Government Employees Pension Law Amendment Bill; Taxation Laws Amendment Bill, 2011: briefings

Meeting report

Introduction
The Chairperson noted the two pieces of legislation before the Committee had not yet been referred to it officially. This was a preliminary briefing. The referral process in this institution was very slow. Although the Government Employees Pension Law Amendment Bill was short, it had huge implications for everyone.

Government Employees Pension Fund: National Treasury briefing
Background - The “Clean Break” Principle
Ms Jeannine Bednar-Giyose, Director: Legislation, National Treasury, said that the Government Employees Pension Law (GEPL), currently, did not allow a former spouse of a member to claim a portion of the member’s pension interest, in terms of a divorce order or an order for the dissolution of a customary marriage, soon after the divorce order or the order for the dissolution of a customary marriage was granted. The former spouse could only receive a portion of the member’s interest after the exit of the member from the GEPF.

The Government Employees Pension Law Amendment Bill, 2011 would amend the GEPL to provide for the implementation of the “clean-break” principle.

The “clean-break” principle allowed for the non-member spouse to claim and receive a portion of the member’s interest that was assigned in terms of the divorce order or the order for the dissolution of a customary marriage, soon after the divorce order or the order for the dissolution of the customary marriage had been granted. The former spouse did not have to wait until the member exited the pension fund.

A “clean break” could then be made between the parties as far as the non-member’s claim to a portion of the member's pension interest was concerned.

The Pension Funds Amendment Act (Act No 11 of 2007) had already incorporated the “clean-break” principle into the Pension Funds Act (Act No 24 of 1956) as Section 37D(1)(d), (3)(b), (4) and (5).

• Clause 3 of the Bill provided for the insertion of a new Section 24A into the GEPL, to provide for the implementation of the “clean-break” principle.
• The new Section 24A that would be incorporated in the GEPL would bring the GEPL in line with what was currently provided for in the Pension Funds Act (PFA). [Slides 1-3]

Revised Non-Statutory Forces (NSF) Pension Dispensation
The Amendment Bill also enabled the implementation of the Revised NSF Pension Dispensation.

On 15 April 2009 and 24 November 2010, Cabinet approved the revision of the NSF Pension dispensation:
• abolishing the need for former NSF members to contribute to the funding of the recognition of their NSF Service by the GEPF;
• recognising the full period of NSF Service by all former NSF members who entered into an employment contract with all Government departments and institutions that contributed to the GEPF; and
–providing that Special Pension benefits paid to qualifying members who were still in service should cease at exit from the GEPF, and that members should then receive their full pension benefits in accordance with the GEPF Rules.

An amendment to Section 30A(2) of the GEPL and a consequential amendment to Section 14(4) of the Special Pensions Act, 1996 (Act No 69 of 1996) would give effect to the Revised NSF Pension Dispensation as approved by Cabinet.
• Section 30A(2) would be amended to provide that a person who had their NSF service recognised as pensionable service by the GEPF, would not have any benefits that they might have received in terms of the Special Pensions Act deducted from the benefit to which they were entitled to receive from the GEPF.
• It would also be explicitly provided in Section 30A(2) of the GEPL and in Section 14(4) of the Special Pensions Act (in terms of the consequential amendment contained in the Schedule to the Bill) that a person’s entitlement to receive a benefit in terms of the Special Pensions Act would only terminate on exiting the GEPF. (Slides 4-5)

Objects Of The Bill (Please see slide 6)

Clause By Clause Analysis
The Bill was divided into eight Clauses.
• Clause 1 provided for the amendment of Section 1 by amending the definition of “employer”, which was an important definition in relation to the application of the Revised NSF Pension Dispensation, and inserting a definition for “pension interest”, which was an important term that was used in the Bill.

'Pension interest', in relation to a member of the Fund who was a party to an action for divorce action or for the dissolution of a customary marriage, meant the benefits to which that member would have been entitled in terms of the rules of the Fund if the member’s membership of the Fund would have been terminated on the date of the divorce or the dissolution of a customary marriage on account of the member’s resignation from the service of the employer.

• Clause 2 provided for the amendment of Section 21 of the GEPL, to extend the potential for the assignment or transfer of benefits. This was achieved by making Section 21 subject to the provisions of the proposed new Section 24A that would be inserted into the GEPL through Clause 3 of the Bill.

•Clause 3 provided for the insertion of a new Section 24A into the GEPL, to provide for the implementation of the “clean-break” principle upon divorce or the dissolution of a customary marriage.

•Clause 4 provided for the amendment of Section 29(2)(g) of the GEPL, to enable the Board to make rules to provide for the appropriate implementation of the “clean break” principle by the GEPF.

Clause 5 provided for the amendment of Section 30A(2) of the GEPL, in order to enable the implementation of the Revised NSF Pension Dispensation that was approved by Cabinet.

•Clause 6 provided for a transitional provision.

•Clause 7 and the Schedule provided for the consequential amendment of Section 14(4) of the Special Pensions Act, which was necessary to enable the implementation of the Revised NSF Pension dispensation that was approved by Cabinet.

