Taxation Laws Amendment Bill: hearings

Meeting report

FINANCE PORTFOLIO COMMITTEE
7 June 2002
TAXATION LAWS AMENDMENT BILL: HEARINGS

Chairperson: Ms Hogan (ANC)

Relevant Documents:
Taxation Laws Amendment Bill (Draft)
Explanatory Memorandum
Ninth Schedule (Public Benefit Activities)
Submission by the South African Institute of Chartered Accountants - Appendix 1
Submission by the South African Council of Churches - Appendix 2

SUMMARY
The Committee heard submissions from the South African Institute of Chartered Accountants (SAICA) and the South African Council of Churches (SACC). SAICA did not comment on how it viewed the Bill overall but made comments on specific clauses. SAICA suggested an amnesty for people who had taken money out of the country illegally in the past and requested finalisation of outstanding regulations. The SACC submission focussed on Public Benefit Organisations (PBOs) and endorsed many of the provisions in the Bill but highlighted a few concerns and recommended certain amendments.

MINUTES
South African Institute of Chartered Accountants (SAICA)
The Submission was presented by Mr B Croome, the Chairperson of the Taxation Committee.

The concerns of SAICA are contained in their submission (see Appendix 1.)

The more important submissions are the request for amnesty for people who took money out of the country illegally and its comments on the outstanding regulations. Mr Croome said that that many regulations had to be promulgated but they had not been issued yet. The delay in the regulations caused uncertainty for taxpayers. This is especially true for PBOs because the Minister is yet to prescribe the conditions that entities need to comply with - in order to obtain exemption.

The request for amnesty is a suggestion that has been lobbied by SAICA for a long time because there is no process whereby funds can be brought back into South Africa.

Commenting on certain aspects of the Minister's Budget Speech, Mr Croome noted that the Minister had identified the need to regulate tax advisors. He pointed out that there are many tax advisors in South Africa not registered with SAICA or any other body and many complaints about advisors are against those not registered with SAICA. SAICA has its own disciplinary procedure and there is also available to the client the route of civil action for damages due to negligent/incorrect/wrong advice. In principle SAICA supports the regulation of tax advisors.

Discussion
Ms Hogan asked for an update on the outstanding regulations.

Mr Tomasek (SARS) said that there is still debate about various pieces of regulations. There are three categories of regulations:
- The first is where the legislation has not yet come into operation.
- The second is where the regulations are optional, the legislation is working well and regulations will only be required for unforeseen circumstances.
- The third is where the regulations are essential for the operation of the legislation. Under this category are the foreign currency regulations and the liquidation steps. The regulations around the liquidation steps have been drafted and circulated for comment. Because of SARS default in getting these regulations published, an extension period is being looked at. As far as the designated country list is concerned, there is already a list in existence - it is just a matter of extending it.

Prof. Engel (Treasury) commenting on the foreign currency regulations said that the first draft was completed but it was too lengthy and had to be simplified. He said that government realised the importance thereof but it is being worked through and is reaching finality. The question of the effective dates will be taken into account and will be fair so that taxpayers are not hit with new rules.

Mr Croome commented that it was worthwhile to hear that there would be retrospective relief in respect of the liquidations steps. In relation to the foreign currency regulations, he asked if the effective dates would be beyond those envisaged at the moment.

Prof Engel relied that that the matter must still be taken to the Minister. Government wants to be fair and he hoped to get the Minister's answer shortly. He added that those regulations were a high priority.

Ms Joemat (ANC) asked about the process around the general publicity campaign to notify PBOs about all the new developments.

Mr Tomasek said that the publicity campaign had already started and it will be extended to communicate what SARS needs and by when it is needed.

Dr Woods (IFP) asked if the alignment of the tax years will have any effect on the workload of the accounting profession. In respect of the depreciation allowance, he wanted to know if there was a possibility that the 40% deduction in the first year could distort the balance sheet and the health of a company. Lastly, he asked if SAICA has a view on the discretion given to the Commissioner and if SAICA is happy with it.

Mr Croome replied that the change of the year end affects only a small number of individuals. He added that when he was in the audit profession all but one of the clients had a different year end.

Commenting on the depreciation allowance, he said that the 40% allowance in the first year is fiscally beneficial in that it improves the cash flow of the business. He said that it would however still be necessary that the asset is depreciated over the useful life of the asset. The useful life of the asset was different from the depreciation allowance.

Prof Engel clarified by adding that the disparity between the tax books and the accounting books is how the world works. The 40% allowance is an incentive to the taxpayer and two sets of books has to be kept because this is the way it works.

Responding to the question on the discretion of the Minister, Mr Croome referred to the Katz Commission that said that discretion should be limited. He said that he is concerned about the discretion given to the Minister to estimate the value of the asset and the income derived from the asset. There was a concern about how the discretion is going to be policed and controlled. He added that where the route of court action is prevented then discretion is good. In some areas discretion is essential and others not. The correct balance is difficult to achieve.

Ms Hogan asked on what grounds the Commissioner would have reason to believe that assets are held outside the country.

Mr Tomasek replied that the classic source of information is from the ex wife. SARS gets a lot of information from the informant source such as ex-business partners etc. There are also records available when taxpayers requested to take money off shore. He added that the belief must be reasonable. The taxpayer will have a chance to comment on the belief and the Commissioner can evaluate the explanation given.

Ms Mahlangu asked what justifies giving amnesty to people who took funds out of the country illegally.

Mr Grote (Treasury) said that amnesty was debated but then there was the Rand Commission and government first needs to hear what comes out of that. He said that government would like to see huge amounts of money flow back into the country. First government wants to see what has been done in other countries. There is also the equity consideration because other taxpayers have obeyed the law. Another consideration is the foreign exchange regime - because people will not simple bring back funds if the law does not allow it to be taken out later on.

Mr Croome, replying to Ms Mahlangu, said that there was no legal process of bringing back the money. There had been a violation of the exchange regulations but at the same time if there is no disclosure of income, the Income Tax Act is being violated. The amnesty was just a proposal and might not be the ideal one - but the bottom line is that there is money outside the country that must be brought back. He added that he did not condone the illegal action and a penalty to bring back the money could be considered.

Ms Hogan commented that this category of people needs to be looked at. She said that Mr Croome was saying that people might want to bring the money back but that there was no mechanism. She felt that the preferable route was to get the money back into the country but that Treasury should not be concerned with the foreign exchange regulations because this should be the concern of the individual.

Mr Grote said that the foreign exchange regulations was identified as an area that needs to be looked at - but a much bigger debate is needed.

Mr Ralane (ANC) asked why SAICA wants the possibility to recover costs when a matter is conceded before going to court.

Mr Croome replied that the submission should actually apply both ways. If either party concedes just before going to court, then the aggrieved party should be able to get costs because it is very expensive to prepare for trial.

Mr Tomasek advised that this was catered for in last year's amendments that provide for the application by the aggrieved party to apply for costs.

South African Council of Churches (SACC)
The Submission was presented by Adv Schwarer, Chairman of the South African Catholics Bishops Conference. The submission was in respect of Public Benefit Organisations (PBOs).

