Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B10-2012]: public hearings

Meeting report

Sizwe Ntsaluba Gobodo Audit, Advisory and Forensics (SNG) submission
Mr Zweli Mabhoza, SNG Tax Director, submitted that the effective dates for most proposals were deemed to have been either 1 March 2012 or 1 April 2012. There was a legal anomaly in that a proposal that was not law repealed an effective law that had been duly enacted and promulgated. The only way in which these proposals could be effective prior to the promulgation of the intended law was when the final legislation was promulgated with retrospective effect.

It was trite law that any amendment with retrospective effect was bad in law as it destroyed certainty of law and undermined the characteristics of the Rule of Law and natural justice.

In the recent United Kingdom case of Huitson v HMRC it was stated that retrospective legislation was not in itself prohibited but its ultimate effect should not result in an unreasonable burden on the individual taxpayer.

There was no doubt that most of the sections that would have retrospective effect would create an unreasonable burden on the taxpayer. For instance, companies with a June 2012 year end would be adversely affected as there was uncertainty about which law was applicable to them in respect of capital gains tax.

The same applied to entities which declared a dividend after 1 April 2012.

Although the proposed rates for individuals in respect of the year of assessment ending February 2013 had already been effected, it was proposed that in future the more creative model should be created for taxpayers falling under the highest marginal 40% tax rates. The successful operation of South African businesses was dependent on them. Without their success, the there would be no effective poverty alleviation and employment creation. Although the taxation of individuals was based on Pay As You Earn (PAYE), the model should not be seen as punitive and thus discourage hard work.

Mr Mabhoza pointed out that most of these amendments came one after the other. This made it hard to track them. There was confusion under the present system: currently the law remained what it was when signed on 20 December 2011. On 22 February 2012 the budget speech was delivered and certain proposals made, including proposals to change some of what had been signed into law in December 2011. The proposed changes had April 2012 as their effective date, but these were not law. This presented difficulties to tax advisers, who, having advised clients on the basis of what had been signed into law on 20 December 2011 now had to tell their clients that things had changed, even though the changes had not been signed into law. This begged the question what should be followed by taxpayers now? He gave an example of such confusion as it applied to dividends.

Mr Mabhoza recommended that there should be a change in the effective date to a future date, such as 1 November 2012 [after the legislation had been enacted].

South African Constitutional Property Rights Foundation (SACPRIF) submission
Mr Peter Meakin, SACPRIF Chairperson, said that SACPRIF stood for doing away with taxes on labour and capital entirely, and replacing them with a land tax. It would encourage people, since they would know at the beginning of the year what they would have to pay, and then they could work as hard as they wished. Moreover, a land tax would reduce land prices.

SACPRIF submitted that income tax and value added tax (VAT) caused citizens to become landless and jobless by discouraging work, investment and trade and making land unaffordable for millions. This could be rectified only by introducing a 'single land rent' system that accorded entirely with the essential elements of Section 25(5) of the Constitution: “The State must take reasonable legislative and other measures, within its available resources, to foster conditions which enabled citizens to gain access to land on an equitable basis”.

Mr Meakin said that under the present regime land owners were subsidised by the state. He quoted Mr Joshua Nkomo's profound assessment, with which both poor and rich landowners could accommodate:

'We don't believe in changing land or selling land. No. That does not mean that we will be taking people's land. It means that other people who haven't got money will have a chance to use land, which is the common property of everybody. And if they have to pay some rates or rents, that will go to a general tax fund of the people. Our system is this, once you use land that land belongs to you, but you have not bought it. You cannot sell it to somebody. The land belongs to the people, but everything on that land is yours.'

That was a profound assessment of where SACPRIF thought that South Africa could go. However, it was not true in the South African sense that one would not be able to sell land to somebody else. One could always sell land here. The thing was that the land itself would not have any value, and the rents on which the land prices were based would not have any value, but the buildings would and might be appreciated or depreciated.

There was no compensation for the withdrawal of a subsidy when land rents replaced income tax and VAT. Nor was there any change in title deeds. It was not expropriation.