•Clause 8 provided for the short title and commencement. (Slides 7-9)

Financial Implications
The implementation of the “clean break” principle was not anticipated to have financial implications for Government. It would be sought to implement the “clean break” principle in a manner that would have, as far as possible, a “revenue neutral” effect for the GEPF.

It was estimated (by the GEPF actuary) that the additional liability owed to the GEPF by the respective Departments and/or Institutions was R4,735 billion as at 31 December 2011. In order to maintain the Fund’s funding requirements, the Board of the GEPF had requested that in respect of members who had already exited the Fund, a lump sum payment of R1,378 billion be made (as per the actuary calculations).

•The GEPF would require an immediate cash injection of R1,378 billion for the payment of lump sums to members who had already exited. (Slide 10)

Determination of Financial Implications
The costing of the financial implications relating to the implementation of the Revised NSF Pension Dispensation was done as explained in slides 11-14, to which Ms Bednar-Giyose referred Members.

Summary Of Costs
Total cost as at 31 December 2010 for all departments, could be summarized as illustrated (table, slide 15)

Addressing The Financial Implications
There should not be any financial implications since it was aimed to be implemented on a cost-neutral basis for the GEPF. The financial implications for the revised NSF pension dispensation would be addressed through appropriate budgeting and budget submissions on the National Treasury Vote (slide 16).

Government Employees Pension Fund presentation on GEPL Amendment Bill, 2011
Ms Joelene Moodley, GEPF Head: Corporate Services, explained the need for changes of definitions in order to implement the Clean Break Rules.

Definition Clause
• “Divorce debt” in relation to a member meant “...an amount equivalent to the amount of the pension interest assigned to the member’s former spouse in terms of a divorce order or decree of dissolution of marriage accumulated from the date of payment to the former spouse to the date on which a benefit is paid to the member in terms of the Rules together with the interest from the date of payment to the former spouse at the rate or rates determined from time to time by the Board as the rate or rates of interest payable in respect of
monies owed to the Fund...”;

• “Former spouse’s share” meant “...an amount equal to the share of a member’s ‘pension interest’ assigned to his or her former spouse in terms of a divorce order, accumulated with interest at a rate or rates determined from time to time by the Board from the former spouse election date to the date of payment or transfer, as the case may be...”;

• “Pension interest” meant “...the lump sum cash benefit to which a member would have been entitled in terms of these rules had he or she resigned from service on the date on which he or she was divorced from his or her former spouse...”; (Slides 2-3).

New Rule 14.10
Rule 14.10 detailed process and time frames for the clean-break principle implementation:
• Rule drafted along the same lines as of the Pension Fund Act (Section 37D).
• The Fund must receive a certified copy of the Divorce Order from the either party (Rule 14.10.1).
• The non-member spouse must indicate to the Fund whether he/she wanted to receive the payment directly or must the payment be made into a preservation fund (Rule 14.10.2).
• Once the non-member had made an election and informed the Fund how payment must be made, the Fund must make payment within 60 days (Rule 14.10.4).
• If the non-member spouse failed to make an election then the Fund must make payment to the non-member spouse directly (Rule 14.10.5).
• Once the Fund received written notice of the Divorce Order, the Fund must record a divorce debt against the member in the amount due to the former spouse (Rule 14.10.6).
• Notwithstanding Rule 14.10.5, if the Fund could not reasonably ascertain how the payment to the former spouse must be effected the Fund must retain the amount plus interest as determined by the Board until such times as it had details of how and where payment should be made (Rule 14.10.7).
• When the debt became payable to the member in terms of the Rules:

”The amount of the gratuity, if any, must be reduced by the amount payable to the non-member spouse.
If the amount of the divorce debt exceeded the gratuity and there is an annuity payable to the member, the capital value of the annuity must be determined by the Fund’s Actuary and the amount of the annuity must be reduced by the amount paid to the former spouse” (Rule 14.10.8).

• The balance would then be paid to the member of the Fund (Rule 14.10.9). (Slides 4-8)

• Implementation Process: NSF
Amended Rules relating to the NSF provisions were gazetted on 8 July 2011.

• Implementation Process: Clean-break
The Rules on Clean-break still needed to be gazetted. There was engagement under way with the Public Service Co-ordinating Bargaining Council and Treasury to clarify the treatment of tax. (Slides 9-11)

Non-Statutory Forces Rules for GEPL Amendment Bill: GEPF presentation
Mr Rean Fourie, Legal Advisor, Government Pensions Administration Agency (GPAA) said that the Bill dealt with two main issues: the Clean Break and the new NSF dispensation. In terms of the NSF dispensation, it had been necessary to make legislative amendments, which were before Members. It had also been necessary to issue rules in terms of the GEPL. To give Members a full picture of how the NSF dispensation was implemented, it was necessary to explain the Bill and the NSF rules.