He said that the SACC endorses many provisions of the Bill and particularly support group registration, the extended public benefit activity list and the extension of the deadline to apply for exemption. The concerns of the SACC are in the submission (see Appendix 2.

Their recommendations are summarised as follows:
- Introduce an automatic exemption from income tax (and, thus, ancillary taxes) for associations of persons with annual incomes less than the personal income tax threshold.

- Develop written criteria for determining when there is "good cause" to exempt an organisation from the NPO registration requirement.

- Establish a clearer test for determining what proportion of an organisation's activities occur outside of the Republic.

- In Part One of the Ninth Schedule that appears in sec.39 of the bill, insert:

"teaching" in item 5(a) to read "...which encompasses acts of worship, teaching, witness..."

- a new item 8(c): "The compilation and distribution of news, information and analysis by non-
profit organisations such as community media, and the facilitation of access information held by a public or private body in terms of Section 32 of the Constitution."

- a new item 11 (aA): The promotion of policies for or actions by public or private sector institutions intended to enhance the frequency, capacity or effectiveness of one or more of the public benefit activities contemplated in this part.

- In item (c) of the amendment that appears in sec. 22(b), insert "or" at the end of sub item (i) and "and" at the end of sub item (ii). This section provides the test for the 'public character' of an organisation. It currently provides that if the activity is (a) widely accessible or to the benefit to the general public, (b) for the benefit of the poor and needy or (c) at least 85% of the funding comes form donations or state grants then the organisation is a PBO. SACC feels that the 85% is to high and that the last test should be made obligatory not optional.

Discussion
Mr Ralane said that there were big churches like Rhema, with many assets, and wanted to know if these churches should also be exempt. Secondly, some churches served the purpose of enriching individuals. Thirdly, churches do depend on donations but what about subscriptions and tithes?

Adv Schwarer was of the view that SARS has provided itself with sufficient apparatus to control the activities of a church where it is perceived that the church is run to enrich people. an example is that salaries cannot be out of sync with what is paid in that sector. Also funds cannot be spent on anything but for furthering the objectives of the organisation. He was sure that SARS would be able to see when the legislation is abused.

He said that tides was fixed at 10% but in church circles it was voluntary and is part of the income of the PBO.

Ms Joemat (ANC) asked what percentage the SACC had in mind to replace the 85% test.

Adv Schwarer replied that that he had not really thought about it.

Prof Engel asked why there was problem with registering in terms of the Non Profit Organisation Act. The Act just asks for full disclosure and Prof Engel wanted to know what disclosure was problematic.

Secondly he wanted to know why the SACC wants to make the 85% test softer by reducing the 5 but at the same time make it obligatory because the net result would be a tougher test.

Adv Schwarer replied that the original argument against registration in terms of the NPO Act is that it doubled up the reporting requirements. There is no attempt to combine the reporting requirements of SARS and the NPO Act.

Ms Hogan commented that there had been a debate in civil society that civil society organisations should not be registered with the State and said that the waiver of registration on 'good cause shown' is an important allowance.

There were no further questions. Ms Hogan confirmed that SARS and Treasury would respond fully to the submissions.

The meeting was adjourned.

Appendix 1
The South African Institute of Chartered Accountants
TAXATION LAWS AMENDMENT BILL 2002

Introduction
The South African Institute of Chartered Accountants (SAICA) welcomes the opportunity
afforded to it to make a written submission to the Portfolio Committee on Finance on the
Taxation Laws Amendment Bill, 2002, a Bill comprising 80 pages as well as the Explanatory
Memorandum thereon comprising approximately 40 pages.

SAICA represents approximately 19 000 Chartered Accountants (South Africa), comprising members in commerce and industry, small and large auditing firms, universities and the public service. The Taxation Committee includes members from the various constituencies of SAICA.

Timing
The Taxation Laws Amendment Bill was received by SAICA on Monday, 27th May 2002.
SAICA received a fax from the secretary of this committee dated 27 May 2002 only on 29 May 2002 requesting that written submissions be forwarded no later than Monday, 3 June 2002.

We were under the impression that agreement had been reached that bodies consulted on the legislation would be given 10 clear days in which to consult their members and to properly prepare written submissions on the Taxation Bills. In view of the fact that the Bill was received by SAICA on 27 May 2002 and the fact that this written submission is required to be submitted on 3 June 2002 we have been unable to consult as broadly with our members as we would have liked to. It would have been preferable if we were granted at least 10 clear days in which to call for comment not only from the Taxation Committee but the regional taxation committees located around South Africa.

1. Amendment of section 1 of Act 58 of 1962
It is proposed that the definition of "year of assessment" be amended so as to prescribe that all taxpayers, other than companies, shall have a year-end of the last day of February of each year. It is submitted that the section should have clarified the manner in which trusts are to be dealt with. It often happens in practice that the financial year of a trust is the same as that of a company with which a trust is associated. In such a case the trust will prepare annual financial statements for the year end in question, other than the last day of February. It does not appear that the amendment addresses this aspect. It is therefor submitted that the reference to "in the case of a company" should be amended to read "in the case of a company or trust".

2. Amendment of section 5 of Act 58 of 1962
It is suggested that the reference to "company" at clause 10(c) should include the reference to a trust in light of our comments made above at paragraph 1.

3. Amendment of section 8 of Act 58 of 1962
3.1. The amendment provides that any allowance or advance granted by a principal shall be included in taxable income, excluding an allowance or advance to the extent it was actually expended on travelling on business or accommodation, meals and other incidental costs under certain circumstances. Section 8(1)(a)(ii) excludes reimbursements for entertainment or in respect of accommodation, meals and other incidental costs provided certain conditions are met. It is considered that this exclusion is too restrictive in that it applies only to entertainment and accommodation, meals and other incidental costs, as there could well be other reimbursements which in our view are not covered under these headings. For example, an employee could be granted an advance to make telephone calls where the employee will not spend at least one night away from his usual place of residence in the Republic or where the employee receives a reimbursement of subscription expenditure, cell phone costs or any other expenditure that may have been incurred on behalf of the employer. In such circumstances the exclusion would not apply and any allowance granted, even if proof was provided that the expenditure was only incurred for business purposes, would be taxable. It is submitted that this is not the intention of the amendments but that it will be the effect thereof.

3.2. It is submitted therefor that the exclusion should apply to all expenses incurred where the recipient has provided proof to the principal that the expenditure was only incurred for business purposes and the recipient is obliged to account to the principal for that expenditure.

4. Amendment of section 10 of Act 58 of 1962
It is thought that (bb) can be read as meaning that, for a person who is less than 65 years of age, the exemption to be applied to domestic interest is R6 000 less any amount set off against foreign dividends and interest; but that for a person who is at least 65 years of age, the exemption to be applied to domestic interest is Rl0 000 in addition to a maximum of R1 000 that can be set off against foreign dividends and interest. It is not believed that this is what was intended as the words "reduced by the amount of any exemption ..." appear to form part of situation (B), which applies to persons who are not at least 65 years of age. This should be clarified.

