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FINANCE PORTFOLIO COMMITTEE
4 June 2002
TAXATION LAWS AMENDMENT BILL: BRIEFING
Chairperson: Ms Hogan (ANC)
Taxation Laws Amendment Bill (Draft)
Ninth Schedule (Public Benefit Activities)
National Treasury PowerPoint Presentation
The Committee was briefed on the Taxation Laws Amendment Bill by National Treasury and the South African Revenue Service. The Bill contains all the budget proposals delivered in the Minister's Budget Speech. A significant amendment is the new provisions relating to Public Benefit Organisations.
The Committee was briefed by Mr Grote (National Treasury) and Mr Louw (SARS).
Mr Grote took the committee through the PowerPoint Presentation that reflects the Budget Proposals. This will not deal with technical corrections in relation to capital gains tax, company restructurings, controlled foreign entities and foreign currency. A new Bill should come to the committee in October. He highlighted the increase in tax relief to individuals over the past few years as well as the significant relief to industry. The presentation lists the key features of Personal Income Tax and Corporate relief.
Other specific relief includes:
- Monetary threshold adjustments for the Estate Duty exemption from R1 million to R1.5 million.
-The Donations Tax exemption increased from R25 000 to R30 000 per annum.
The accelerated depreciation allowance is reduced to a 4 year period as opposed to the five year period. In the first year a 40% capital allowance is allowed followed by 20% in the following years. This provision expires in March 2005 in an attempt to get business to invest.
There has been more relief for small business in that more will qualify for the 15% rate because the taxable income has been increased to R150 000 and the turnover limit increased to R3 million.
There has been rigorous discussion between SARS and the Public Benefit Organisations (PBOs). Mr Grote said that Schedule 9 is a good compromise. The PBO provisions have been revised and expanded. The Bill at the same time tries to ensure that that the organisations are indeed operating for the public good.
The Domestic Dividend and Interest exemption has been increased from R4000 to R6000 for under 65's and from R5000 to R10000 for over 65's. foreign dividends have a maximum exemption of R1000 to encourage persons to keep their money in South Africa.
The learnership incentive regime is effective from 1 October 2001 to 1 October 2006. When an employer enter into a learnership agreement a R25000 deduction is allowed. If the employee successfully completes the programme then another R25000 deduction is allowed.
R300 million Transfer Duty relief is provided. Properties under R100 000 attract no transfer duty. Thereafter tax is calculated on 5% on the value of the property. A graph in the presentation reflects the saving of the new rate.
Government has removed security taxes and stamp duty on the issuance of listed debt. Securities taxes on warrant repurchases is removed. Stamp duty on mortgage cessions, accident insurance policies and insurance transactions are removed. The Lloyds insurance premium is removed as well.
In order to broaden the tax base, a host of employee deductions have been removed. The employee deductions that will be allowed are contained in a specific list. Travel deductions will continue but a receipt of expenditure must be produced. The deemed domestic allowance will be eliminated.
For individuals or entities who do not declare foreign assets the commissioner is empowered to impose a deemed income charge on the undeclared asset. The charge is equal to the official rate of interest.
Trusts will be subject to a flat rate of 40%. Trusts that are established for mentally and physically disabled persons and testamentary trusts that have beneficiaries under the age of 21 will continue to enjoy the lower rate applicable to individuals.
The key features of Indirect Taxes is that the rate for alcohol and tobacco has increased. There has been no change to air passenger tax and the general fuel levy. The diesel fuel tax concession is extended and a new fuel tax regime for environmentally friendly fuels is provided for. The duty on soft drinks and mineral water is abolished.
In conclusion, Mr Grote said that Treasury is currently preparing to issue detailed explanations describing technical aspects and concerns in respect of controlled foreign entities and company restructurings. The explanations will be published on the Treasury website. Other tasks being undertaken is the review of the designated country exemption and the revised version of the proposed currency regulations for individuals and non-business will soon be issued. The new regulations remove the admin burden. It is not known when the regulations will come into effect.
Mr Louw took the committee through the Bill:
Clause 1 removes an old provision left from the Old Insurance Act. This amendment removes the 2.5% Lloyds premium.
Clause 2 gives the new transfer duty rates.
Clause 3 is also an amendment to the Transfer Duty Act and it provides that PBO's can acquire a property without paying transfer duty.
Clause 4 - amends the Estate Duty Act and is consequential to the amendments in the Income Tax Act dealing with PBO's. Currently only religious, charitable or educational institutions of a public character qualify for certain deductions. The amendment extends the relief to all institutions created by by-laws. An example would be a university.
Clause 5 deals with the increase of the Estate Duty exemption to R1.5 million.
Clause 6 brings a new section into the Estate Duty Act. if a taxpayer receives an assessment and is unhappy, at the moment a formal objection and appeal must be lodged. Sometimes it is SARS that makes a processing mistake and the Commissioner (CIR) cannot correct the mistake without embarking on the long process. The amendment makes it clearer that the CIR can issue a reduced assessment.
