National Treasury, South African Revenue Services (SARS) and the South African Reserve Bank (SARB) briefed the Committee on the Draft Taxation Laws Amendment Bill (the Bill). They stated that the background to current tax policy was the need to maintain revenue capacity while the economy emerged from recession. The fiscus had collected R60 billion less than expected in the previous year. With regard to individuals, there would be partial fiscal drag relief of R6,5 billion. There would be allowance made for the development of amateur sport by professional sport. A Voluntary Disclosure Programme (VDP) would grant an opportunity to deal with previous tax contraventions. There would be an increase in fuel levies, and excise duty on alcohol and tobacco. Carbon emissions tax would be introduced. The personal income tax threshold would advance to R57 000. Where people had multiple employers, they would be required to lump the two incomes for tax purposes. Banks were implicated in financial instrument mismatches, and there would be pressure on them to assist with tracing. It was also noted that Islamic law would be taken into account, especially as regards the prohibition of interest. Micro business relief would apply if the ultimate owner held no shares in other companies. Taxpayers had abused participation exemption in respect of the holding of shares in foreign companies, for instance by taking funds offshore and then repatriating them as tax-free funds, and this loophole would be closed. It was noted that South Africa, as a regional economic power, could be a gateway to investment in Africa, but there was no benefit if funds only passed through. It was necessary to base the tax system on the local and current situation. It was also noted that there would be reconsideration given to foreign exchange control.
Members were concerned that all tax proposals should be made known to a broad public, and not just to elites. Members also questioned the reference to Islamic traditions and funding, asking if this followed international trends and whether local trends would be accommodated in other countries. Members also asked about the emissions tax, and the formula applied. A Member challenged the use of global warming and climate change concepts as a basis for carbon tax, but National Treasury pointed out that it had the right to adopt a position while the debates were ongoing. Members also questioned the situation with withdrawal of pension funds prior to retirement, and how withdrawals in stages would be taxed. They questioned how the Bill treated churches who received donations but used them to uplift the community, and National Treasury outlined how giving and receiving donations was treated from a tax point of view, stressing that this applied to any religious organisation. Members sought clarity on deductions and exemptions in respect of amateur sporting bodies, taxation of travel allowances, share options, and the reasons why additional tax payments would often be levied on taxpayers at year end. Members also questioned the closing of loopholes that resulted in long-established practices being declared illegal, and what would happen after cut-off dates for voluntary disclosure. A Member suggested that there was a need to re-think exchange control. National Treasury indicated that the Minister had already called for a review but pointed out that total relaxation of all exchange controls was not likely.
Draft Taxation Laws Amendment Bill (the Bill): National Treasury (NT), South African Revenue Services (SARS) and South African Reserve Bank (SARB) briefing
The Committee received a briefing from representatives from the National Treasury (NT), the South African Revenue Services (SARS) and the South African Reserve Bank (SARB).
Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, National TreasuryNational Treasury, noted that the Draft Taxation Laws Amendment Bill (the Bill) gave effect to tax proposals announced in the February 2010 Budget. A key Tax Policy objective for 2010/11 was to maintain sufficient revenue capacity while the economy emerged from a severe economic recession. The fiscus had collected R60 billion less than it had anticipated. One tax proposal, relating to individuals, was partial fiscal drag relief to the tune of R6,5 billion. Others related to making allowance for the development of amateur sports by professional sports. A voluntary disclosure programme would give taxpayers in default a chance to order their tax affairs. There would be an increase in the general fuel levy, and increases in the excise duties on alcohol and tobacco, and the introduction of a carbon emissions tax.
Mr Cecil Morden, Chief Director: Economics and Tax Analysis, National Treasury, provided detail on fiscal drag relief. He noted that fringe benefits derived from company cars would be based on the presumption that use by employees was deemed to be private use unless the contrary was proved.
Mr Keith Engel, Director: Legislative Oversight and Policy Co-ordination, National Treasury, said that rules based on historical anomalies would be streamlined. With regard to key Personal Insurance Plans, he noted that savings would be promoted, not the shifting around of money. He touched on the commutation of annuities into lump sums and the partial wind-up of umbrella funds. Insurance schemes currently created difficulties. National Treasury was aware that matters would have to be simplified.
