The National Treasury, the South African Revenue Service and the South African Reserve Bank briefed the committee on the Draft Tax Law Amendments Bills. The Bills gave effect to the tax proposals announced in February of this year and contained in Chapter Five of the Budget Review and in Annexure C. The Bill had been published for public comment on 10 May 2010. The deadline for public comment was 11 June 2010. There would be public hearings in June and July 2010. Workshops would be held with tax practitioners and taxpayers in the course of June and July. The revised Bills were scheduled to be tabled in August or September 2010.
The purposes of the Bills were to raise revenue after the severe economic recession, to limit tax avoidance and provide partial fiscal drag relief of R6.5 billion to individual taxpayers. Most of the revenue would come from personal and corporate income tax which together with value-added made up over 80% of the revenue.
The Voluntary Disclosure Programme and exemptions from exchange control were targeted at encouraging tax payment. Standard Income Tax on Employees tax would be phased out over a period of three years. Investors in non-interest bearing Islamic finance products would not be disadvantaged. The three most common forms of savings and borrowings in Islamic finance had been identified and would be regarded as deemed interest transactions to allow them to get the benefit of tax allowances. The goal was to build the domestic market and then to attract foreign investment interested in this form of finance. There was an increase in the fuel levy comprising 10 cents per litre general tax, 8 cents per litre for the road accident fund and 7.5 cents per litre for building a new fuel pipeline from Durban to Johannesburg. There was an increase in ‘sin’ taxes and the introduction of a carbon emission tax on new vehicle sales to promote Government’s environmental concerns. It would extend to used cars in the future, as the environment would become a major issue in the years to come. The new car allowance measures aimed to avoid its abuse. 20% was now deemed to be business travel and 80% private unless a logbook could be provided to prove otherwise. There was an amendment to the mineral royalties levy. Professional sports would be allowed a tax deduction for supporting the development of amateur sport at the lower levels. There were refinements to micro business tax issues
Members questioned why all South Africans had to pay for the construction of the Durban – Johannesburg fuel pipeline. They wanted to know why the South African Revenue Service was always targeting the higher income bracket earners, whether the royalty rollover tax was a disincentive to beneficiation, what real alternative cars there were to purchase to give effect to the carbon emissions tax and how much was expected to be repatriated through the exchange control exemptions.
National Treasury, SARS & SARB. Tax Proposals: Budget 2010
The National Treasury, the South African Revenue Services (SARS) and the South African Reserve Bank (SARB) briefed the Committee on the Draft Tax Law Amendments.
Mr Ismail Momoniat, National Treasury, led the briefing with input from Mr Keith Engel, National Treasury, Mr Franz Tomasek, SARS and Mr Tom Coetzee, SARB.
Mr Momoniat said that the Bills gave effect to the tax proposals announced in February of this year and contained in Chapter Five of the Budget Review and in Annexure C. It had been published for comment on 10 May 2010. The deadline for public comment was 11 June 2010. Public hearings would be held with the Standing Committees and workshops would be held with tax practitioners and taxpayers in June and July. The Bills were scheduled to be tabled in August or September 2010.
The purposes of the Bills were to raise revenue after the severe economic recession. The measures sought to limit tax avoidance and provide partial fiscal drag relief (R6.5 billion) to individual taxpayers. Most of the revenue would come from personal and corporate income tax which together with value-added tax (VAT) made up over 80% of the revenue. The Bills detailed measures to protect the tax base and limit tax avoidance. There were many anti-avoidance measures and new measures were introduced to protect the environment.
The phasing out over three years of Standard Income Tax on Employees (SITE) tax had begun. Investors in non-interest bearing Islamic finance products would not be disadvantaged because of this. There were refinements to micro business tax issues. There was a Voluntary Disclosure Programme, which gave relief to taxpayers in default and a similar programme to encourage exchange control defaulters to come forward. There was an increase in the fuel levy comprising a 10 cents per litre general tax, 8 cents per litre for the road accident fund and 7.5 cents per litre for building a new fuel pipeline from Durban to Johannesburg. There was an increase in ‘sin’ taxes and the introduction of a carbon emission tax. There was an amendment to the mineral royalties levy.
Under tax revenue trends it was noted that for the first time total nominal tax revenue collections were less than the collections of the previous year by 4.2%. This had been borne out by the figures for specific taxes; corporate taxes had seen an 18.4% decline on 2008/9’s figures and 3.8% on 2007/08’s figures. Customs duty had similarly seen a decline of 13.6% on 2008/9’s figures, 26.1% on 2007/8 and 17% on 2006/07’s figures.