Non-Statutory Forces (NSF)
During 2003 statutory recognition was given to former members of non-statutory forces or services Government Employees Pension Fund by the amendment of the Government Employees Pension Law 1996 (slide 2). This was the old dispensation, in which one had to contribute 5% of what it cost towards the recognition of one's NSF service In 2009 the Cabinet approved a revised NSF pension dispensation for members who were integrated into the South African National Defence Force (slide 3). In terms of the new dispensation, one did not have to contribute if one was an NSF member. The Cabinet further directed that the Ministers of Finance and of Defence together with the Government Employees Pension Fund consult and consider implementation details. In the context of achieving full alignment of the pension dispensation for all forces, the interdepartmental task team identified additional aspects that were required to achieve full implementation (slide 4).

In accordance with the task team's recommendation, the Cabinet approved the extension of the non-statutory forces dispensation to all former NSF members and that special pension benefits paid to qualifying members who were still in service should cease at exit and that members should receive their full pension benefit instead of in accordance with the GEPF Rules (slide 5).

Following Cabinet's decision, the GEPF Rules were revisited to achieve full alignment of the pension dispensation. The gist of the rule amendments was to achieve this goal.

Amendment of rules
Since the pension dispensation was now extended to all former members, rule 6.10 was amended (slides 6-7). A new simplified rule 11.9 was introduced (slide 8). As a consequence of the realignment of the pension dispensation, it was necessary to introduce rule 11A and 11B to achieve the required outcome (slide 9).

Rule 11A dealt with the repayment, with interest, by the Fund of contributions, special pension and demobilisation benefits previously paid by former NSF members in recognition of pensionable service. Its prescriptions were explained (slide 10).

Rule 11B dealt with the recalculation of the pensionable service and benefits of former non-special forces members and their beneficiaries. Its prescription was explained. (Slides 11-13).

The rules came into operation on the date of publication – 08 July 2011. In the final analysis, the achievement of the full alignment of the dispensation could only be achieved by the consequential amendment of the Special Pensions Act 1996 (slide 14).

Discussion
Mr B Mashile (ANC, Mpumalanga) complained that, yet again, Members had not receive their documents on time. He objected to being 'flooded with documents' at the start of the meeting. This reduced Members to the level of 'listening animals' or 'listening tools' which was not appropriate to the role of well-informed Members of Parliament.

The Chairperson said that he had received his documents some time ago.

Mr Mashile said that the officials must try their best to send the documents early.

The Chairperson noted Mr Mashile's concern and said that it was the Committee’s right to recall the National Treasury; moreover, this was a preliminary briefing ahead of the official referral of the proposed legislation to the National Council of Provinces (NCOP).

Mr Mashile asked if these amendments had already been put into effect, as they were being gazetted, when Members still had before them the GEPL Amendment Bill. He did not want to waste his time on rules that the Department had already approved.

Ms Moodley replied, that, in terms of the GEPL Amendment Bill, the Clean Break rules had not yet been gazetted, because the GEPF board did not yet have the authority to implement such rules. There was a Clause in the Bill which spoke to amending the powers of the board to allow it to make rules on the Clean Break. The Clean Break rules could be gazetted only after the GEPL Amendment Bill had been enacted.

In respect of the NSF, the current GEPL allowed the board to implement rules that spoke to the NSF. So the board, within its authority, had already gazetted the rules in respect of NSF to allow for implementation. There was nothing in the Bill that would require the board to gazette these rules. The board already had it in its power to do so.

What was needed to do in the Bill was address the implications for special pensions.

In respect of the NSF, it had already been gazetted on 08 July, because the board had within its powers the authority to do so. However, the Clean Break rules in front of Members were to give a fuller picture around the Bill and its implications for the Clean Break, 'and that has not been gazetted'.

The Chairperson asked in which document the NSF rules were contained.

Mr Fourie replied that he could provide the Select Committee with a copy of the rules.

The Chairperson asked what document was in front of Members.

Mr Fourie replied that the presentation had been provided, but not the rules.

The Chairperson wanted to know exactly what Members must have in front of them.

The Chairperson asked, in terms of proposed Section 24A(2)(g),why it took 60 days to pay, whereas, in terms of proposed Section 24A(2)(h) it took only 30 days to pay.

Mr Mashile replied that the Bill sought to amend provisions related to people's lifelines at the most vulnerable stage of their lives. In view of the problems faced with the Protection of Information Bill, he felt obliged to ask if the parties affected had been given any opportunity to give their views on this amendment, and if the Select Committee could have access to their input.

Mr B Mnguni (ANC, Free State) asked how a spouse could obtain her portion of a pension, in the case where a divorce decree did not state that the spouse must get a portion of the pension of the other spouse, and the lawyers said that there was nothing that she could do.

Mr R Lees (DA, KwaZulu-Natal) referred to slide 15 of the first presentation. He did not understand how the R3.9 billion in respect of the Department of Defence and the R700 million in respect of other departments was gong to be funded. How was the reserve account of R1 billion odd being dealt with now? Was it a separate ring-fenced account within the Fund?