5. Amendment of section 11(u) of Act 58 of 1962
The amendment denies a taxpayer the deduction for entertainment if he derives remuneration as defined from employment. It is suggested that the word "solely" be inserted before "remuneration" so that where a taxpayer derives remuneration and commission, the taxpayer is not precluded from a deduction for entertainment against commission notwithstanding that he derived remuneration from employment. It is accepted that the current proposed amendment may be capable of allowing a deduction in the circumstance described above, but recommend clarity by the insertion of the word "solely".

6. Amendment of section 12D of Act 58 of 1962
6.1. The effective date of this amendment, which is still to be inserted, should in our opinion not be retrospective and should only take effect from a prospective date.

6.2. It is accepted that the intention of the amendment is to limit the scope for abuse, and also to bring the wording in line with other provisions regulating capital allowances available under the Income Tax Act, Act 58 of 1962, as amended (the Act). However, surely such a restriction limits the effectiveness of the allowances, especially to a person who is investing heavily in an industry where the taxpayer may have a small amount of taxable income and thus not much income which is capable of being reduced by the allowance available under the section.

7. Insertion of section 12H in Act 58 of 1962
Subsection 5 provides that where the registered learnership agreement is terminated within a period a period of six months the amount previously allowed to the employer shall be regarded as having been recovered or recouped for tax purposes. It is submitted that it would be preferable that the time period is removed. It is submitted that if the employer wishes to enjoy the benefits of this section there should be an obligation upon the employer to ensure that the learnership agreement runs its full course. It is accordingly our view that the concession available under section 12H should fall away and be regarded as having been recovered or recouped in the event that the learnership agreement is terminated at any time other than for reasons of death or certain other specific circumstances.

8. Amendment of section 18A of Act 58 of 1962
It is noted that the word "public benefit organisation" contained in the fourth line of the new subsection (5)(a)(i) is incorrectly spelt in that it currently reads "organisation".

9. Amendment of section 23 of Act 58 of 1962
9.1. Amendment of section 23(m)(iii) restricts deductions for commission earners to those available in terms of subsections 11(a) or (c). It is submitted that this is too restrictive. It is recommended that commission earners be entitled to any general or special deductions in respect of expenditure incurred in the course of that trade that meet the requirements of the sections concerned.

9.2. It has been stated that the intention of subparagraph (m) is to limit the range of deductions available to persons deriving income from employment or persons holding an office. A number of taxpayers choose to take out insurance policies, often referred to as income protection or income continuation policies, whereby premiums are required to be paid to an insurer registered under the Long Term Insurance Act, Act 52 of 1998, and in the event that the person is no longer able to earn income they will receive an amount from the insurer in compensation for the income they would otherwise have received had they not fallen ill. It would appear that the amounts received under such policies constitutes income for tax purposes in that it is paid to the taxpayer in order to compensate them for the loss of income. Premiums paid on such policies have traditionally been allowed by the Commissioner: SARS in accordance with the practice contained in the SARS Income Tax Practice Manual published by Butterworths. It would be preferable though if the position were clarified in the law and the Commissioner is thus requested to clarify the position particularly in light of the amendments introduced to section 23. It is submitted that the premiums paid by a taxpayer in respect of an income protection/continuation policy is not related to that person's employment and thus subparagraph (m) to be inserted in section 23 of the Act should not apply thereto. Taxpayers currently paying premiums under the policies in question should therefor continue being entitled to claim the premiums as a deduction in accordance with section 11(a) of the Act read together with section 23(g). The insertion of subsection (m) to section 23 should not alter the position but the Commissioner is urged to clarify this.

10. Amendment of section 30 of Act 58 of 1962
10.1. It is noted that the definition of "public benefit organisation" is to be amended such that subparagraph (b) will specifically require that at least 85% of the PBO's activities are carried out in the Republic, unless the Minister, having regard to the circumstances of the case directs otherwise. In view of the fact that a fairly large number of public benefit organisations are raising funds in South Africa not only for utilisation in South Africa but in the SADC, it is submitted that the reference to the Republic be amended to refer to the SADC also. In the event that subparagraph (b)(iii) retains a reference to South Africa only, those organisations that are engaged in activities in the neighbouring
states, such as Namibia, Zimbabwe, Mozambique etc will have to apply for permission to the Minister of Finance. It is submitted that it would be preferable that reference is made to the SADC region thereby facilitating ease of administration insofar as the National Treasury and indeed PBO's are concerned.

10.2. The notification in the Sunday press advising Non-Governmental Organisations (NGOs) of the amendments to section 30 of the Act and the fact that the date by which NGO's have to reapply for exemption has been extended from 15 July 2001 to 31December 2003 must be welcomed. The Commissioner's difficulty in reaching the NGO's in the country is the fact that many of them are not currently registered for tax purposes and it is thus not possible to send notices directly to such organisations. A campaign to advise NGO's via the printed media must therefor be welcomed and it is hoped that this will firstly remind NGO's of the need to reapply for exemption and secondly inform them that the date by which the reapplication for exemption must be made will be extended to 31 December 2003, assuming that the bill before you is approved by Parliament.

10.3. The proposal to insert a new subsection (3A) must be supported in that the amendment will reduce the administrative burden facing both the Commissioner: SARS and non-governmental organisations. The intention to recognise groups of organisations sharing a common purpose requires that the Commissioner must prescribe what steps the body is required to take in order to fall within the proposed subsection (3A). It would appear that there are a large number of organisations that would, on the face of it, appear independent but are in fact controlled by a regulating or controlling body. The proposal will in our view, reduce the number of applications required to be submitted to the Commissioner for exemption. It is important though that the non governmental organisation sector is advised as to what criteria will be used in order to fall within the provisions of the proposed amendments. Will, for example, it be necessary that the subsidiary non-governmental organisations not have their own accounting systems but rather that such organisations are aggregated and accounted for in the umbrella body? The Commissioner is urged to clarify exactly what criteria will be used in determining whether or not a particular group of organisations will indeed qualify for the purposes of the proposed subsection (3A) of section 30.

AMENDMENT OF SECTION 78 OF ACT 58 OF 1962

11. Introduction
11.1. The Taxation Committee has previously called for an amnesty allowing those persons who have removed funds from South Africa unlawfully to legitimise the assets that they hold abroad. In this regard we draw attention to our submissions made during 1997 when sections 9C and D were introduced into the Act as well as our submission to this Honourable Committee on the introduction of the residence basis of taxation by way of Act 59 of 2000. A copy of our submissions to this committee dated 21 May 1997 and 2 October 2000 (particularly with reference to paragraph 1.5) are attached hereto for ease of reference.

11.2. It is most unfortunate in our view, that the National Treasury did not heed the call at that time for the introduction of an exchange control amnesty in order to encourage those persons with funds abroad to legitimise the funds and thereby encourage such persons to disclose the income derived to tax in South Africa from assets held by them abroad.