Personal income tax
On personal income tax there had been partial relief for fiscal drag. In 2009/10 there had been an income tax rate of 18% for each R1 of taxable income between R0 - R132 000. There was for 2010/11 a rate of income tax of 18% for each R1 of taxable income between R0 - R140 000. The tax threshold for those aged 65 or over had been shifted from R84 200 to R88 528. The tax threshold for those aged below age 65 had been shifted from R54 200 to R57 000.
Medical Aid and Car Allowance
Medical Aid adjustments had been inflation-related. The deemed kilometres of the car allowance facility had been repealed last year. Now 80% was subject to employee’s tax, subject to a rebate based on having kept a logbook. It was proposed that the employer provide the car and there were earmarked provisions to tighten control over this aspect also.
There had been adjustments made to the retirement tax table and to key person insurance to prevent misuse as a deferred salary. There had been a tightening up of the tax-free interest provision to promote general savings. An explanatory note would be published on the SARS website. Pension funds amendments were aimed at helping the taxpayer. The executive share schemes had been adjusted to account for the schemes being used as disguised salaries. SITE tax was being phased out as SARS had increased the efficiency of its collection of data and the need for this tax had become less.
SITE will be phased out over a three year period in order to limit any potential hardship for low income individuals with more than one job or who had have more than one source of income that was subject only to SITE. The phasing-out relief would be:
– 1/3rd of the difference between SITE and normal tax would be payable in the 2011/12 tax year;
– 2/3rds of the difference between SITE and normal tax would be payable in the 2012/13 tax year, and
– 3/3rds (the whole) of the difference between SITE and normal tax would be payable in the 2013/14 tax year.
Professional sports development
The Government recognised the need for development at the amateur levels and allowed tax deductions by professional sports bodies promoting development programs at the lower levels.
Property development of Government land
The Government had land but no cash to develop it but did not want to sell it, so would develop it in conjunction with private property developers. As a private company not owning the land, developers could not get the benefit of depreciation deductions as these were spread over a long period of time. The amendments treated the private company as if it owned the land so that the company could get a better tax write-off.
Islamic finance was defined as finance involving financial services, transactions and instruments that complied with shari’ah or Islamic law. In Islamic finance interest (riba) was not allowed. Islamic finance also was based on the principle of sharing profit or losses, and on materiality, whereby financial transactions must be linked to a real economic transaction. So many transactions were needed to obtain the same results as those of the western economic system. These transactions triggered tax consequences for people trying to save or borrow but did not generate interest. The three most common forms of savings and borrowings had been identified and were regarded as deemed interest transactions, to allow participants to obtain the tax benefits accruing. The goal was to build the domestic market and then to attract foreign investment interested in this form of finance.
Business and property tax
Small business would get tax relief but entities should not own multiple companies. The fact was allowed for that close corporations might have been terminated but had not yet been ratified by the Companies and Intellectual Property Registration Office (CIPRO).
Liquidation of residential properties
Transfer tax had been avoided by creating closed corporations to hold the property and therefore no tax was liable when the shares were transferred. That loophole had been blocked and Capital Gains Tax introduced in 2001. This tax excluded one’s primary residence. Many people wanted to transfer their primary home out of a closed corporation into their own name but would be liable for transfer duty. They were going to be given an opportunity to do so without penalty. They would however not be getting relief from estate duty.
Company law had been changed and so company tax had to be updated and aligned to it. Micro business turnover tax excluded professionals; however it allowed 20% for professional services in recognition of the services required in micro business. This excluded entertainment and secretarial services.
There was a concern that money was going off shore, getting a tax deduction and coming back tax-free and being recycled in a loop. It had been tried to close that gap by focusing on ensuring that dividends coming back to the country really were foreign dividends and also not interest income. The foreign investment of money was limited to categories of investment in bank deposits, JSE companies, and government bonds, and not in closely held arrangements of companies designed to avoid tax.
Transfer pricing was to be aligned with international practices.
Gateway to Africa
The existing regulations did now allow foreign funds earmarked for developing Sub Saharan Africa to go via the South African financial system without being additionally taxed. The amendments altered this so that they would not be taxed.
The measures had been in effect since 01 March 2010. The issue had been that minerals in a stockpile could trigger a tax event, now such an event would only be triggered once a sale from the stockpile occurred. Similarly, regarding exports, tax would not be triggered on the sale of the goods but only when the minerals were actually exported.
The tax rules were designed to promoted beneficiation of minerals to a minimum level. Some Black Economic Empowerment (BEE) companies only did extraction and not refining because they were too small. They were thus disadvantaged by the beneficiation part of the tax law. Now the beneficiation part would rollover to the refining company which would benefit from the beneficiation. This would take that part of the tax burden off the small BEE company.