The Chairperson said that it was very important that members of the board of trustees be given training to run such an institution, since they were working with other people's money. He observed no members of the board present.

Ms Bednar-Giyose replied that the time frames terms of proposed Section 24A were similar to those currently reflected in Section 37D, so to avoid any possible challenges, National Treasury had modelled Section 24A in the Bill on Section 37D in the Pension Funds Act to achieve a consistent application of the Clean Break principle in terms of the time frames. She understood the question, but pointed out that it was necessary to ensure consistency as far as possible with Section 37D of the Pension Funds Act.

As regards engagements, it was important to note in relation to the implementation of the Clean Break principle, that this was something that was being strongly pushed by non-member beneficiaries – former spouses, of the GEPF. In fact, there had been a case brought in the Western Cape High Court. A judgement had been issued in that case indicating that the inconsistency of the application of the Clean Break Principle in the GEPF compared to its application in the Pension Funds Act was unconstitutional. So the Court had essentially ordered that the Clean Break principle be implemented. Already the National Treasury was working on implementation of the Clean Break principle, but the Court had emphasised the urgency of its implementation in respect of the GEPF.

There had been no objection, in the comments raised in the parliamentary processes, to the implementation of the Clean Break principle. Support for its implementation was in fact extremely strong.

As to the revised NSF dispensation, the submission to Cabinet proposing its revision was in fact spearheaded by the Department of Defence. Moreover, there had been strong support from the former NSF members. The revised dispensation was intended to enhance benefits provided to people and should not have any negative implications for others, per se.

In relation to the query about the divorce decree, when the GEPF was dealing with the pension benefit on divorce, it was bound by what was indicated in the divorce order. If a couple wanted to enter into an agreement on how the pension interest should be dealt with, that could be made an order of court, and the GEPF would be bound by it. If the divorce order did not make any provision on how the pension interest should be dealt with, then the GEPF did not make any payment or distribution in such a case – it remained the interest of the member concerned. The GEPF could not go further than what was provided for in a divorce order.

Ms Esti de Witt, Head: Legal Services, GPAA, added that the GEPF was a pension fund and pension monies were almost sacred. So one could not just make deductions from pension benefits. So this was why a deduction was allowed if there was such an order in terms of Section 7 of the Divorce Act. Pension monies could not be attached. So it was necessary to have very specific authority to make a deduction from pension benefits. In an instance where it was not contained in a divorce order, and the pension benefit remained with the pension fund and the member had not exited the pension fund, the non-member could approach the courts again to amend that divorce order to allow for a deduction and a division of pension benefits in terms of Section 7 of the Divorce Act. On the basis of such an amended divorce order, the GEPF would be in a position to make such a deduction.

Mr Mashile asked how, in the dissolution of customary marriages, which were recognised in South Africa, this specific Section applied, in the absence of a decision on the dissolution that addressed the matter of pension funds.

The Chairperson thought this a very interesting question.

Ms Bednar-Giyose replied that if the customary marriage was registered in terms of the Recognition of Customary Marriages Act, then Section 8 of that Act specifically referred to some of the processes, and there was specific reference to the dissolution of customary marriages in terms of that Act. That Section gave powers to a court similar to those given in Section 7 of the Divorce Act. In that instance the court could make an order to dissolve the customary marriage. That order could address distribution of the assets and pension interests and would have the same effect as a divorce order in terms of a marriage under the Marriage Act and it also applied to Civil Unions.

One aspect that was slightly complicated was religious marriages, like the Muslim marriages, which were not formally recognised as such. This would have to be looked at in relation to all the legislation on unions and partnerships. As far as possible, it had been endeavoured to include that.

The definition of spouse included in the rules of the GEPF was a widely worded provision that included spouses in civil unions, life partnerships, and even in terms of the tenets of a religion. Ms Moodley said that there had also been engagement with the PSCBC, which had raised no objections.

Ms Moodley was not a member of the board but was a member of the executive management of the GEPF and could assure Members that board members did undergo stringent training including investment issues.

Ms Laurel Shipalana, Director: Civil and Military Pensions, National Treasury, replied that the reserve account was used to cover the NSF costs in respect of the Department of Defence when the first dispensation came out. As of 31 December there was a balance of R1 billion in the account and this money was going to be used to cover these payments.

National Treasury had decided to cater for NSF payments centrally through the budget process.

The Chairperson asked what happened after the fund was depleted by R1 billion by taking the R1 billion from the reserve account.

Ms Shipalana replied that this was the reason for following the general budget process.

The Chairperson was satisfied to have the process on record. Mr Lees said that the R1 billion was available and that was fine, but the R4.7 billion was not available. He was worried that the Select committee would pass the Bill and then there would be an obligation to find the R4.7 billion. Over what period was it required? What were the real implications for the budget over the next three years?

Ms Shipalana replied that National Treasury was catering for NSF within the budget process for the next three years. If it obtained the funds, they would be available on 01 April 2012, and the R4.7 billion would be split into three equal amounts to be paid every April for the next three years.