However, owners received recompense for living in a tax haven where there were no taxes on private property, or on work or savings. Everything there was tax free. Neighbours there, with identical plots, paid the same tax whether they worked eight hours a day or 12.

He showed a recent graph from The Economis. (see presentation) which indicated the real prices of houses in South Africa (the upper line) and the prices of houses in Hong Kong and Singapore (lower lines). Hong Kong and Singapore used this land rent system as part of their revenue base. As one would expect, the prices had hardly risen. Hong Kong and Singapore had five times the Gross Domestic Product (GDP) of South Africa. This was because those countries were 'tax free'. People paid the rent, which was like a rates charge, and then everything else was theirs. Unemployment was 2% there.

Since 1994 South African land prices had, on average, risen 12 times, 'when the Consumer Price Index (CPI) was about four'.

Nobody could afford these prices who had not attended university.

The problem was that man-made assets behaved completely differently from natural assets. All man-made assets had a limited lifespan, even a house, which lasted 20 years until the demolition squad arrived, unless continually maintained.

Natural assets were a gift to every human being and lasted for perpetuity, with no depreciation and no new models.

At the same time, land was a factory floor for the unemployed. Consultants had shown that if one had one hectare of arable land, and one had three, four or five years to spare in developing it, one could become a millionaire in cultivating a vineyard or a fruit farm.

Economists called these natural assets inelastic, because they could be taxed 100%. On the other hand one could not tax bricks and mortar, or machinery, at 100%, since everyone would leave.

The Katz Tax Commission had mislead South Africans about this matter. It had said that both equity and the enhancement of economic growth required a considered balance between direct and indirect taxation, and between taxes based on income, transactions, resource use and consumption, and taxes on capital and wealth.

SACPRIF's view was that one did not have to mix 'bad taxes' and 'good taxes' as in the Tax Commission's recommendation. Mr Meakin had given evidence to the Tax Commission. In fact, SACPRIF's view was that it was pointless to mix 'bad taxes' and 'good taxes'.

To get round that there was Section 25(5) of the Constitution: “The State must take reasonable legislative and other measures, within its available resources, to foster conditions which enabled citizens to gain access to land on an equitable basis”.

Mr Meakin acknowledged that it would probably take four years to introduce, but when that day came about, everybody would be able to afford land. Everyone would be able to afford a hectare or a hundred hectares.

The Tax Commission had also said that economic stability could not be promoted through attempts to shift the tax burden predominantly onto any single dimension of economic activity.

However, Mr Meakin argued, economic stability was meaningless when 25% of the population was unemployed. A single land tax would mean 100% employment.

Therefore, SACPRIF recommended, that, commencing with the 2014/15 budget, and continuing until the budget of 2019/20, all income tax and VAT collections were to be gradually repealed. It was to be announced in the 2012/13 budget to give due notice to the owners of the 27 million hectares of unused arable land that existed in South Africa.

Simultaneously the collection of surface land rents as a budget item, currently collected as mining royalties and landing fees, should be increased to exactly the value of the repealed income taxes and VAT in order to replace them.

Further, the amount of land rent payable on each plot of land would be defined as follows, according to the terminology of the Property Rates Act:

For residential property purposes, the median market land rent per square metre in each suburb, or a part, which landowners were willing to pay for exclusive use rights and privileges, in place of income tax and VAT, on conditions similar to those of the Municipal Property Rates Act (No. of 2004) including perpetual tenures and periodic rent reviews, preferably determined by auction (which was how it was done in Hong Kong).

For non-residential commercial properties, there would be a charge of 29% of the value-added (that is the GDP of each parcel of land) or the land rent as determined for residential uses, whichever was the higher.

The reason for the above was that if one was not using land as aggressively as other people in the area, one would pay what those more aggressive users would pay.

Mr Meakin explained the changes to personal tax liability: it was calculated that currently the households in an average suburb in South Africa, paid an average of R5 920 a month in income taxes and VAT. In the proposed system it would be exactly the same, but it would come from their assets to which the state contributed to the value.