11.3. We also draw your attention to a statement attributed to Ms G Marcus, the Deputy Governor of the South African Reserve Bank, in Personal Finance on 27t October 2001:

"Marcus told Personal Finance that the idea of an amnesty on grey money had been mooted a number of times and it is being considered by the government."

11.4. It would appear that certain South African residents have removed fairly significant sums abroad and these funds are currently lost to South Africa. It is accordingly suggested that serious consideration be given to the concept of an exchange control amnesty thereby encouraging those persons who have unlawfully removed funds from South Africa to legitimise such funds and also encourage such persons to disclose the income derived on such funds. We have seen a number of different amnesties in South Africa ranging from tax amnesties to an amnesty for certain offences committed and it is submitted that it is appropriate to consider an exchange control amnesty for the reasons stated above.

12. Subsection (1A)(a)
It is submitted that the current version of the abovementioned subsection is an improvement on the first version made available to us. The first version of the subsection did not require the Commissioner to give the taxpayer notice that the application of section 78 was under consideration. The Commissioner is now required to call upon the taxpayer to account for those assets or funds held abroad that have not been properly accounted for in the taxpayer's return. Clearly, where the taxpayer has failed to disclose income derived from assets held abroad they can be subject to additional tax in accordance with section 76 of the Act and could face criminal prosecution under section 104 of the Act.

13. Subsection (1B)
13.1. It is proposed that the taxable income shall be estimated by having regard to the "official rate of interest" contained in paragraph 1 of the Seventh Schedule of the Act (currently 11,5 percent). It is submitted that this rate is unreasonable in that that rate of interest bears no relation to the likely rate of return on assets held abroad. It is submitted that another benchmark should in our view be determined so as to set a reasonable rate of return on assets held abroad, such as an overseas rate of interest.

13.2. The reference to the official rate of interest is in our view unduly penal having regard to the fact that the offshore investments do not yield a rate of return approximating the "official rate of interest". Whilst it is accepted that it is meant to be a penal provision, it is suggested that the Commissioner should have regard to the income earning capacity of the assets held abroad by having regard to the nature of the assets in question. For example, if the taxpayer owns say, cash denominated in UK Pounds then the Commissioner should have regard to the rate of interest in the United Kingdom.

13.3. It is no doubt true to state that rates of interest in South Africa are higher than the rates of interest abroad and it is for this reason that it is submitted that to rely upon the official rate of interest to determine the income that has possibly been derived from abroad is extremely harsh.

14. Subsection (b)(2)
It is submitted that the 5^th line should be amended to read as follows:

"... person is unable for any cause to furnish ..."

15. Insertion of section 79A of Act 58 of 1962
The proposal to allow the Commissioner to reduce an assessment where processing errors have been made in issuing an assessment must be supported. In the event that a taxpayer receives an assessment that is patently flawed the taxpayer has no choice under the current statutory provisions but to lodge a formal objection against such assessment. Unfortunately, a large number of assessments have been issued with errors thereon in the last while and thus the introduction of section 79A must be supported. The new section alleviates a taxpayer's need to lodge a formal objection against an assessment that is patently incorrect as a result of processing errors made by the Commissioner's office.

16. Amendment of proviso to section 79A(1) of Act 58 of 1962
The proviso to Section 79A(1) which states that "... was issued by the Commissioner based on information provided in the taxpayer's return" should be amended along the following lines "... based on information provided in the taxpayer's return for the current year or any prior year". This is to cater for the situation where information in a prior year has been incorrectly treated, but has an impact on the subsequent tax years and the taxpayer does not object to the subsequent year's assessment on the assumption that the subsequent year's assessment will be revised automatically once the prior year assessment is adjusted. For example, if the assessed loss determined in a year was incorrect and such assessment was objected to, but a subsequent year's assessment has the incorrect assessed loss brought forward, but was not objected to by the taxpayer, this situation must be catered for. The proposed amendment does not go far enough in this case to cater for such situations. The issue of what is a "processing error" may require clarification. In the example set out above with the assessed loss, will this be regarded as a "processing error"?

17. Amendment to section 83(1 C) of Act 58 of 1962
We suggest that consideration be given to amending section 83(1C) to allow for the Commissioner to be liable for costs if the appeal is conceded just prior to the hearing and where the taxpayer can prove that it has incurred costs with regard to preparing for the appeal. This would be to prevent disallowances or inclusions in income by the Commissioner without merit, but being conceded after the taxpayer has incurred significant expense in getting the Commissioner to concede the matter before trial.

18. Amendment to section 102(3) of Act 58 of 1962
Section 102(3), which allows for set off does not differentiate between amounts that may be said to be owing but are under objection or appeal and amounts accepted by the taxpayer as said to be owing to SARS. The taxpayer could be prejudiced financially if the refund is withheld because tax is shown to be owing by SARS due to an administrative error on their part with the assessment, which has happened often recently with the change to the New Income Tax System (NITS). It is suggested that this subsection be amended to cater for this situation of set off.

19. Amendment of paragraph 1 of the Fourth Schedule to Act 58 of 1962
The amendment to the definition of "remuneration" in paragraph 1 of the Fourth Schedule by the insertion of "(bA)" has the word "in missing. The sentence should read ..... an allowance in respect of...".

20. Amendment of paragraph 13 of Seventh Schedule to Act 58 of 1962
The heading contained in the proposed bill currently refers to Act 59 of 1962 and it is clear that this should in fact read Act 58 of 1962.

21. Insertion of Ninth Schedule to Act 58 of 1962
21.1. Many universities and indeed secondary schools established separate educational funds in the form of trusts to raise educational donations in compliance with the erstwhile section 18A of the Act (see the definition of 'educational fund' previously contained in section 18A(l) of the Act). These funds were generally recognised by the Commissioner: SARS such that they could issue certificates of donation to donors thereby enabling the donors to claim amounts donated to such trusts as a deduction for income tax purposes. In reviewing Part II of the proposed Ninth Schedule of the Act it does not appear that an educational trust raising funds from the public for a university or a secondary school will entitle the donors of funds thereto, to deduct such donations for tax purposes. From an examination of the current provisions of Part II of the proposed Ninth Schedule of the Act there is no reference therein to providing of funds, assets or other resources to qualifying public benefit organisations.

21.2. It is clear though that an educational trust qualifies for exemption in terms of paragraph 10 of Part I of the Ninth Schedule, however Part II contains no similar reference to that found at paragraph 10 of Part 1 of the Ninth Schedule.

It is accordingly submitted that consideration should be given to including a paragraph along the lines of paragraph 10 of Part I as a new paragraph 5 of Part II of the proposed Ninth Schedule. Part II of the Ninth Schedule should therefor recognise those public benefit organisations that are raising funds for secondary schools, universities and other qualifying organisations as envisaged in Part II of the proposed Ninth Schedule of the Act.

21.3. Insert the word "or" at the end of sub-paragraph (c); paragraph (d): insert the word "of" on the second line after 'the direct cost to the organisation'; remove the word "any" from sub-paragraphs (i), (ii), (iii) and (iv) as the word is already stated in the line "to any" that precedes these items.