Mr Mashile asked again about the process of this amendment bill. He felt that nobody had attempted to answer him. He noted that National Treasury had spoken to the PSCBC. He wanted to know the process that had led to that consultation. He asked if National Treasury had spoken to the veterans and what the veterans' contributions to the amendments were. He wanted to know more about proposed Section 33A(2) and was concerned about retrospective application of an amendment to legislation. 'What kind of legislation is that?'

Ms Bednar-Giyose replied that National Treasury had proposed the Clean Break amendment on the basis of the increasing number of court cases being brought by non- member spouses. There was no disagreement expressed by any stakeholders. The Commission for Gender Equality (CGE), the Cape Bar Council, and others, had expressed their support for implementation on an urgent basis.

Ms Moodley added that there had been engagement with all relevant stakeholders, and they had not come back with any problems.

Mr Mashile thought that Ms Bednar-Giyose and Ms Moodley had tried hard but their response was still not adequate. There were pensioners who were out of the system. National Treasury had been motivated largely by a court ruling. The people affected should have been consulted. The kind of public consultation undertaken was not adequate.

Mr Lees understood that the application of the Clean Break principle had no financial implications.

The Chairperson requested a list of those whom National Treasury had consulted in its interactions.

Taxation Laws Amendment Bills, 2011: South African Revenue Service & National Treasury briefing
Prof Keith Engel, Chief Director: Legal Tax Design, National Treasury, said that the Bills were to give effect to tax proposals announced in the 2011 February budget and amend pre-existing legislation. Of course, an amendment bill was completely unreadable without reference to the legislation to be amended. So Members were referred to the Explanatory Memorandum on the National Treasury's website. There would be a revision of this when the final version of the Bill was published. The draft was released on 02 June 2011. The initial briefing to the Standing Committee on Finance (National Assembly) was on 15 June 2011. Hearings were held on 21 and 22 June 2011. Treasury and the South African Revenue Service had interacted with the public through receipt of more than 500 pages of responses provided by approximately 60 organisations by 11 July 2011, and workshops in July with interested stakeholders. An accelerated consultation process on the contentious Section 45 and related matters was announced on 29 July 2011. One-to-one meetings were held, covering more than 50 transactions. Revised proposals on Section 45 and related matters were released on 03 August 2011. Comments on the revised legislation were due by 17 August 2011 and a workshop was held on 31 August 2011. Hence the Bill was being presented in September, and not in August as usual (slides 2-3).

Rates, thresholds and taxation of individuals/employment
Prof Engel explained that the rates and thresholds were already in force. The Minister had the power retroactively to change them. The rates and thresholds were announced in the February budget, and implemented, subject to subsequent ratification by Parliament. Effectively, Parliament was ratifying the Minister's announcement.

Rates and thresholds
Ms Beatrice Gouws, Director: Personal Income Tax (PIT) and Savings, National Treasury, explained rates and thresholds, with a numerical summary of the main tax proposals (table, slide 5), current rates and thresholds for individuals (table, slide 6), and proposed rates and thresholds for individuals (table, slide 7). She pointed out that proposed meant the rates that we were actually paying now.

She then explained rebates for individuals (table, slide 8), and current and proposed retirement lump sum and severance benefit tax table (slide 9).

Medical scheme contributions
She explained medical scheme contributions and other medical expenses – past reforms (slide 10), and credit proposal for 2012/13 (table, slide 11). She defined 'financial dependent' as any part of the immediate family for whom one is responsible for the care and support. The definition was broader than previously. It would include a brother or sister, or mother or father, even though that person was not on one's medical aid. She explained the difference between a medical credit and a deduction. A deduction worked from one's income. With credit, one worked out everything to the end, determined the tax payable and then obtained a credit so that one paid less tax. She then explained the effects of medical credits – example (Sections 6A and 18) (table, slide 12)

Insurance policies
She then explained insurance policies: employer contributions as a taxable fringe benefit (paragraphs 2(k) and 12C of the 7th Schedule (slide [13]), insurance policies: employer contributions as a taxable fringe benefit (paragraphs 2(k) and 12C of the 7th Schedule and Section 23(m)(ii) (slide [14], insurance policies: employer risk plans (Section 11(w)(ii) and paragraph (m) of 'gross income') (slide [15]), and insurance policies: investment policies for the benefit of employees (paragraph (d) of 'gross income') (slide [16]).

Prof Engel said that in the group plans, there was a lot of law around taxpayers trying to re-characterise their salary for different reasons. Whether people received cash, or at other times fringe benefits, the object of tax law was to ensure that they should all be taxed the same. Whatever one paid in a group plan, if it was a fringe benefit, one was taxed as one received the fringe benefit, which was the coverage.

