taxation laws. The Bill should have been addressing such issues.

Mr Harris asked if SARS looked at tax breaks to defend the economy in the face of the recession.

Mr Harris asked for clarity on the increase in fuel levies, given the current economic downturn.

Prof Engel noted that the fuel levy impacted on the poor and it was injected in order to catch up with inflation. The aim was to try and discourage unnecessary usage of cars.

Mr Harris said it sounded as if the grant for the film industry was cancelled overall, thus punishing those who were not involved in any fraud. He wondered if there was not some other way to handle this.

Mr Tomasek said that the film grant was not going to be taken away, but it would be merely adjusted.

Mr Harris asked if there was any fiscal de-centralisation that was tabled when the proposals were compiled.

Mr Makhabule asked for clarity on the personal income tax table and how 18% for every rand was taxable for those earning between R0 and R122 000.

Prof Engel responded that the Bills were currently amendments and there were laws that presently addressed a lot of the issues raised. 18% only applied once a person earned above R54 200. He also noted that SARS would not be extending the deadline and the strike action had been resolved.

Mr Lees said that the tax rates on the medical aid amounts were not significant when compared with the actual medical aid costs. If this amount was increased, he asked whether it would really impact on the tax revenue amount.

Prof Engel said that the constant question between the Department of Health and Treasury was how health care costs could be distributed equally. The health care deduction was designed for the middle class and that was the entry level. National Treasury had to balance the distribution of funds to provinces without impacting unnecessarily on tax payers.

Mr Lees noted that keeping a log book for the motor vehicle claims would be an onerous task, and the likelihood would be that fictitious log books would be created. He wondered if there was not some other alternative to this.

Mr Tomasek informed the Committee that there was an official log book from SARS that could be used by the public to make it easier to keep records for the purposes of the business travel claim.

Prof Engel added that motor vehicle claims should not be considered when individuals were filing their claims. This was having an effect on the personal income tax table.

Mr Lees thought that the principle of allowing those dismissed from their jobs to benefit from exemption for the withdrawal of the first R300 000 of their retirement fund was poor.

Prof Engel replied that the exemption for the R300 000 withdrawal was for employees who were retrenched only, not those who were dismissed.

Mr Lees also asked what the position would be of spouses divorced prior to 13 September 2007.

Prof Engel added that there were a lot of schemes aimed at avoiding estate duty. Those who divorced before 2007 were now enabled to have a clean break from each other’s estates as well as with SARS.

Mr Lees noted that setting up of learnerships was an onerous task, and asked if SARS was anticipating more learnership programmes, due to its proposed simplification.

Prof Engel said that the learnership issue had to be discussed further.

Mr Lee asked if the dividends tax would be 10%.

Prof Engel confirmed that this was so.

Mr Gunda asked for further clarity on the personal income tax table and the rebates. He asked for further explanation regarding the pre-retirement benefits.

Mr Mashile suggested that the age range on the personal income tax tables should address the relevant age limits for both males and females. He asked if filing tax returns would be made easier by the Taxation Laws Amendment Bills.

Prof Engel said that SARS was trying to simplify tax returns.

Mr Tomasek added  that over the years the figures had been adjusted. The trade off was that personal income tax was used in order to reduce borrowing and to enable equitable collection of tax. Government had to complete its objectives and the funds had to essentially come from somewhere.

Mr Lee asked how much discretion SARS was given regarding the ‘Pay Now Argue Later’ rule.

Mr Gunda referred to the third bullet on slide 36 and asked if the onerous of rectifying an error in tax returns lay with the employer or employee.

Mr Tomasek explained that courts could review decisions by SARS where the ‘Pay Now Argue Later’ was enforced; SARS paid 10.5% interest in the event of the finding going against SARS and in favour of the taxpayer.

Mr Lee expressed the view that the provisional tax two tier system, at R1 million, was too low. Huge burdens would be placed on employers and small businesses regarding the proposal for the quarterly 501 EMP.

Mr G Mokgoro, Northern Cape (ANC) asked if it would not have been better for government to create a favourable environment for investment purposes in order to create more jobs and increase the numbers of taxable citizens. He further asked if proposals were aimed at raising taxes in order to make up the budget shortfall or were taxes being generally raised.

Mr Tomasek responded by saying that taxes were not being raised at all; the tables were merely indicating when one would be taxed. The purpose for the quarterly EMP 501 was because PAYE deductions were not being paid to SARS by employers especially during the recession. The quarterly EMP 501 was to monitor this.

General comments were made that in respect of properties and shelf companies, individuals would probably not move their properties out of trusts.

Mr Mashile asked if the sixty five year age threshold was used in the personal income tax table because it was the official retirement age.

Mr Tomasek responded that this was merely a coincidence.

The meeting was adjourned.

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