Taxation Laws Amendment Bill, Tax Administration Laws Amendment, Rates & Monetary Amounts and Amendment of Revenue Laws Bill: briefing

NCOP Finance

19 November 2014
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

Rates and Monetary Amounts Bill
The majority of South Africans (8.8 million) earned less than R70 000 per year and the other 6.4 million people were spread over income brackets higher than that. The estimated income for this year was R335.9 billion and a significant part of that income was paid by people earning more than R1 million per annum. The pre-retirement lump sum taxation and retirement lump sum taxation for both 2013/14 and 2014/15 showed an increase of around 10%, but there had been a larger increase in the first bracket of retirement lump sum taxation from R315 000 to R500 000. The larger increase was to avoid situations where individuals (especially in provident funds) who did not receive a deduction on their contribution over their working lives would be forced to now pay tax on their retirement benefits.

Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB)
The current tax regime for contributions to retirement savings was excessively complicated and National Treasury published a discussion document in October 2012 to detail the proposed tax amendments. Employer contributions to retirement funds would be treated as a fringe benefit in the hands of the employee. Total contributions to all retirement funds would be given the same level of allowable deduction of 27.5% of taxable income remuneration. The benefit to higher earners would be limited by placing a cap of R350 0000. Employee contributions to provident fund members would now receive a deduction which was not previously available. In return for the allowable deductions and to ensure harmonisation, the annuitisation requirements for pension funds and retirement annuities would apply to provident funds. Anyone over 55 will not be affected in any way by the annuitisation requirements, anyone below age 55 could still take out the full value that was in their pension as at 1 March 2015 and only two thirds of new contributions from 1 March 2015 would be required to annuitise. It did specify that contributions below R150 000 did not need to annuitise. Labour and community constituencies had requested the need for more clarity on social security reform. There were also concerns about false retirement rumours and premature resignations to cash in retirement funds. Government proposed to delay implementation for one year to 1 March 2016.

The main features of the tax free savings account were that all the returns in the account would be free from tax and individuals could open multiple accounts. There was a R500 000 lifetime limit, individuals could access the amounts in the account at any time, but withdrawals could only be replaced up to the value of the annual limit. To ensure these limits were adhered to, a penalty of 40% of contributions above these limits was proposed.

The Income Tax Act did not provide tax relief for grant funding aimed at supporting and developing small business. The Taxation Laws Amendment Bill 2014 allowed tax relief for entities which provided grant funding for small business development and made grants in the hands of small businesses tax exempt.

Employers have asked for more clarity on the methodology to calculate the value of the incentive that an employer could claim for part-time employment. It was proposed that fulltime remuneration be determined with reference to 160 hours in a month. If an employee worked less than this, the salary was grossed up to what it would be if they had worked 160 hours. The incentive value was calculated and then grossed down. A cap was placed on the amount of the incentive that could be rolled over and the cap was intended to only impact on non-tax compliant employers. To avoid a cap on compliant firms and allowing firms to receive the reimbursement when they become compliant, it was proposed that the rolled over amount was ring-fenced and paid when the firm became compliant. If the firm was not compliant within six months, the amount was lost.

The current VAT legislation zero rated some supplies of goods used or consumed for agricultural, pastoral or other farming purposes. The concession was intended to provide cash-flow relief to the agricultural sector when VAT was introduced, but it created a systemic weakness and had been open to abuse. The amendment sought to repeal the provision; however the industry was of the view that it would negatively impact on cash flow, increase costs of financing and was likely to have negative impacts on food prices and food security. The Taxation Laws Amendment Bill included a provision that allowed the Minister of Finance the discretion to determine the implementation date by way of a notice, but such implementation date could only take place 12 months after the promulgation of the TLAB 2014.

A VAT vendor who acquired second hand goods, including goods made from precious metals, from a seller who was not a vendor, was entitled to claim a notional input tax deduction. SARS had detected that VAT vendors were abusing this provision to obtain fraudulent tax deductions. It was proposed that second hand goods made from precious metals be excluded from obtaining the notional input tax.