Share incentive schemes
Prof Engel said that in share incentive schemes (Section 1091)(k)(i)(dd)) (slide [17) there was much activity because executives were involved who hired expensive lawyers to reduce their tax liability. To the extent that the benefits of share incentive schemes were taken in cash, one would be taxed. This provided a deferral, because the tax was paid later. 'However, we pick up all the growth.' Dividends were tax free in the current law, whereas salaries were taxable. So there was a tendency to disguise salaries through preference share dividends, and thus turn one's 40% rate into a zero rate. In most of these schemes, the preference share itself had no value; it would just give a dividend yield based on the design bonus that one wanted. So one set up a trust, put these preference shares in and so one would receive tax-exempt dividend income as part of one's salary. However, National Treasury had tried to close down this area last year, but the problem was that it went to far. So it had revised the proposal. If one held shares in a trust, the dividends on that share would be ordinary revenue unless the sole assets of the trust were equity shares or the assets used in the trust to facilitate those shares. So Black Economic Empowerment employees would be taxed only on their cash out. National Treasury was still working on the proposal to refine it with the aim of targeting only the high executives.

Road Accident Fund payouts
Ms Gouws said that it was proposed to exempt all payments from the Road Accident Fund (Section 10(1)(gB) whether received as a lump sum or via annual payments, (slide 18), since currently whatever was payable in the form of an annuity was taxable like ordinary income.

Judicial commuting
For purposes of the employer-provided motor vehicle rules (Paragraph 7(8) of the Seventh Schedule), it was proposed that judges, who were unique in that they were required to travel long distances to serve various courts placed far and wide, treat their daily commute as business travel if they kept a log book to record the distances covered (slide [19]).

Exemption of Members of Parliament from contributing to the Unemployment Insurance Fund
In regard to parliamentarians' contribution to the Unemployment Insurance Fund (UIF) (Section 4 of the UIF Act), it was proposed that, since they did not have the option of drawing benefits from the UIF when they lost their seats, they should no longer be required to contribute to the UIF (slide [20]).

Business and international
Dividends Tax
Prof Engel said that the Dividends Tax was to replace the Secondary Tax on Companies (STC) from 01 April 2012. STC credits would continue for a transitional period. Around the world, most countries, when there were dividends, taxed the shareholder. The exceptions were three countries: South Africa, India, and Estonia. The problem with the STC was that the dividends tax fell on the company. The company dividends tax was easier to enforce, but one could not work with it very well internationally for treaty purposes. For treaty purposes you did not get relief. So if a foreigner invested into South Africa, and wanted to take out dividends, the foreigner did not get treaty relief in the way the foreigner should. So National Treasury had switched the tax to a dividends tax at a shareholder level, and it would go into effect on 01 April 2012. For pension funds, dividends would be exempt. Company to company dividends would be exempt. So the new rule for dividends was not just a switching of the tax, but it was actually an overall relief mechanism to encourage investment. This year National Treasury had refined all the details in the administration (slide 22).

The Value Extraction Tax (VET)
This was really a disguised dividend tax. After much wrangling, this tax turned out to be more trouble than it was worth, and it had been decided to rely on 'the judicial law'. The exemption would be when the company made a loan to the shareholder. That loan could create a deemed dividend, if that loan was below market interest rates. Common law had trouble with that. The way to eliminate the tax was to pull back on the loan and pay the dividend. This was what one was supposed to do (slide 23).

Foreign dividends
Domestic dividends were subject to a rate of 10%. Under the current law foreign dividends were subject to a rate of 28% to 40% which was a complete mismatch. Now all domestic and foreign dividends would be taxed equally. The aim was parity on the Johannesburg Stock Exchange. (Slide 24).

Section 45
Section 45 was a special roll-over tool. When you had a group of companies, you had different legal entities, but economically they were all one group. The operations were merely separated by using different companies rather than separate divisions. However, the shareholders ultimately owned everything. In 2001 when the capital gains tax was introduced, National Treasury said that when you moved the assets around in a group you were not really obtaining any cash so you should not be taxed and all the gains and losses should roll over – in other words, be deferred. It seemed innocuous enough ('transfers within wholly owned group, left-hand side of diagram, slide 25). National Treasury then wanted minority share holders to enter the group and that was to allow and facilitate BEE transfers; to the extent that you needed to give 26% to meet the codes, National Treasury did not want to have a tax charge on that. National Treasury was not giving exemption, but just giving roll-over treatment. What happened was that tax advisors began to get involved, and began to use Section 45 as an acquisition technique? Now the purpose of the acquisition technique was that if you borrowed money to acquire shares, the borrowing of the interest was not deductible because dividends were not subject to tax under the current law. ('Transfer with minority standards, right-hand side of diagram, slide 25).

Reorganisations and leveraged buyouts (LBOs)
Reorganisations (Section 45 and also Section 47) became a technique to borrow to acquire shares, but to do so indirectly. Not all of this was bad, and SARS had sanctioned it, but people began to use it to connect assets to excessive amounts of debt. So there was gearing on debt to the extent of borrowing 95% of the assets. Small entrepreneurs would know that banks were not willing to give loans on 95% of the assets. In commercial terms it was more like 40% to 50%. So one found that debt was not really debt at all. It really was shares with the label of debt. The purpose of re-labelling the shares as debt was to give one a big interest deduction, so that the money going out was reducing one's tax. If one was shrewd, one made sure that the money went to exempt parties. (Slide 26).