22. Amendment of section 21 of Act 30 of 2000
22.1. Section 21(1) of the Taxation Laws Amendment Act, 2000 amended section
10(1)(d) of Act No.58 of 1962 to include previous section 10(1)(cB) type organisations.

22.2. Section 21(2) of the Taxation Laws Amendment Act, 2000 provided for uninterrupted exemption for organisations that qualified for exemption under section 10(1)(cB) and now applied under section 10(1)(d)(ii) or (iii).

22.3. Section 21(1) was later amended by section 78 of the Revenue Laws Amendment Act, 2001. This gave section 10(l)(d) of Act 58 of 1962, four subsections rather than three (no types of organisation were added or deleted but benefit funds were moved to a separate subsection).

22.4. Section 21(2) of the Taxation Laws Amendment Act, 2000, was not, however, amended to allow for uninterrupted exemption when application is made in terms of the 'new' section 10(1)(d)(iv) of the Act. Organisations falling into section 10(l)(d)(iv) were previously included in section 10(1)(d)(iii) of the Act and qualified for uninterrupted exemption.

22.5. Section 21(2) of the Taxation Laws Amendment Act, 2000 should be amended to include those organisations qualifying for exemption under section 10(1)(d)(iv). It should be confirmed that these bodies also have until 31 December 2003 to reapply for exemption from income tax.

EXPLANATORY MEMORANDUM

23. Clause 37
It would appear that the word "they" has been omitted from the last sentence contained on page 26 of the Explanatory Memorandum. The sentence in question should read as follows:

"The purpose of the requirement that prices had to be published was to ensure that they were not manipulated."

24. Clause 61
The proposal to extend the date by which public benefit organisations are required to reapply for exemption from income tax under the Act must be welcomed. It does appear that there are still a very large number of public benefit organisations that have not yet reapplied for exemption under the Act. The Commissioner: SARS is urged to remind non-governmental organisations that they have to reapply for exemption and that the date has been extended now to 31 December 2003. Many public benefit organisations are not aware of the provisions of section 30 of the Act. The Commissioner is urged to continue with the process of bringing the changes to the attention of the NGO sector.

OUTSTANDING REGULATIONS

25. Introduction
Currently there are a fair number of regulations required to be promulgated in accordance with the provisions of the Act and it is unfortunate, in our view, that these regulations have as yet not been issued thereby resulting in uncertainty for various taxpayers.

26. Section 9E
In accordance with section 9E(8) the Minister is required to publish in the Gazette a schedule of designated countries for the purposes of section 9E. A draft schedule was made available to SAICA for comment and unfortunately the schedule has to date not yet been promulgated. It is hoped that the schedule of designated countries will be finalised shortly thereby ensuring certainty for taxpayers insofar as section 9E is concerned.

27. Section 10(1)(d) of the Act
In accordance with section l0(1)(d) of the Act it is required that the Minister of Finance will prescribe the conditions that entities will need to comply with in order to obtain exemption under section l0(l)(d) of the Act from the Commissioner: SARS. It is accepted that the current bill proposes that the date by which organisations must reapply for exemption has been extended until 31 December 2003 but it would be far preferable in our view, if the regulations required under section l0(1)(d) of the Act are issued so that taxpayers know what is expected of them in order to obtain exemption under the said section.

28. Section 30(3)(a)
28.1. It is specifically provided at section 30(3)(a) that those public benefit organisations seeking exemption from income tax must comply with such conditions as the Minister may prescribe by way of regulation to ensure that the activities and resources of such organisation are directed in the furtherance of its object. Unfortunately, no regulations have as yet been published in this regard and it remains to be seen what conditions must be complied with by a public benefit organisation in order to obtain exemption from income tax in accordance with section 10(1)(cN) of the Act read together with section 30 thereof.

28.2. Furthermore, section 30(3)(e) requires the public benefit organisation to comply with "such reporting requirements as may be determined by the Commissioner". Unfortunately, the Commissioner has to date not publicised what reporting requirements must be complied with in order to ensure that the public benefit organisation complies with the requirements of section 30 of the Act.

29. Section 64B(5)(c)
Another very important regulation that is required to be promulgated relates to the procedures to be adopted by a company in order to comply with the provisions of section 64B(5)(c) of the Act thereby ensuring that the company and its officers have complied with the statutory requirements in order to enjoy the exemption from secondary tax on companies available qualifying dividends. The requirement for regulations to be gazetted was introduced by way of the Second Revenue Laws Amendment Act, Act 60 of 2001 and it was specifically provided at clause 48(2)(b) of that Act that the taxpayer must comply with the regulations in respect of dividends declared on or after the date of promulgation of Act 60 of 2001 namely, 12 December 2001. Taxpayers have therefor been placed in an invidious position in that in order to comply with section 64B(5)(c) they have to comply with regulations that are not yet in existence.

30. Section 41
It is noted that in accordance with section 41(3) of the Act that the Minister may prescribe regulations specifying the circumstances under which the prior written approval of the Commissioner: SARS must be obtained or may be elected to be obtained in respect of certain corporate restructuring transactions dealt with in Part III of the Act. It remains to be seen whether regulations will indeed be promulgated under the section and once again it would be preferable, in the interests of certainty, that regulations are indeed published in accordance with the said section.

31. Section 46
In accordance with section 46(6) of the Act the Minister is required to promulgate regulations in the Gazette specifying the steps that are required to be taken by a liquidating company in order to show that adequate procedures have been put in place to commence the liquidation or deregistration of the company. Section 46 was inserted into the Act by way of the Second Revenue Laws Amendment Act, Act 60 of 2001 and came into operation on 1 October 2001. Once gain taxpayers have been placed in a difficult position in that in order to comply with the provisions of section 46(6)(c) of the Act they are compelled to comply with regulations that are not yet in existence.

32. Section 107A
It is provided at section 107A that the Minister may, after consultation with the Minister of Justice, promulgate rules prescribing the procedures to be observed in lodging an objection and noting an appeal against an assessment as well as the conduct and hearing of an appeal before a tax court. It remains to be seen when the said rules will be promulgated.

33. Section 107B
The insertion of section 107B, effected last year, allows the Commissioner to settle disputes with taxpayers and the introduction of that section must thus be supported. Once again though the section requires the Minister to promulgate regulations setting out the rules to be complied with in order for the Commissioner to reach an agreement with the taxpayer on settling a dispute. It is hoped that the regulations required under this section will also be issued shortly.

34. Paragraph 84 of the Eighth Schedule of the Act
Capital gains tax took effect on 1 October 2001 and certain taxpayers have no doubt realised capital gains in respect of foreign currency transactions and are thus compelled to report such transactions in the 2002 tax return which is due to be submitted to the Commissioner: SARS shortly. The difficulty facing such taxpayers is the fact that the regulations pertaining to the determination of capital gains and losses on foreign currency assets have as yet not been promulgated as required under paragraph 84 of the Eighth Schedule. The Commissioner is urged to finalise the regulations required under this section so that taxpayers are placed in the position that they can comply with their statutory obligations.