National Treasury knew the differences between income taxes and VAT and land rent and had documented it in the 2000 Environmental and Fiscal Report Study.

Discussion
Mr D van Rooyen (ANC) struggled to relate SACPRIF's submission to the agenda.

Mr N Koornhof (COPE) questioned the appropriateness of SACPRIF's submission. SACPRIF was lobbying for a new tax regime, but these hearings were on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill. SACPRIF was proposing a completely new tax regime, and this was not the place or the time to discuss it. SACPRIF might do better to present its views at future hearings on the Taxation Laws Amendment Bills, though even there its proposal might be out of order.

Mr Meakin explained that Members would recall SACPRIF's submissions at the 2009 public hearings on the Taxation Laws Amendment Draft Bills, when it had suggested phasing out income tax and value added tax (VAT) in favour of a 'rent for revenue' system. This was sometimes incorrectly referred to as the 'single land tax' but it was not a tax at all but a user charge, like rates and taxes. The Committee had referred SACPRIF to National Treasury for discussions on its 'orthodox fiscal intervention', but National Treasury had abandoned these discussions in May 2011 'without any explanation'. SACPRIF felt that it had a case in terms of the Constitution.

The Chairperson endorsed Mr Koornhof's observation and suggested Mr Meakin came to the October hearings on the Tax Laws Amendment Bills. In the meantime he asked Mr Meakin to focus on his recommendations on the Bill under discussion.

Mr Meakin said that his immediate recommendation on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill was to reduce income tax and VAT over the next four years and recover the amounts through his proposed land rent.

The Chairperson acknowledged Mr Meakin's point.

Mr Harris said that the first part of this proposal (reducing income tax and VAT) could, perhaps, be approached through this Bill.

Ms J Tshabalala (ANC) asked that Members be allowed to engage on the first submission.

The Chairperson opened the discussion on both submissions simultaneously.

Mr D Ross (DA) questioned Mr Meakin's assertion that the landowner was subsidised by the state at present. Mr Ross himself owned some properties, not only with the intention of benefiting himself but to create many jobs for other people. To have no ownership of his properties would be a major problem. Many jobs were created by the maintenance of a building. Not to have personal ownership would be a disincentive to maintain. He gave examples – such as the lack of maintenance of distribution networks by state owned entities. Nobody took responsibility for these networks, and there was a R30 billion backlog of maintenance work. He asked about the effect of the proposals on public private partnerships (PPPs). He denied that property owners like himself were subsidised by the state, as they had been paying taxes over a long period of time. On the contrary, he felt that he as a property owner was subsidising many of the municipalities. It was a submission that did not make a great deal of sense.

Mr Meakin could not understand how Mr Ross thought that he would lose his land. His title deeds would remain intact. There would be no expropriation of his property. Instead of paying tax on the income from his land, he would pay on the benefits with which ownership of that land endowed him.

Ms Tshabalala found Mr Meakin's submission difficult to follow. In future his organisation must align its submissions to the agenda of the meeting.

Ms Tshabalala sought clarity from Mr Mabhoza.

Mr Harris was interested in Mr Mabhoza's point about Secondary Tax on Companies (STC) credits (slide 3). If dividends paid between firms where STC was paid once were exempt from STC after that, how did this translate into a system of credits. Surely it was just a straight exemption?

Mr Mabhoza replied that the intention was that STC had to be paid once. If anyone received a dividend on which STC had been paid, he or she should not be subject to dividends tax. There was a sunset clause linked to that which was this five year period. This had now been changed to three years. Obviously from the viewpoint of the fiscus this was understandable as one would not want this complication to be prolonged. At the same time, in this situation one started seeing the kind of schemes that National Treasury and the South African Revenue Service (SARS) did not like. Sometimes when law was made, and people planned around that, and then the state made changes, people devised all these devious schemes. He felt that once the law was passed, the budget speech should deal with technical amendments – things that were not intended by the law, and new proposals, rather than to have legislation to which the President had signed his assent as early as 20 December the previous year and then on 22 February propose changes to that legislation.