Prof Engel explained basic tax mathematics (table, slide 28), before returning to Section 45 leveraged buy-out (LBO) transactions (slide 27), and discussing the closure of excessive LBO schemes (slide 29).

National Treasury, under its revised proposal, now said that, if one entered into a Section 45 or Section 47 transaction, if you used those provisions to obtain an interest deduction, National Treasury would deny the interest deduction unless it approved of the transaction. The purpose of the approval process was to determine if a Section 45 or Section 47 transaction was hurting the fiscus – if there was a tax leakage. If one borrowed money and one obtained a deduction, this was fine, but National Treasury wanted to be sure that there was matching income on the other side.

With the revised proposal, much of the controversy had died down. While there was resistance to the approval process, National Treasury wanted to collect as much information as possible from it, with a view to discontinuing it eventually.

Prof Engel explained regulatory discretion (slide 30), hybrid shares (debt disguised as shares) (slide 31), the South African paradigm (slide 32), the Section 8E funnel problem (diagram, slide [33]), the hybrid share proposal (slide 34), the acquisition and pledge of ordinary shares (diagram, slide 35), and anti-avoidance: dividend cessions (slide 36).

Prof Engel noted that the aim was to close loopholes to protect the tax base. It also wanted to discourage entering into transactions merely to benefit financial advisors. Section 45 transactions had cost the fiscus as much as R50 million or R100 million each. The borrowers benefited, but the advisors usually picked up about 25% to 30% of the benefit, which was why they had originated these structures. National Treasury preferred equality between rich and poor. It was a major aim to make sure that the tax system was fair.

Islamic Finance: Government Sikuk (Section 24JA)
National Treasury had found that Islamic finance was being treated unfairly. If you wanted to make an Islamic financial arrangement, you found yourself paying a higher rate of tax than if you followed the traditional Western way. In Islamic finance you were not allowed to borrow money at interest. Usury was prohibited. It was prohibited in Christianity back in the 1500s, but then, for various reasons, the religious prohibition was dropped. Also the Islamic world deplored financial wizardry, such as derivatives, and preferred to see the movement of real assets. An Islamic bond had been requested. All debt locally had a benchmark, which was a Treasury bond. A Government Sikuk was requested, which was an Islamic treasury bond. National Treasury thought that was exciting idea. It would also encourage savings, and the tax system was going to recognise such a Sikuk. Moreover, in the long term it was hoped to attract capital from the Middle East. However, it was somewhat complicated, and it was necessary to have religious scholars to sanction what one was doing. (Slide 37)

Incentives
Incentives for industrial policy projects, venture capital companies (Section 12J) , research and development (Section 11D) , and film production (Section 120) were explained (slides 38-41).

Micro-business turnover tax relief
Micro-business turnover tax relief (Paragraph 7 of Appendix 1)) was explained (table, slide 42). National Treasury had a strong interest in promoting small business. The aim was a simplified tax. However, only about 7 000 people had registered, of whom 6 000 were previously on the system. Hence the Voluntary Disclosure Programme (VDP) to ensure that people could obtain amnesty and enter the system. The rates had been lowered slightly, and more importantly, one could use this system and remain a Value-added Tax (VAT) vendor, as was necessary to do business with Government.

Unification of source rules
On the foreign side, National Treasury sought to simplify investment into Africa. Firstly, it wanted to promote South Africa as a regional centre for head-quarter companies, by unifying source rules, and avoiding any unintended South Africa tax (slide 43). Only the South African profit should be taxed, not the money that was going through South Africa.

Special foreign tax credit
Special foreign tax credit for management fees was explained, with a view to eliminating double taxation of multinationals. (Slide 44)

Head-quarter company incentive
The head-quarter company incentive was introduced in 2010 to encourage South Africa as a regional centre.
(Slide 45).

Value-added Tax
Relief for temporary rental use by developers of residential fixed property (section 18B of the VAT Act)
Prof Engel explained that this relief was not for speculators but for developers, whereby fixed property might be temporarily rented for residential purposes for a maximum period of 36 months, provided the intention remained to sell the property (i.e. the developer did not permanently change intention from a selling purpose to a rental purpose) (Slide 47). This was to assist developers affected by the economic recession which had made it difficult to sell houses.

Imported Services (Section 14(5)(e) of the VAT Act)
National Treasury thought that this amendment was non-controversial but had been surprised by the reaction. The local book industry complained that the removal of VAT on imported goods would undercut the local industry. Therefore the revised proposal was that the exemption for imported goods would remain at R100. A matching exemption for imported services would be added at R100. The validity of the competition argument needed to be reviewed as well as the policy for effectively imposing VAT for imported electronic downloads (Slide 48).

Discussion
The Chairperson said that the situation of Members of Parliament was not very dissimilar to that of judges.

Prof Engel said that National Treasury had taken note of that.