MONETARY LIMITS
35. Schedule
35.1. The National Treasury last year undertook to consider the review of certain of the monetary limits in the Act and the changes introduced this year must therefor be supported. It is clear that the process of reviewing the monetary limits contained in fiscal legislation has commenced and it is hoped that this process will continue on a regular basis.

35.2. It can be pointed out that the following monetary amounts are to be amended in accordance with the bill now under consideration:

It is apparent from the above summary that a number of monetary limits in the Act were amended this year and it is hoped that we will see further changes in next year's budget.

BUDGET ANNOUNCEMENTS NOT IN THE CURRENT TAX BILL

36. Regulation of tax advisors
36.1. The Minister of Finance announced in his Budget Speech presented to Parliament on 20 February 2002, at page 32, that the role of tax advisors and consultants would be reviewed. At page 70 of the 2002 Budget Review the following was stated:

"Many individual and business taxpayers receive advice and assistance from tax consultants and advisors. Although the final responsibility for the contents of a tax return legally rest with the taxpayer, the return is completed on the advice of the tax consultant or advisor, who bears limited responsibility for the advice given. In order to promote better compliance and ensure that taxpayers receive advice consistent with the tax legislation, SARS will initiate discussion on the regulation of tax consultants and advisors in South Africa, with appropriate sanctions in the event of noncompliance with tax legislation."

36.2. It must be noted that there are many tax advisors in South Africa who are not registered with SAICA or indeed with any other professional controlling body. It is unfortunately true to say that many complaints received by SAICA from members of the public for poor performance or other problems encountered with accountants relate to persons not registered with SAICA.

36.3. It must be pointed out that members of SAICA are subject to SAICA's code of professional
conduct. Where complaints are received by SAICA against a member on the grounds that they have violated such code an inquiry will be conducted and where appropriate the necessary sanction will be imposed on the defaulting member.

36.4.In addition, the Commissioner: SARS is empowered under section 105A of the Act to report
professional misconduct to the professional's controlling body. The Interim Report of the Commission of Enquiry into Certain Aspects of the Tax Structure of South Africa (known as the Katz Commission) at chapter 6 weighed up various provisions of the fiscal statutes against the Interim Constitution Act 200 of 1993. Paragraph 6.3.24 of the Katz report was of the view that section l05A of the Act as it stands could be held to be unconstitutional. At paragraph 6.3.25 the following view was expressed:

"The objective of this section would, it is considered, be justified in terms of section 33 of the Constitution were the section to be couched more carefully and, accordingly it is recommended that the exact mischief intended to be cured by this section should be specified and accordingly the remedial measures be confined to the attainment of each objective."

36.5. To date the section has not been reviewed and at a meeting held with the
Commissioner: SARS and SARS senior representatives on 28 November 2001 it was
agreed that SAICA should, together with the Commissioner, review section 105A with a
view to recommending amendments thereto.

36.6. In the event that the Commissioner: SARS believes that a member of SAICA has given incorrect tax advice to a client the Commissioner is empowered to bring the matter to SAICA's attention under section 105A of the Act. We wish to place on record that the Commissioner: SARS has only raised one complaint against a member of SAICA in the past 10 years in terms of section 105 of the Act.

36.7. SAICA has now called for a meeting with the Commissioner: SARS to further discuss the
regulation of tax advisors in South Africa and also to debate the provisions contained in section 105 of the Act.

36.8. It submitted that where SARS comes across accountants that are members of SAICA it has a duty to report such chartered accountants to SAICA so that it can take disciplinary action against the defaulting members. It is unfortunate that the public and indeed the SARS takes the view that accountants and auditors are automatically members of SAICA. There is currently no statutory prohibition on any person holding themselves out to be an accountant despite the fact that they are not a member of SAICA. SAICA can on]y take action against those persons who are indeed members of SAICA and are registered as Chartered Accountants (SA). It must also be pointed out that in the event that a member of SAICA gives advice to a client which is found to be patently wrong the member would under contract law be liable to the client for damages suffered on the grounds of negligence. Members of SAICA therefor have an onerous responsibility in giving tax advice to their clients in that they are compelled to comply with the statutes of the country and also the code of professional conduct as published by SAICA. SAICA can only take action against those members that are in default of their professional duties where it receives proper complaints from either members of the public or the authorities.

36.9. The intention to regulate tax advisors is, in principle, supported in that it will ensure that all persons involved in the tax advisory arena will be treated equally and hopefully face the same sanction for breach of a well defined set of rules regulating professional conduct.

37. Complaints office
The Minister announced the intention to launch a complaints office that will operate independently of the Receiver of Revenue branch offices. The proposal to establish such an office must be supported in that taxpayers unfortunately are reluctant to lodge complaints because of the perception that they will be victimised in the event that they do so. It remains to be seen exactly when the complaints office will be launched and the form thereof.

38. Taxpayer's Charter
The Minister indicated in the 2000 Budget Speech that the 1997 SARS Client Charter would be revisited. The establishment of the complaints office will hopefully go someway in establishing a remedy for taxpayers that are aggrieved with administrative decisions or lack of decisions having been taken by officers employed by SARS. It is hoped though that the SARS Client Charter will be reviewed shortly and that more effective means of enforcing taxpayer's rights will be considered such as the possibility of establishing a specialist tax ombudsman's office to deal with taxpayer complaints as is found in the United Kingdom, United States of America and various other countries. We look forward to being involved in the ongoing debate relating to the revision of the Taxpayer's Charter in South Africa.

39. Retirement industry
The proposal to review the tax consequences facing the retirement industry must be welcomed. We have for some time been calling for finality insofar as this industry is concerned. It is hoped that the process of finalising the retirement industry in taxation will commence and be finalised shortly.

40. Tax Gap
40.1. The Minister alluded to the question of the tax gap in South Africa in the Budget Speech and it is agreed that active steps are required to reduce this gap. In our view the gap can be defined as comprising two distinct parts. Firstly, that tax due by persons who are not registered for tax purposes despite the fact that they should be and secondly those persons in receipt of income who fail to disclose the full extent of their income to the SARS.

40.2. Based on a review of labour statistics published by Statistics South Africa it would appear that South Africa currently has approximately 11,8 million persons employed in the country. The Minister previously published the number of taxpayers in South Africa in the Budget Review and has unfortunately not done so for the last two or three years. It is therefor unclear exactly how many persons are paying tax in South Africa, that is either via the submission of income tax returns or via the Standard Income Tax on Employees (SITE) system. It would appear though that the number of persons paying tax amounts to approximately 6.687 million people. It would thus appear that there are some 5.112 million persons not currently registered for tax purposes. The Commissioner: SARS appeared before this Honourable Committee on 14 May 2002 and indicated that in his view approximately 5.9 million people are missing from the tax register.

40.3. It is essential that the SARS reduces the number of people missing from the tax register thereby collecting the tax due to it and enabling it to ultimately ensure a reduction of the tax burden faced by the citizens of the country that are registered for tax purposes.

