Taxation Laws Amendment, Taxation Laws Second Amendment & Tax Administration Bills [B19-2011, B20-2011 & B11-2011]: National Treasury formal briefing, consideration & adoption; Committee Reports : consideration & adoption

NCOP Finance

21 November 2011
Chairperson: Mr De Beer. C. (ANC; Northern Cape)
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Meeting Summary

The Chairperson highlighted seven questions which the Committee thought the National Treasury should address in term of the proposed Taxation Laws Amendment Bill [B19-2011], Taxation Laws Second Amendment Bill [B20-2011]  and Tax Administration Bill [B11-2011]. These were: how the legislation would assist and promote entrepreneurship,  and whether there was any analysis that proved its effectiveness; how individuals would benefit from the medical scheme deductions; if courts would be able to judge tax neutrality; and further clarity on the term tax leakage and the limit on interest deductions.  Other questions included whether any lesions were learnt from the suspension of Section 45, the impact on the fiscus and further clarity on Sections 45 to 47. 

The National Treasury responded that, in the main, the micro business turnover tax had been made more generous. Small businesses could now be able to apply for Value Added Tax and also keep this relief which was not previously possible. The medical scheme provisions had been converted from a deduction to a credit. By converting it from a deduction to a credit everybody effectively would get the same subsidy for medical scheme contribution regardless of income. Those above the 30% bracket would not get as much as they used to but those below the 30% bracket would get more.

National Treasury provided clarity that a tax leakage was a deduction on one side but with an exemption on the other hand. Treasury had started picking up on the Section 45 deals that were undermining the fiscus but had not been really sure what was going on. Those in the habit of evading tax did not want to provide information to Treasury or the South African Revenue Service. The Treasury had decided to suspend Section 45 in order to force companies to come forward to provide information on what was happening. The idea was not to lose money involuntarily through such schemes. National Treasury further clarified on Sections 45 by stating that it was to do leverage buy outs. If one acquired a company and needed to take it over one would need to provide one's own money, use shares or borrow the money. The difficulty was that when one borrowed money to acquire a target company and the borrowing was excessive the borrowing would attract large amounts of interest deductions.  The borrowing might be so high that the interest wiped out the profit from the company for a period of five to seven years. This eliminated the company's tax contribution for five to seven years. In many of these situations the transaction was rebooted for an additional five years so there was no addition to the fiscus. The lawyers and tax practitioners had been manipulating Section 45.  Shares were being reclassified as debt merely to reduce tax liability. The National Treasury in the new proposal had allowed companies to go ahead and conduct Section 45 transactions but the only condition was that if these companies wanted to borrow money to facilitate the transaction the interest deductions could only be obtained with the pre-approval of National Treasury. The regulatory mechanism was meant to force out facts.

The Committee unanimously agreed to adopt the Taxations Laws Amendment Bill [B19-2011] and the Taxation Laws Second Amendment Bill [B20-2011] without amendments.

Meeting report

Chairperson's Introductory remarks
The Chairperson welcomed the Members and the National Treasury. The Committee had received a preliminary briefing on 20 September on the Taxation Laws Amendment Bills [B19-2011] and [B20-2011] but  In terms of procedure the Committee must have a formal briefing before formal consideration and adoption. The legislation gave effect to the tax proposals as highlighted in the 2011 Budget review to broaden the tax base as tabled by the Minister of Finance in the National Budget presented in February. The Chairperson highlighted seven questions which the Committee thought that National Treasury and the South African  Revenue Service (SARS) should address in term of the proposed legislation as follows:

How would the legislation assist and promote entrepreneurship; and whether there was any analysis that proved its effectiveness
How would individuals benefit from the medical scheme deductions
If courts would be able to judge tax neutrality
Further clarity was needed on the term tax leakage and the limit on interest deductions 
Whether any lessons were learnt from the suspension of Section 45
The Committee wanted to know if the changes to legislation would have any impact on the Fiscus
Further clarity on Sections 45 to 47

National Treasury on the Taxations Laws Amendment Bills [B19-2011 B20-2011] responses
Prof Keith Engel, Chief Director: Legal Tax Design, National Treasury, apologised on behalf on SARS, which was unable to attend the meeting. The questions would be addressed by the team from Treasury.

How would the legislation assist and promote entrepreneurship; and whether there was any analysis that proved its effectiveness

Prof Engel replied that the Bill did some things for small business. In the main the micro business turnover tax had been made more generous. The micro business turnover tax threshold had been upped from R100  000 to R150 000. Small businesses could now be able to apply for Value Added Tax (VAT) and also keep this relief which was not previously possible. The things that had been done to help small businesses would not result in big changes. There was need for a multidisciplinary solution to problems faced by small businesses.