The current tax clearance legislation was largely built around the model of a tax clearance certificate. Proposed amendments cater for a full transition to a real time confirmation of a taxpayer’s compliance status.

The Committee asked for clarification on specifically the tax free savings account, the zero rating of goods for agriculture, pastoral or other farming purposes and the research and development incentive. There were questions on why people had to be taxed both monthly and on their lump sum pension fund payments and why widows and widowers were often so heavily taxed.

The Committee agreed to the three Bills: Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B12-2014], the Taxation Laws Amendment Bill [B13B-2014], and the Tax Administration Laws Amendment Bill [B14-2014], which were adopted without amendment.
 

Meeting report

The Chairperson emphasised the importance of the pieces of legislation being dealt with. Over the last 20 years South Africa had built a progressive tax system based on the principles of equity, efficiency, simplicity, transparency and certainty. Taxation was a contract between the State and its citizens and it was the duty of Members of the Committee to explain the division of revenue to their respective constituencies.

Rates and Monetary Amounts Bill: briefing
National Treasury Chief Director: Economic and Tax Analysis, Mr Cecil Morden, said the three main types of tax were personal income tax, value-added tax (VAT) and corporate income tax and combined it amounted to approximately 80% of the country’s tax revenue.

Mr Morden said the Rates and Monetary Amounts Bill dealt with personal income tax and he referred to table 4.1 on slide 5 that showed the personal income tax and bracket adjustments for 2013/14 to 2014/15. Table 4.2 gave an overview of taxpayers and income distribution and it showed the majority of South Africans (8.8 million) earned less than R70 000 per year and the rest of the 6.4 million taxpayers were spread over the income brackets higher than R70 000 per annum. The estimated income for this year was R335.9 billion and a significant part of that income was paid by people earning more than R1 million per annum.

Tables 4.3 and 4.4 showed pre-retirement lump sum taxation and retirement lump sum taxation for 2013/14 compared to 2014/15. The brackets in the tables had been increased by around 10%, but there had been a larger increase in the first bracket of retirement lump sum taxation from R315 000 to R500 000. The larger increase was to avoid situations where individuals (especially in provident funds) who did not receive a deduction on their contribution over their working lives would be forced to now pay tax on their retirement benefits.

Inflationary adjustments were made to medical tax credits, car allowances and the taxable income threshold for small businesses. Medical tax credits were increased by 6.2% and the maximum value of the cost of a vehicle that an employer could use and claim a travel allowance on increased from R480 000 to R560 000. The taxable income threshold for small businesses increased from R67 111 to R70 7000 and the new rate would be in line with the new income tax table for individuals to avoid any potential tax arbitrage. Table 4.5 showed the amended excise duties for alcohol and tobacco. The largest increase in excise duties for regular alcoholic beverages was for wine and spirits, with a 10% and 12% increase in their excise duties. The largest increase was 9% for cigars, while cigarettes and cigarette tobacco increased by 6.2% and 7.2% respectively.

Taxation Laws Amendment Bill & Tax Administration Laws Amendment Bill: briefing
Contributions toward retirement savings
National Treasury Director: Personal Income Taxes and Savings, Mr Chris Axelson, said there were currently three different tax treatments for allowable deductions for pension funds, provident funds and retirement annuities. The current tax regime for contributions to retirement savings was excessively complicated and National Treasury published a discussion document in October 2012 to detail proposed tax amendments. The 2013 Taxation Laws Amendment Act (TLAA) legislated these proposals and sought to harmonise the tax treatment of contributions across different retirement funds. Employer contributions to retirement funds would be treated as a fringe benefit in the hands of the employee. Total contributions to all retirement funds would be given the same level of allowable deduction of 27.5% of taxable income remuneration. The benefit to higher earners would be limited by placing a cap of R350 0000. National Treasury also published a discussion document in September 2012 which covered the annuitisation requirements of all retirement funds. Employee contributions to provident fund members would now receive a deduction which was not previously available. In return for the allowable deductions and to ensure harmonisation, the annuitisation requirements for pension funds and retirement annuities would apply to provident funds. Full vested interests were put in place. These stated that anyone over 55 will not be affected in any way by the annuitisation requirements, anyone below age 55 could still take out the full value that was in their pension as at 1 March 2015 and only two thirds of new contributions from 1 March 2015 would be required to annuitise. It did specify that contributions below R150 000 did not need to annuitise. Through consultations with National Economic Development and Labour Council (NEDLAC), it was found that labour and community constituencies had requested the need for more clarity on social security reform. There were also concerns about the false retirement fund rumours and premature resignations to cash in retirement funds. Government proposed to delay implementation for one year to 1 March 2016.