Mr Harris said that the CGT amendments for which legislation had not yet been passed (slide 4) did raise a question, and was perhaps an oversight. He sought guidance from National Treasury.

Mr Ross agreed with Mr Mabhoza that the legal anomaly referred to in the submission was hugely problematic. Those who applied the law strictly paid less and those who did not were paying more. People would pay the full amount although it was not law because they did not want to enter into law suits because of the cost. It was definitely a grey area.

Mr Harris referred to the point made by the South African Institute of Chartered Accountants (SAICA) in earlier hearings that the new dividends rate had been proposed but it was obviously not yet in the law. National Treasury had responded to Mr Harris in a previous meeting that if the law was not passed then it would have to revert to the legislated amount. Mr Harris felt that it did raise a question as to the legality and sequencing of tax laws. He wondered if the Committee could ask Adv Frank Jenkins, Senior Parliamentary Legal Adviser, to advise if this was indeed a matter of concern, as it was a recurrent matter in the meetings of the Committee. Was National Treasury's answer satisfactory or not?

Mr Mabhoza agreed with the above concern. He had been interviewed on a number of occasions. He had advised clients that it was safe to pay, but the reason for his concern was that in the present environment it needed just one tax payer to insist on paying only 10%, take the matter to court, and win the case, for the state to have to repay all the other tax payers who had paid the additional 5%. It was not about the numbers of people who were paying, but it was about the consequences. He supported, however, the principle of 15%, because with the change from STC to dividends withholdings tax, it was clear that the fiscus would lose for a number of reasons. The problem, however, was how this change had been put into effect.

Mr Mabhoza said that the gambling tax, proposed in the 2011 budget speech, was still a proposal, and he did not know if it would become law this year. The fact that people were now paying the 15% rate on dividends was no guarantee that the new rate would, in fact, become law. Such might be used as an argument by those who were insisting on paying only 10%.

The Chairperson said that National Treasury would respond, in due course, to the Committee on a number of issues. This was already in the Committee's programme. Adv Jenkins would also be expected to look into some of the issues that had been raised.

Mr Harris pointed out to Mr Meakin that if one taxed an asset one was often dealing with people who lacked cash to pay a tax.

Mr Meakin replied that the only property which produced no income was vacant property. 'The rents are often imputed.' However, this was something that must be tackled. 10% of the country was not being used, and this tax on the possible imputed rent of those properties would bring it [that 10%] into life. 'Nobody is going to sit paying taxes when there is now no chance of a capital appreciation.' That capital appreciation in land was entirely out of the hands of the landlord.

Mr Harris thought that the existing tax system tried to accommodate some of Mr Meakin's concerns through the capital gains tax.

Mr Harris saw a total collapse of the property market as an unintended consequence of Mr Meakin's proposals.

Mr Meakin saw this entirely differently. This would be the moment when the property business took off, because when one made improvements to property, all the improvements would be without tax, and all the rents that came from the improvements would be tax free. The experience of Hong Kong, which had one of the most extraordinary property
businesses in the world, denied what Mr Harris said.

Mr Meakin asked the Chairperson if a surcharge on the rates, which basically was what he was talking about, be legal, and would a meeting of this Committee be the right place to discuss it.

The Chairperson said that this could be part of the questions that the Committee might pose, and it could seek clarification thereafter. Some Members of the Committee might reply in the negative, but he did not want the Committee to express an opinion now. He would prefer to deal with this when the Committee interacted with the National Treasury.

The Chairperson appreciated the submissions. It was the task responsibility of Members to steer presenters in the right direction and try to assist them, since Parliament was for everybody, and it was important to give them at least a sense of having been heard.

The Chairperson said that the issues highlighted by Sizwe Ntsaluba Gobodo spoke directly to the issues that the Committee would want National Treasury to consider as the Committee moved forward in its deliberations on taxation and other matters.

The Chairperson assured Mr Harris that Adv Jenkins would advise the Committee, probably next week, on the issues that Mr Harris had raised, and adjourned the meeting.