How would individuals benefit from the medical scheme deductions

Prof Engel replied that the medical scheme provisions had been converted from a deduction to a credit. By converting from a deduction to a credit everybody effectively would get the same subsidy for medical scheme contributions regardless of income. Those above the 30% bracket will not get as much as they used to but those below the 30% bracket would get more.

If courts would be able to judge tax neutrality
No response given

Further clarity was needed on the term tax leakage and the limit on interest deductions

Prof Engel replied that Treasury was assuming that there were no major leakages from the system. A tax leakage was a deduction on one side but with an exemption on the other hand. Treasury had started picking up on the Section 45 deals that were undermining the fiscus but had not been really sure what was going on. Those in the habit of evading tax did not want to provide information to Treasury or SARS. The Treasury had decided to suspend Section 45 in order to force companies to come forward to provide information on what was happening. The Treasury was aware that everyone was going through hard times and therefore did not want to raise taxes. The idea was to not to lose money involuntarily through such schemes.

Whether any lessons were learnt from the suspension of Section 45

Prof Engel replied that in February 2011 Treasury had not made mention of Section 45 because in as much as it was aware of a few things it was planning on dealing with them separately. The business relating to Section 45 begun to set in after the Budget and the real issue was to try and protect the fiscus from unforeseen revenue loss.

The Committee wanted to know if the changes to legislation would have any impact on the Fiscus
Prof Engel replied that the changes to legislation were aimed at protecting the fiscus from unforeseen revenue loss.

Further clarity on Sections 45 to 47

Prof Engel replied that Section 45 was all about leverage buy outs. If one acquired a company and needed to take it over, one would need to provide one's own money, use shares or borrow the money. The difficulty was that when one borrowed money to acquire a target company and the borrowing was excessive the borrowing would attract large amounts of interest deductions.  The borrowing might be so high that the interest wiped out the profit from the company for a period of five to seven years. This eliminated the company's tax contribution for five to seven years. In many of these situations the transaction was rebooted for an additional five years so there was no addition to the fiscus. The lawyers and tax practitioners were manipulating Section 45.  Shares were being reclassified as debt merely to reduce tax. Treasury had started picking up on Section 45 deals that were wiping out the fiscus but had not really sure what was going on. The Treasury in the new proposal had allowed companies to go ahead and conduct Section 45 transactions but the only condition was that if these companies wanted to borrow money to facilitate the transaction the interest deductions could only be obtained with the pre-approval of National Treasury. The regulatory mechanism was meant to force out the facts.

Discussion

Ms S Mazosiwe (ANC, Eastern Cape) asked what the overall tax burden on individuals was. Were individuals being relieved or taxed more?

Prof Engel replied that individuals were facing rising costs but on the other hand revenue had dropped. The Minister had been trying to hold the line and be careful not to raise income taxes as people would feel more squeezed. There was an attempt to provide as much relief as possible to the middle class within a limited envelope while preventing back door offences.

Mr B Mashile (ANC, Mpumalanga) said that there was an intention from National Treasury and SARS to widen the tax base. If SARS and Treasury were wining in their attempt to broaden the tax base there should be reciprocity on the tax relief. Currently the bracket creep was dealing only with inflation. The tax payer was getting nothing from the widening tax base.

Prof Engel replied that Treasury went beyond giving bracket creep this year to providing relief. The difficult part was making choices on whether that additional revenue should go towards spending or tax relief. This Committee wanted to see tax relief; other committees wanted to see more infrastructure and medical care. A decision needed to be made at some point and there was need to understand that one could not have it all.

Mr T Chaane (ANC, North West) asked why parliamentarians' allowances were not being taxed properly. Judges had been rightly given a concession on their car allowances but the nature of parliamentarians' work also required a similar concession on their car allowances.

Prof Engel replied that if Members had issues on this they needed to approach the National Treasury in January, show their IRP5s and ask what was happening. The Treasury would then clarify these matters. More facts were needed.

The Committee unanimously agreed to adopt the Taxation Laws Amendment Bill [B19-2011] and the Taxation Laws Second Amendment Bill [B20-2011] without amendments.

Committee Reports: Consideration and adoption
The Committee still had to consider its report on its visit to the North West. The report would be circulated and Members were requested to make their inputs at a meeting to be scheduled.

Committee Minutes: adoption
The Committee adopted its minutes of 19 October, 26 October 2011, 01 November, 03 November,  04 November, and 16 November 2011 without amendments.

The meeting was adjourned.




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