There was a proposed new carbon emission tax of R75 per g/km aimed at reducing carbon emissions by targeting gas-guzzling cars. Approximately R6 000 extra would be paid on new cars as Government sought to encourage the purchase of fuel efficient cars with a low carbon footprint.
Voluntary disclosure was designed to encourage people to come forward and put their affairs in order without penalties being imposed on them, not only for taxes but also for hidden assets overseas.
The period would last from 01 November 2010 until 31 October 2011. As a rule one should not be under audit or investigation. It allowed for a no name basis representation to be made on someone’s behalf where SARS would indicate whether or not a person qualified. No additional interest penalties would be levied but the original tax payment still needed to be paid and SARS had the discretion to waive the interest on the unpaid portion. If one was under audit then half the interest payment would be waived.
Exchange control exemptions were aimed at both the individual and the corporate world to promote disclosure of any irregular exchange control in which they might have been involved in or any acquisition of any unauthorised foreign assets they might possess. They would pass along information of the application to SARS, if relevant, but each entity would deal with their matters separately.
There was however a levy on loop structures and donations to discretionary trusts. The levy would be 10% of the value of unauthorised assets if paid for from abroad. If paid from local funds, then an extra 2% would be levied.
A Member had asked if SARS could not simplify taxation on parliamentarians to one lump sum. Why was there all the differentiation in the tax return?
Mr Tomasek said that for example, changes in the car allowance, to tax 80% of the allowance as private travel and 20% as business as a rule unless proven otherwise through a logbook, needed to be adjusted to take into account the real business distance travelled.
Another example was medical expenses. Allowance was made for expenses in excess of the 7.5% of the normal medical aid deduction. There was thus the need for the filing of tax papers to give the correct amounts for tax calculation purposes.
Mr B Mashile (ANC, Mpumalanga,) asked what informed the R8 000 increased relief for fiscal drag.
Mr Momoniat replied that it was a function of inflation and what was affordable to the State with a bias towards the lower income earners.
Mr J Gunda (ID, Northern Cape,) asked why SARS was always targeting the higher income bracket earners.
Mr Momoniat replied that they were only a small percentage and that South Africa had a progressive income tax system.
Mr Keith Engel, National Treasury, said that studies showed that as one got closer to a 50% tax rate, the possibility of tax revolt increased.
Mr T Harris (DA, Western Cape) asked if the royalty rollover tax was not a disincentive to beneficiation.
Mr Engel responded that if they did not beneficiate then they get the deemed charge.
Mr Mashile asked if the carbon emission tax would really decrease the amount of big vehicles produced.
Mr Momoniat said the tax would in the future most likely be increased.
Mr Harris said it effectively taxed all new cars.
Mr Mashile said that there were no real alternative cars provided for people to purchase. Could the producer not share the tax with the user?
Mr Momoniat said that a carbon friendly environment was going to require behavioural change. He said that it was a major issue and Government’s approach on the environment was the guideline. This tax gave effect to that policy. Other related issues were the promotion of public transport and safety concerns. They were starting with new cars but it was expected that all cars would be encompassed by this tax as South Africa had committed itself to lowering its carbon emissions. This was one of the reasons why the fuel tax had been increased. The United States of America had no fuel tax and some eastern countries subsidised fuel. South Africa’s fuel tax was much less than in that of the United Kingdom or Germany.
Mr Mashile said that the tax would not affect the behaviour of people just as the taxes on tobacco products and alcoholic drinks had had no effect on people’s behaviour. He reiterated that there were no alternative provided for people to turn to.
Mr Momoniat replied that fewer people were smoking because of the tax on cigarettes and that as an alternative, public transport had to be improved, but that the amendments should be seen as a signal of Government’s intentions.
The Chairperson asked that the environmental background reports mentioned by Mr Momoniat be made available to the committee
Mr Harris asked why all South Africa was paying for the Durban -Johannesburg pipeline construction. He asked how much was expected to be repatriated through the exchange control exemptions. He said SARS’ cancellation of the right to waive the interest penalty seemed to limit SARS’ freedom.
Mr Momoniat said that it was a fair question to ask whether the pipeline should be funded from a general tax or whether the users should pay. He said the interest waiver was giving a benefit to the people and they were trying to encourage people to volunteer to come forward.
On exchange controls, 5% of the money brought back was levied and 10% if the money remained overseas. The monies recovered were substantial and very successful in the last exemption but some people had been sceptical and waited to see if there was going to be a witch-hunt afterwards. There had been none and the system had proved itself. The current rules for penalties were very high at 20-40% and it was hoped that this would encourage disclosure at the lower exemption rates.
The Chairperson reminded the meeting that the Bills were still work in progress with meetings and hearings scheduled to be held in June and July.
The meeting was adjourned.
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