Mr Franz Tomasek, General Manager: Legislation, SARS, noted that the personal income tax threshold for taxpayers younger than 65, for the 2010/11 tax year, would be R57 000. A regulation pertaining to people with multiple employers, to the effect that both employers had to add the income together for the purposes of assessing the tax, would be phased in over three years. Professional sporting bodies would be able to deduct amounts paid towards the development of amateur sport, but only if the development occurred within a single entity. It was proposed that an allowance for future expenditure on the development of amateur sports be introduced.
Mr Engel referred to financial instrument mismatches that occurred when people told SARS that they were not making money, when in fact they were. Banks were implicated. The current inability of the State to trace bank funding appeared outdated. One proposal was to focus on the actual use of funds, and not on what the taxpayer had intended to do .
Mr Engel referred to Islamic Financing, which was based on Shari'a Islamic Law. This contained a prohibition on interest, and an insistence that financial transactions had to be linked to real economic transactions. Interest consequences would be eliminated.
Mr Engel continued that micro businesses would qualify for relief if ultimate owners did not hold shares in another company. Company law, which was closely related to tax law, had recently undergone major transformation. Due to the symbiotic relationship between the Companies Act and the Income Tax Act, consequential amendments had become imperative. Turnover tax allowed micro businesses to opt out of the complexities of the Income Tax Act into a simpler regime. Foreign dividends and capital gains were taxable unless the shareholder held a substantial interest (20%) in the foreign company. Taxpayers had been abusing the participation exemption by re-channelling funds offshore and then bringing them back onshore as tax-free funds. There would be a clamp-down on this Foreign investment was tax exempt, because theoretically taxpayers were taxed at home. The United States (US) had created a tax situation where tax free investment in the US became possible. South Africans therefore took money offshore and brought it back. The tax haven element would be removed from bonds.
Mr Engel continued that South Africa was a regional economic powerhouse and thus an ideal location for multinationals to establish regional holding companies. South Africa was a gateway that was utilised to invest in Africa, although there was no benefit to South Africa in being used as a gateway. Tax rules had to be based on the context of the local economy. Foreign exchange control was a concern. There were small technical anomalies related to VAT. The Royalty Act lacked a definition for “wins or recovery” of a mineral resource. That created uncertainty in terms of residue stockpiles. Stockpiling would not be considered a taxable event. Royalties applied when minerals were taken out and sold.
Mr Tomasek referred to the Voluntary Disclosure Programme (VDP). SARS currently had a discretion to waive interest on underpaid taxes if the taxpayer had a good legal argument. Taxpayers could approach SARS on a no-name basis to obtain a non-binding view on whether they qualified for relief under VDP.
Mr Charles Nevhutanda, Deputy General manager, South African Reserve Bank (SARB), added that VDP provided an opportunity to regularise affairs in respect of exchange control contraventions. VDP related to contraventions before 2010-02-28. Valid disclosure had to be full and complete in material respects, stating market value of the foreign asset(s) in foreign currency.
Mr Tom Coetzee, Assistant General Manager, SARB, noted that there would be a levy of 10% on the value of the unauthorised foreign asset as at 2010-02-28. The levy could be introduced from abroad or by additional payment of 2% from local funds. From 1 January 2011, SARS would only process Transfer Duty returns that had been submitted electronically.
Dr Z Luyenge (ANC) said that Parliament represented the public. Facts about taxation had to be given not only to isolated elite groupings, but to all local levels of the public.
Mr Momoniat agreed that this information had to be taken to the public. The problem was that tax laws were highly complex, and was made more complex by the numerous amendments added each year. New issues had become relevant, like regulations pertaining to sports bodies, and there were new measures to facilitate those. Generally, an effort was made to close loopholes. Only in extreme cases were regulations made retrospective. Change in tax rates were announced in advance of the change coming into effect. The same applied to changes in the tax base. Some other announcements applied with immediate effect, others only at a later stage. According to tax policy, different people and products were reached. He agreed that knowledge had to be made public, and suggested that perhaps a separate TV channel could be devoted to such matters. There was a satellite channel, but it was not run well. There were no announcements of what would follow next. C-span in the United States provided an excellent 24 hour parliamentary update. If such a channel were available in South Africa, he would like National Treasury staff to watch it.