Clause 7 is a consequential amendment as a result of clause 6.
Clause 8 must be read with schedule. This is the start of the amendments to the Income Tax Act. This clause contains the new rates of tax for individuals, companies and trusts.
Clause 9 deals with three issues. the first is the limitation on employee deductions. The memorandum contains detailed notes on this. the second part of clause 9 gives a new definition of special trust and deals with it in the way mentioned by Mr Grote.
The third part of clause 9 as well as clause 10 brings in line the tax year end of all individuals.
Clause 11 increases the primary rebates for individuals.
Clause 12 also relates to the limitation of employer deductions. The move is away from the general deduction but rather list the specific deductions an individual can claim. The clause also lays the basis for the splitting of employment and business income. Internationally there is a move towards this. the administration will be easier and will result in a saving of R100 million. The provisions sounds as if something is being taken way from individuals but this is not he case. 99% of everything remains in tact it is just all the small deductions that are scrapped.
Clause 13 deals with interest and dividend income and foreign dividends in the way described by Mr Grote.
Clause 14 also deals with the limitations of allowances for employees.
Clause 15 is the new depreciation allowance as explained by Mr Grote. The asset must be purchased between 1 March 2002 and 28 February 2005 to qualify for the allowance.
Clause 16 tightens up the allowance given to the owner on the cost of pipelines, transmission lines and cables. The amendment ensures that the financial services industry does not benefit from the allowance.
Clause 17 is the benefits to small business as discussed by Mr Grote.
Clause 18 deals with the wage incentive that was discussed earlier.
Clause 19 deals with the claim of the taxpayer in respect of medical expenses. It use to be that the claim for deduction was the greater of R1000 or 5% of taxable income. The R1000 criteria has been removed because it does not serve a purpose anymore. Now the deduction is simply 5% of taxable income.
Clause 20 and 22 deals with the PBO regime. Clause 39 is the new schedule nine and provides the activity list of PBO's. These clauses in the memorandum clearly outlines the approach to address the concerns of the PBO sectors. The ninth schedule in the Bill (clause 39) does not indicate the changes so a complete and separate ninth schedule is provided. The closing date to apply for exemption has been extended to the end of 2003.
Clause 23 deals with Donations Tax exemptions.
Clause 24 is consequential amendments as a result of the increase in the interest and dividend exemption.
Clause 25 is the deemed income rule for foreign assets that has been undisclosed. The CIR will determine the value of the asset and apply the official inflation rate to the asset to impute the income.
Clause 26 allows the correction of processing errors and the reduction of assessments.
Clause 27 allows the CIR to alter an assessment if he concedes an appeal before the matter is heard.
Clause 28 is a consequential amendment because of the provisions allowing reduced assessments.
Clause 29 widens the powers the CIR to settle disputes. Section 107 B of the Income Tax Act was inserted last year but as it stands only allows the settlement of a claim after an assessment. The wording has been changed to allow for settlement at any time.
Clause 30 & 31 deal with the limitation of employee deductions. Clause 31 is merely consequential.
Clause 32 increases the threshold for provisional tax from R2000 to R10 000.
Clause 33 increases the threshold for the bravery and long term service awards from R2000 to R10 000.
Clause 34 provides that if the employer provides free services to the employee the full vale of the service is taxable.
Clause 35 clarifies that the employer contribution to the medical fund of the employee is not a fringe benefit.
Clause 36 is a CGT refinement. It provides that if the price of an instrument is published for valuation purposes then there is no need for the taxpayer to determine the value.
Clause 37 proposes that the weighted average method can be used for instruments that are registered and approved by the registrar.
Clause 38 is a consequential amendment.
Clause 39 is the new ninth schedule.
Clause 40 is the start of the amendments to the Customs and Excise Act. This amendment allows for a system of internal review of decisions made by officers.
Clause 41 is a textual amendment.
Clause 42 is a Siyakha initiative and tries to ensure better control of the movement of goods in warehouses.
Clause 43 is a consequential amendment because of the amendment to section 113A of the Customs and Excise Act in clause 50.
Clause 44 provides that any new customs union agreements can be made part of the Customs and Excise Act.
Clause 45 is a textual amendment.
Clause 46 tightens up the general licensing provision. Security must be provided before licenses are granted.
Clause 48 enable the CIR to prescribe by rules the benefits to be conferred upon accredited clients.
Clause 49 deals with the settlement powers of the CIR as was discussed.
Clause 50 provides for a new section 113A and build on the provisions of the Counterfeit Goods Act. It provides clarity to SARS officials on how to and when to detain goods. Officers who act in good faith in detaining goods are indemnified.
Clause 51deals with the amendments to the rates of tobacco and alcohol products.
Clause 52 is the start of the amendment to the Stamp Duty Act and is a consequential amendment as a result of the change to the PBO regime.
Clause 53 abolishes stamp duty on the cession of mortgages.
Clause 54 abolished stamp duty on interest bearing debentures.
Clause 55 abolishes stamp duty on certain insurance policies.