40.4. Furthermore, where taxpayers choose not to disclose all income to the SARS action must be taken against such taxpayers to ensure compliance with the law. It is also submitted that where the fiscal statutes are found wanting in that taxpayers are entering into transactions to escape their obligations without violating the statutory provisions, the law must be amended. It is accepted and agreed that tax evasion constitutes a crime and can be prosecuted under the penal provisions contained in the various fiscal statutes or indeed under the common law crime of fraud. The more difficult area to address is that relating to tax avoidance. The SARS Client Charter published in 1997 specifically provides that taxpayers are obliged to pay only what is due under the law. In the event that taxpayers are able to arrange their affairs such that they reduce their tax legitimately such avoidance of tax cannot be prosecuted. Where the avoidance is believed to be unacceptable it is submitted that the taxing statute must be amended. Courts throughout the world have generally upheld the right of the taxpayer to legitimately reduce their tax obligations and structure their affairs so as to minimise the payment of tax due to the revenue authority within the provisions of the law. (see for example IRC vs Duke of Westminster [1936] AC 1).

41. General comments
The effective dates must be inserted into Sections 59, 60, 61, 63, 64, 65 and 72.

42. Conclusion
42.1. SAICA wishes to express its appreciation for being afforded the opportunity to comment on the batches of legislation made available to us over the last few weeks and the bill itself. We are privileged to be part of the process in commenting on fiscal legislation in this country and hope that we contribute to a healthy debate thereon. It must be noted that the batches of legislation made available to us this year were made available together with a draft Explanatory Memorandum thereon which did assist our members in commenting on the draft legislation. The layout of the Explanatory Memorandum on this bill must also be complemented in that it is comprehensively indexed which does facilitate ease of reading.

42.2. The one concern that must be expressed is the fact that the bill before you was received by SAICA on Monday, 27th May and that we were required to submit our written submission by no later than Monday, 3 June 2002. This unfortunately did not allow us the time to consult extensively with our members. It would have been preferably in our view had we had a few more days in which to consult with a wider section of our membership.

Please do not hesitate to contact the writer should further information be required. Yours faithfully

B J Croome
CHAIRMAN: SAlCA TAXATION COMMITTEE
End.

Appendix 2
SOUTH AFRICAN COUNCIL OF CHURCHES
Parliamentary Office
Tel. (021)423 4261 Fax. (021)423 4262 E-mail. [email protected]

Draft Taxation Laws Amendment Bill
Submission to the Portfolio Committee on Finance

Introduction
The South African Council of Churches (SACC) endorses many of the provisions of the draft Taxation Laws Amendment Bill (hereafter the 'Bill') as valuable and necessary adjustments to the new system of tax exemption for public benefit organisations introduced by the Taxation Laws Amendment Act, 2000. In particular, we support the introduction of group registration, the amplification of the public benefit activities list, and the extension of the application deadline. We also applaud moves to enable the Commissioner to waive the NPO registration requirement, but suggest that these discretionary powers should be grounded in written criteria. We raise concerns about the omission of theological education, information services and advocacy from the public benefit activities list, the administrative burden placed on very small public benefit organisations, and the formulation of the tests for operating within the Republic and 'public character".

Registration for tax exemption
1. The SACC objected to the registration procedures originally outlined by SARS which would have required each legal entity to register independently for tax exemption. We argued that this would place too great an administrative burden on both SARS and the religious community, particularly smaller, independent churches.

2. We proposed the introduction of two further options to reduce this burden and to facilitate
compliance. First, we urged SARS to permit related organisations to register for tax exemption as a single group. Second, we recommended the introduction of a registration threshold so that bodies whose annual income was below a certain amount (such as the threshold for personal income tax) would be considered automatically exempt. Although such small bodies would not be liable to pay income tax, the establishment of their exempt status remains important to enable them to enjoy exemption from other taxes.

3.The Bill incorporates the first of these two recommendations. It would empower the
Commissioner of Revenue to grant a group exemption where a number of organisations:
X share a common purpose;
X engage in public benefit activities; and
X operate under the direction of a regulating or co-ordinating body.

The regulating or co-ordinating body would be required to ensure that constituent organisations comply with the provisions of the Income Tax Act regulating public benefit organisations (PBOs).

4. The SACC endorses this amendment as a significant step towards a more flexible registration
mechanism that seeks to reconcile the responsibilities and interests of the government and religious
bodies.

5. At the same time, we recognise that the primary beneficiaries of this change will be larger, more centralised denominations that have the capacity to exercise administrative oversight over a network of constituents (parishes, congregations, etc.). We remain especially concerned about the new tax system's impact on smaller, independent congregations (especially in rural areas) which often have limited access to both information and administrative capacity.

6. We urge the introduction of an automatic exemption from income tax (and ancillary taxes) for
associations of persons that undertake public benefit activities on extremely limited incomes.
Associations of persons that engage solely in public benefit activities, that do not own land or
buildings and that have total annual receipts of less than a certain amount (such as the personal
income taxation threshold) should be automatically recognised as tax exempt. Such a body should still be required to maintain financial records for at least five years; to draw up annual financial statements; to make these available to members of the public on request; and to make its records available for inspection by SARS on written request. They should be excused from submitting a constitution to SARS for approval; filing an annual tax return or financial statement with SARS; or registering as an NPO. However, they should not be excused from complying with the constitutional requirements set out in section 30(3)(b) of the Income Tax Act, 1962, nor the provisions related to tax evasion schemes, excessive remuneration and funding of public benefit activities found in sections 30(3)(c), (d) and (f ).

NPO Registration requirement
7. The Income Tax Act presently makes tax exemption for PBOs conditional on their registration as Non-Profit Organisations in terms of the Non-Profit Organisations Act, 1997. A number of SACC member denominations have objected to this requirement. Others have acknowledged the potential transparency benefits of NPO registration for the PBO sector in general, but have questioned the appropriateness of such oversight with respect to religious bodies, especially where they have internal mechanisms of accountability to their membership. In addition, churches have raised concerns about the administrative burden imposed by the NPO Act's reporting requirement. The SACC has therefore asked for a more flexible application of this provision.

8. The Bill would amend sec. 30(3)(g) of the Income Tax Act, 1962. to enable the Commissioner of Revenue in consultation with the Director of Non-Profit Organisations, to waive the NPO registration requirement if an applicant is able to show good cause for doing so. Whilst we would see this as an improvement, we would prefer for there to be a set of written guidelines to assist the Commissioner in deciding what constitutes good cause.

Among the factors to be considered should be the nature of the organisation and the extent to which it has established effective alternative mechanisms of public accountability.

Activities outside the Republic
9. The Income Tax Act currently requires an exempt PBO to undertake substantially the whole of its activities inside the Republic, unless the Minister of Finance waives this requirement. This could pose problems for a number of the SACC's member denominations that are organised on a regional basis.

10. The Bill helps to clarify this requirement by changing 'substantially the whole" to at least
85 per cent of such [public benefit] activities, measured as the cost related to the activities and the time expended in respect thereof". Ministerial discretion remains intact.