Mr Momoniat reiterated that there were constant amendments to current Acts, and new proposals. In theory, change in budgets had the potential to create havoc, but there was still a right to amend budgets. Amendments to anything other than difference in rates were not that significant in terms of revenue. For instance, if an environmental tax proved entirely undesirable, the lost revenue could be made up somewhere else. Not all amendments were revenue-sensitive, and not all of them affected the tax base. The Minister of Finance had to comment on finance changes.
Dr Luyenge referred to Islamic funding. He said that many South Africans had little knowledge of the Islamic tradition. He asked if catering for this tradition through the tax law was part of an international trend. He asked if local traditions would be likewise accommodated in other countries. It would not be easy to engage communities about such matters.
Mr Engel responded that Islamic financing was an attempt to level the playing field. According to Shari'a or Islamic law, there was a prohibition of riba (interest). This law also included the concept of materiality, which meant that financial transactions had to be linked to a real economic transaction. Tax regulations had been too harsh on that. The common forms of Islamic financing were examined, and the conclusion had been that the net result was the same. Interest consequences would be eliminated, and from there the tax situation would be the same as for Western financing. The aim was to build local expertise to attract Middle Eastern money. Industry had no problems with that.
Dr Luyenge asked who would ultimately be paying, in terms of emissions tax. South Africa had the highest pollution status in Africa.
Mr Morden responded that the levying of an emissions tax had been proposed the previous year. It was a specific tax which applied to all new passenger cars. A formula was used, based on grams emitted per kilometers traveled. Emissions of over 120 grams came to R75 per gram. In the previous year, the average car had been taxed at 2%. He continued that he was at that moment on his way to a conference where carbon tax would be debated. The international trend was to tax carbon emissions properly.
Dr Luyenge asked about withdrawal of pension funds prior to retirement. He asked if an employee who wanted to access his pension investment after 10 years, was permitted, by the pre-retirement clause to invest retirement money. He asked if partial withdrawal from an investment fund could be made to fall into the non-taxable bracket.
Mr Engel replied that the system had not changed, with regard to withdrawal from pensions. The system was opposed to the spending of pension money, but funds could be withdrawn in order to move them around. Retirement annuities provided choices about withdrawal. The best option for the individual would be to choose a contingency clauses. He said that if a person were first to withdraw R25 000, to fall within a certain tax bracket, but then withdrew R30 000 later, the tax would be levied as if R55 000 was withdrawn at one time.
Dr Luyenge approved of the tax rules related to professional and amateur sport. He asked how the Bill treated churches, saying that these were federations that used contributions to the good of the community.
Mr Momoniat responded that provision was made for donations to churches. Allowance was also made for the kinds of products that would qualify for tax deduction.
Mr Tomasek added that legitimate and established churches were exempt from tax, in terms of their status as public benefit associations.
Ms Z Dlamini-Dubazana (ANC) agreed with Dr Luyenge that tax issues were public issues that affected everyone directly. She asked if she was right in assuming that there was no intention to tax amateur sports bodies.
Mr Tomasek replied that independent amateur sports bodies could meet requirements for tax exemption. A local soccer or cricket club, for instance, was exempt from taxation. It was only when an amateur body began to drive a business that tax considerations would enter the picture.
Dr Luyenge asked for more clarity about the taxing of motor vehicles.
Mr Morden responded that regulations for travel allowances had been changed in the previous year. There were originally two options. One option, where the first 18 000 kilometres travelled were deemed to be private use, had now been done away with. Under the current system, a person having a company car would have to keep a log of business-related travel, synchronised with the company’s information. Current rates amounted to 4% of the value of the car.
Dr D George (DA) referred to the process of passing the Money Bills Amendment Procedure and Related Matters Act (Act 9 of 2009), which had been approved in March. The process was currently being followed for the Tax Bills. In theory these had already been approved, yet could still be changed. He asked what the impact of such changes might be.
Ms Dlamini-Dubazana asked if shares converted into cash would be taxed, and asked what the best tax option would be for shares.