Clause 56 is an amendment to the Vat Act and brings in line schedule one of the Vat Act with the tariff structure in the Excise schedules.
Clause 57 is consequential as a result of the amendment in clause 58. Both clauses are amendments to the Uncertificated Securities Tax Act.
Clause 58 provides that the repurchases of warrants by the issuers thereof and the issue of listed interest-bearing debentures will be exempt from uncertificated securities tax.
Clause 59 removes an anomaly from the Skills Development Levies Act that allows the double taxation of Director's fees.
Clause 60 is a consequential amendment to the Skills Development Levies Act as a result of the changes to the PBO regime.
Clause 61extends the application date for PBO's to apply for exemption.
Mr Louw advised that clauses 62 - 78 were merely consequential amendments.
(The Bill read with the Memorandum clearly explains which sections of the relevant Acts are being amended and the reasons therefor.)
Ms Taljaard (DP) said that there was a tight regulatory framework that governs the wage incentives and asked if there was a concern that there would be a low take-up because of the regulatory burden.
Ms Taljaard was also concerned about the discretionary powers given to the Commissioner.
Mr Louw replied that the employer must register the programmes and the learners. He agreed that there were additional layers of compliance, but the take-up has been faster than anticipated by the Department of Labour. So far 8000 learners have been registered. He said that the benefit of the regulatory framework outweighed the complexities.
In response to the discretionary powers, he said that SARS is sensitive to this issue. The Margo Commission and the Katz Commission preferred the avoidance of discretion as much as possible. After the Margo Commission SARS looked at the discretionary powers that are not needed. The powers that were left relate to procedural issues and are in favour of the taxpayer. An example is that the Commissioner could extend time periods. He said that it is not always possible that a Bill can cater for all the implications of the measures adopted and sometimes discretionary powers are needed to deal with this.
Dr Woods (IFP) wanted clarity that the deemed domestic accommodation allowance was being scrapped - but as long as a person can prove the expenses, then the deduction would be allowed. He was concerned that people would stay at five star hotels and claim it as a deduction.
Secondly, he said that the accelerated depreciation allowance seems to be specifically for the manufacturing industry to the exclusion of the services industry. The services industry is allied to the manufacturing industry and often employs more people.
Mr Louw replied that if the taxpayer wants to stay in a five star hotel he/she must first pay the cost of accommodation.
In response to the second question, Mr Louw said that that in the inflationary environment a 20% per annum deduction over five years does not have the same benefit as a 40% deduction in the first year. The amendment to the depreciation allowance addresses the watering down of the allowance in the outer years.
Mr Grote added that the current depreciation allowance is not attractive. Current South African competitors have problems balancing their budgets. they cannot continue to give allowances to certain sectors an burden the people with high tax and vat rates. SARS has over collected and can therefore use the extra money to stimulate certain sectors to improve competitiveness. He said that government has met with the services industry and asked them what incentives they need. Industry replied that it was unfair to just give incentives to the manufacturing industry. Treasury is reviewing this to see how to give incentives to areas where growth is taking place. At the same time anti-avoidance measures needs to be in place to ensure that the tax base is not eroded. This takes time but government is aware that this area needs work.
Mr Nene (ANC) asked what steps have been taken to tax properly the retirement and banking sectors.
Mr Grote replied that the Minister was told that a task team is needed to look at al the documentation dealing with the retirement industry. The Task team is made up of the SARS, Financial Services Board and Treasury. At the same time Treasury is looking at international best practice and is currently engaging with international think tanks. The task team will write a document that will be workshopped. There will be a consultation process before any policy decision is taken. He asked SARS to comment on the Banking Sector.
Mr Louw said that SARS is engaged with institutions to see to what extent the transactions can be challenged in terms of the existing laws. This exercise has been successful and R950 million was collected by applying existing legislation. Areas that SARS cannot challenge by using existing legislation will have to be dealt with by amendments. Discussions have been held with the Banking Council and it is clear what areas need attention. Legislation was prepared last year but it was a piecemeal approach as it did not deal with financial and derivative instruments in its totality. SARS has done quite a bit of work in many areas. A holistic approach is needed to ensure that there are no gaps.
Ms Joemat (ANC) commented that any settlement by the Commissioner must be published to ensure accountability and prevent corruption.
Ms Taljaard agreed with Ms Joemat's comment. She was also concerned about the limitation of liability of officials.
Mr Louw replied that he agreed with the concerns surrounding the settlement powers. The framing of the criteria on how to settle a dispute must be carefully done. The Minister will provide the criteria. He agreed that there must be reporting requirements and this the Minister must also spell out. He was not sure about public disclosure of settlement agreements if it involved the names of the taxpayer. This would work against the idea of trying to settle matters without going to court.
In response to the limitation of liability, he said that there is no blanket limitation. The official must act in good faith and on a reasonable basis.
Ms Hogan commented that she felt that the governance arrangements of PBOs should be left to themselves but this will be returned to when the section is dealt with.
The were no further questions. The meeting was adjourned.