Mr Mashile pointed out that Members of Parliament had to compile logbooks for their constituency travels.

The Chairperson remarked that this was quite an exercise.

Prof Engel said that the UIF proposal would help Members, since currently they had to pay, but were not entitled to benefits from the UIF. Treasury was not really obtaining enough information about Members' travel expenses, and wanted to be careful that it did not start a precedent.

The Chairperson pointed out the Parliamentary Research Unit. 2011 Tax Proposals research document. He asked what National Treasury's response was to all the inputs and for this to be provided in a document.

Prof Engel said that a draft response document [National Treasury and South African Revenue Service. Draft response document [as given at 07 September meeting of the Standing Committee on Finance] had been issued three weeks previously. A final version would be issued shortly. Prof Engel said that National Treasury had basically dealt with most of the taxpayers' objections. The controversy around Section 45 had largely subsided, as could be seen from the newspapers. There were some contentious issues remaining around Section 45 and the hybrid shares. Stakeholders wanted a much more liberal interpretation than National Treasury wanted. It was a question of balancing the needs of the fiscus with the needs of commerce.

Mr Mashile could not remember Parliament changing National Treasury's tax proposals. This was a problem. Also Members did not have enough time to talk about proposals. He proposed a workshop with National Treasury on its tax proposals to influence the bureaucratic minds of the officials with regard to the next Taxation Laws Amendment Bills.

There was an amendment to the Road Accident Fund Act. He was not sure if there was integration with National Treasury's tax proposals. One believed that creating decent work was a Government priority. However, it did not appear that National Treasury understood that. It was dong nothing about small businesses. He was not sure what relief it was talking about in slide 42, beyond juggling with the percentages.

The medical aid contributions (slide 12) were going up all the time, but the credit remained constant across the taxpayers. Why? Why did we not talk to the reality?

Mr Lees commented that everything was equal in the past, but the new proposal for medical credits had given a bias in favour of those on lower incomes, and [for those on higher incomes] had created an additional tax. It was not going through the fiscus but it was a kind of indirect cross-subsidisation.

Mr Lees asked how one was to deal with the transitional period in the change to insurance policy taxation and the creation of a fringe benefit and the tax-free payout (slide 13).

Dividends were not tax free – hence STC. They had already been taxed.

Judges were being given preferential treatment. He did not understand that this contributed to the independence of the judiciary.

Mr Lees commended Mr Mashile on highlighting the turnover tax (slide 42).

Prof Engel said that what would be more useful was to have an engagement with Members to find out what was important to their constituencies. National Treasury's discussions tended to be overtaken by the lobbyists – vocal people with access to the newspapers. They typically cared about Section 45 issues and the hybrids, because they made much money from those things.

The micro-business tax was intended to be small. The main concern was to legitimise and register those involved in micro-business and offer a simplified tax, with a tax guide that was technically correct but straightforward.

Ms Gouws responded that the medical credit would change on a year to year basis, similar to what one had before with the caps (see slide 10). The value of the tax benefit at the end would increase by virtue of the fact that the medical credit would increase.

Prof Engel said Members had inferred correctly that it was a redistribution. The fiscus was actually going to lose, because there would be a greater pay out in credits than collection at the high end.

Mr Mashile was not sure that National Treasury had considered any unintended consequences of this change. The people who were earning a lot of money did not stand to benefit from this credit, and might opt out, thus defeating the object of trying to encourage people to join a medical aid scheme.

Prof Engel replied that most people wanted to join a medical aid scheme for their protection. National Treasury was trying to cover the minimum benefit. However, it was a trade-off because those on lower incomes did not have enough money to join a medical scheme, so a subsidy to them would help them to enter a scheme. He thought that the wealthier people would stay with the medical scheme credit.

Prof Engel conceded that dividends were partially taxable depending on the circumstances.

What made the judges' situation unique was that they had a roving commission, and you could not move houses to deal with that. Because of the court circuit, their work was, in a sense, always temporary. If you went to a temporary work-site every day for a week, that was a business expense and it was deductible.

Mr Mashile said that MPs were temporary workers, with no guarantee of continued employment. Moreover, they had to travel backwards and forwards for constituency and oversight duties.

The Chairperson said that there would be a follow-up discussion when National Treasury presented its final response document to the Select Committee. He commended Prof Engel's idea for a workshop and would discuss it with the Whip and his colleagues in the National Assembly.

Committee Report on Free State Oversight Visit: Consideration of first draft
The Chairperson pointed out that this was only a discussion document at this stage: it was not being adopted. It was merely being discussed to assist Members in preparation for the Bloemfontein visit. The Select Committee discussed the report and made corrections.

Apologies
Apologies had been received from Mr T Chaane (ANC, North West) who was part of an international team monitoring the elections in Zambia, and from Mr M Makhublela (COPE, Limpopo) who was attending a caucus meeting of his party. The Chairperson noted that Mr S Mazosiwe (ANC, Eastern Cape) was attending a meeting of the Programming Committee.

The meeting was adjourned.