Mr Engel responded that the buying of shares was not yet a taxable event. When shares were sold, the money earned became taxable. There was a R15 000 tax-exempt ceiling for people who earned small amounts from the selling of shares.
Mr N Fihla (ANC) asked about those who had two sources of income, commenting that bunching these together could create a “lump sum shock”.
Mr Morden responded that the problem in the past lay in determining which employer to check with on the payments. If it was known that the employee had a pension fund, additional deductions could be made from that.
Mr Fihla referred to sophisticated electronic means to assess money deducted from an individual, and asked why, if these were used properly, so many people were faced with making additional tax payments at the end of the year.
Mr Tomasek responded that this could be because of deductions that may have been made monthly, or on an ongoing basis, but pointed out that it was not always possible to make an accurate estimate. Some deductions were based on information that could only emerge at a later stage, like the total amount of kilometers travelled, or medical expenses.
Dr M Oriani-Ambrosini (IFP) referred to the closing of loopholes through amendment of regulations, which could make certain practices illegal from a point in time. He asked what would happen to those who had relied on those practices. An example was key personnel insurance plans, where people had relied, for the past twenty to thirty years on a situation that would henceforth be illegal.
Mr Engel responded that the National Treasury was mindful of that issue. People would be warned of the changes, increasingly so as the deadline dates came closer. Shutdown indeed meant that some people would lose benefits enjoyed for long periods. However, shutdown was necessary for the sake of fairness. If rich executives failed to pay insufficient tax, that loss had to be recovered from others. The tax policy had to be broad. Effective dates were important. Some schemes would remain unaffected.
Mr Tomasek added that the more elements retained from the past, the more complex would be the system. Some taxpayers were running with the 2009 system, and some were not. It was undesirable to have a system that still retained past elements.
Dr Oriani-Ambrosini remarked that people were taxed for carbon emission because that was considered good for the environment. He said that the global warming debate had quietened down, because it had been established that global warming was not significant. Currently the debate was about climate change. Carbon emission had been proven as unrelated to climate change. He asked about the meaning of carbon tax in that context.
Mr Momoniat contested Dr Oriani-Ambrosini’s statement that global warming was not significant. He thought that there was in fact consensus that global warming was a reality. Climate change was as valid a reason for tax responses. There were debates on the issues, but the tax cluster had the right to have a view, and to take a position.
Dr Oriani-Ambrosini suggested that exchange control be amended. The Reserve Bank had recovered its assets abroad, yet there had not been a single amendment to the Exchange Control Act. South Africa could be bypassed as a finance centre, in favour of Gabarone, which had no exchange control. The local situation was one of a State law being driven by a privatised Reserve Bank not related to the process. There were legal complications. The possibility of getting rid of the Exchange Control Act had to be considered.
Mr Momoniat responded that the Minister had announced that there had to be research done into reforming the Exchange Control Act, which dated back to 1933. There were specific areas to consider, so it could not simply be a free for all. Some exchange controls were to be found everywhere outside South Africa. More modern control mechanisms would be considered.
Mr Engel noted that India had a strong exchange system. It was a highly civilized country. Locally, the aim was to remove certain areas from exchange control.
Dr Luyenge asked about voluntary disclosure. He asked whether, once the cut-off dates had been passed, nothing could be done to remedy the situation. He asked if there could be retrospective implications.
Mr Tomasek replied that voluntary disclosure provided an opportunity to set tax affairs in order. It mostly applied to rich people who had foreign dealings. Constituencies could be informed of what the cutoff dates were. There were different cutoff dates. The cutoff date for applications was 1 November 2010. Only faults before a certain cutoff date would be considered, to prevent current transgression.
Dr Luyenge asked again about donations. He noted the response that churches, if they used their donations for the benefit of the community, would not be taxed. He asked what the situation was for the individual taxpayer who donated to causes.
Mr Tomasek answered that some donations could be claimed as deductions, if, for instance, they went for assistance of a cause such as treatment of HIV. A Section 18A receipt had to be obtained. If a church assisted in the treatment of HIV, it would be deductible.
Mr Momoniat added that the reference to “churches” did not refer to specific religions or denominations and covered any religious organisations. There was also an exempt category for belief systems.
The meeting was adjourned.
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