11. The attempt to introduce greater precision is welcome, although it is unlikely to remedy the problem faced by denominations that operate under regional structures. Nevertheless, we recognise that a blanket relaxation or elimination of this requirement could invite abuses.

12. However, the provision, as currently worded, is difficult to interpret. How should one integrate the cost and time calculations to arrive at a single percentage? Many of the church's pastoral activities, for instance, are low-cost but time intensive. If an organisation commits 20 per cent of its staff time and 10 per cent of its budget to work outside the Republic, does it meet this test? Do time and money always receive equal weighting?

Approved public benefit activities in terms of sec. 30
13. In order to be approved as an exempt PBO, an organisation must engage exclusively in designated public benefit activities. Section 30 of the Income Tax Act requires that a list of these activities be incorporated into the Act. The Bill would satisfy this requirement by adding a Ninth Schedule to the Act.

14. The Minister gazetted a draft list nearly a year ago. The Working Group and other religious and secular bodies have commented extensively on this list and pointed out a number of
omissions. Many of these have been included in Part One of the Ninth Schedule, including:
- The promotion of human rights and democracy [item 1(i)];
- The promotion or protection of the rights and interests of, and the care of, asylum seekers and refugees [item 1(n)];
- Community development and anti-poverty initiatives [item 1(o)]; and
- The donation (or provision at cost) of funds, assets or other resources to any PBO or association of persons engaged in public benefit activities [item 10].

In addition. the Bill would remedy an ambiguity in the current law by explicitly empowering the Minister of Finance to identify new public benefit activities and to table these in Parliament for incorporation into the Ninth Schedule.

The SACC has also raised three other issues that do not yet appear to have been fully addressed
in the list:

- Theological education - A number of churches undertake theological education, and such courses are frequently not accredited in terms of the Acts cited in section 4 of the list (Education). These courses would more appropriately be considered to be covered by item 5(a): "The promotion and/or practice of religion which encompasses acts of worship, witness and community service based on a belief in a deity." However, theological education does not fit very comfortably in any of the three categories named (worship, witness and community service). Whilst it could also be subsumed under item 5(b) "The promotion and/or practice of a belief" - we propose that "teaching" be added to the list in 5(a).

- Information services - Two different types of activities should be included: compilation and distribution of news. information and analysis by non-profit organisations such as community media and the facilitation of access information held by a public or private body in terms of section 32 of the Constitution. These activities go beyond the research and PBO support activities envisioned in items 8(a) and 11(a). respectively.

- Advocacy - PBOs serve the public both by delivering services directly and by prompting other public and private agencies to do so. Advocacy is often central to the latter enterprise. Although the advocacy work of church agencies is clearly covered by item 5(a) as an act of social witness and community service, there is no similar generic coverage for the advocacy activities of secular organisations. These are insufficiently accommodated by "promotion of democracy" [item 1(i)] or "promotion of the common interests of public benefit organisations" [item 11(a)]. We propose the insertion of a new item 11(aA): The promotion of policies for or actions by public or private sector institutions intended to enhance the frequency, capacity or effectiveness of one or more of the public benefit activities contemplated in this part.

Definition of "public character"
16. The current Act defines a PBO as an organisation "of a public character" that also meets other requirements. However, this term is not currently defined.

17. Section 22(b) of the Bill would introduce three tests for the "public character" of an organisation:

- All its activities must be "for the benefit of, or widely accessible to, the general public at large, including any sector thereof (other than small and exclusive groups)";
- All its activities must be "for the benefit of, or readily accessible to, the poor and needy"; or
- At least 85 per cent of its funding must come from donations or state grants (either domestic or foreign).

18. The "or" at the end of item (c)(ii) indicates that an organisation would be considered to be a public benefit organisation if it satisfied any one of these three tests. We would propose, instead, that an organisation be required to meet either the first or second test and the third test. [We note that it would be equally undesirable to require organisations to meet all three tests. Part One of the proposed Ninth Schedule requires that certain activities enhance the provision of services to poor and needy persons in order for them to be considered public benefit activities, but this condition is not applied to all items on the list.]

Extension of application deadline
19. The SACC strongly endorses the Bill's provisions extending the deadline for the submission of applications for tax exemption from 14 July 2002 to 31 December 2003.

Standing of the SACC
20. The South African Council of Churches (SACC) is the facilitating body for a fellowship of 24 Christian churches, together with one observer-member and associated para-church organisations. Founded in 1968, the SACC includes among its members Protestant, Catholic, African Independent, and Pentecostal churches, representing the majority of Christians in South Africa. SACC members are committed to expressing jointly, through proclamation and programmes, the united witness of the church in South Africa, especially in matters of national debate.

In terms of the Taxation Laws Amendment Act, 2000, churches and church agencies are no
longer tax exempt on the basis of their religious nature. Instead they will only be exempt if they can satisfy the Commissioner that they qualify as public benefit organisations (PBOs). This generic category encompasses a wide range of organisations with diverse aims and administrative structures. Although the SACC has benefited from continuing cooperation with secular PBOs to assess the impact of the new tax system, we have also recognised that the changes often have unique implications for churches and other religious bodies.

Consequently, the SACC Parliamentary Office has facilitated a consultative process among
SACC member denomination to identify potential problems with SARS' proposed implementation arrangements and to develop possible alternatives. More recently, we have worked to broaden this discussion to include Christian churches that are not SACC members, as well as parallel structures in other faith communities. Our discussions have included representatives of the Zion Christian Church and the South African Jewish Board of Deputies. We have also been in contact with Hindu and Muslim organisations.

SACC members have met with South African Revenue Service (SARS) officials on several
occasions, both independently and through the SACC consultative group. We have found SARS officials to be consistently attentive to the concerns we have raised. In this regard, we wish to express particular appreciation to Mr. Mark Kingon and Ms. Lynette Hazelhurst of SARS for their responsiveness and openness to our proposals.

Summary of recommendations
The South African Council of Churches recommends the following changes to the draft Taxation Laws Amendment Act:

1. Introduce an automatic exemption from income tax (and, thus, ancillary taxes) for associations of persons with annual incomes less than the personal income tax threshold.
2. Develop written criteria for determining when there is "good cause" to exempt an organisation from the NPO registration requirement.
3. Establish a clearer test for determining what proportion of an organisation's activities occur outside of the Republic.
4. In Part One of the Ninth Schedule that appears in sec.39 of the bill, insert:
X "teaching" in item 5(a) to read "...which encompasses acts of worship, teaching. witness..."
X a new item 8(c): "The compilation and distribution of news, information and analysis by non-profit organisations such as community media, and the facilitation of access information held by a public or private body in terms of Section 32 of the Constitution."
X a new item 11 (aA): The promotion of policies for or actions by public or private sector institutions intended to enhance the frequency, capacity or effectiveness of one or more of the public benefit activities contemplated in this part.
5. In item (c) of the amendment that appears in sec. 22(b), insert "or" at the end of sub item (i) and "and" at the end of sub item (ii).