Tax free savings account
Mr Morden said the main features of the account were that all the returns in the account would be free from tax and individuals could open multiple accounts. There was a R500 000 lifetime limit, individuals could access the amounts in the account at any time, but withdrawals could only be replaced up to the value of the annual limit. To ensure these limits were adhered to, a penalty of 40% of contributions above these limits was proposed. A simple penalty was chosen to avoid additional administrative burdens and it needed to be high to avoid individuals trying to abuse the system by contributing more than the limits.

Fringe benefits of company cars
Mr Axelson said all company cars purchased or acquired on or after 1 March 2015 would have a fringe benefit value that was equal to the retail market value of the vehicle to ensure equity amongst individuals at different employers. Individuals should be taxed on the benefits they received, irrespective of the form of that benefit. It was recommended that the list price, in the case of new vehicles, and the used car price list that was used in the insurance industry for second hand cars, was the basis for retail market value. The legislation would now allow the Minister of Finance to regulations to prescribe how the retail value of motor vehicles should be determined.

Excessive interest limitations rules
Mr Morden said Sections 23M and 23N were introduced in the 2013 TLAA as measures to limit the amount of interest that a company could deduct to a more reasonable level. Section 23N had an objective set of rules that disallowed the deduction of interest exceeding a percentage of the tax equivalent of earnings before interest, taxes, depreciation and amortisation (EBITDA) according to a formula that adjusted with changes to the repo rate. Section 23M followed the same approach to determine the deferral of interest deductions and applied in respect of debt between persons in a controlling relationship, where the interest income was not taxable in the hands of the creditor.

Tax treatment of the risk business of long term insurers
There were concerns that the current taxation of long term insurers did not distinguish between investment and risk business. Business in terms of risk policies would be taxed in a risk policy fund and the taxable income of the risk policy fund would be taxed at a rate of 28%.

Long term insurers: Foreign reinsurance
Currently, long term insurers should disregard premiums paid and claims received in respect of reinsurance policies when calculating taxable income. This created a problem in the case of foreign reinsurance because this form of reinsurance enjoyed unwarranted relief from South African tax. The amendment would ensure that the net returns from foreign reinsurance would be included in the calculation of the taxable income of the long term insurer.

Research and development incentive
The changes to the research and development tax incentive were predominantly technical in nature to ensure certainty and clarity for taxpayers. The main outstanding issue was defining the term ‘innovative’, which had proved a challenge due to the variety of industries that submitted research and development projects to the adjudication committee for approval. A broad definition, along with nuances for industry specific requirements, was being developed for the Department of Science and Technology (DST) as a first step.

Venture Capital Company (VCC) Regime
The VCC regime was introduced to encourage equity investments in small enterprises. TLAB 2014 amendments included making the normal tax deductions permanent if the investments were held for a period exceeding five years and increasing the asset limits for qualifying investee companies from R30 million to R50 million for qualifying companies and from R300 million to R500 million for junior miners. VCCs were required to utilise 80% of their investment expenditure to acquire qualifying shares issued by qualifying companies. They were given a period of 36 months to meet this requirement. This had been identified as too inflexible and TLAB 2014 proposed that the legislation dealing with the 36 month requirement was clarified to indicate that VCCs should comply with the 80% allocation rule even after the 36 month period. The verification methodology was amended to use “subscription monies received” as a basis, rather than “expenditure incurred”. This will make it easier for VCCs to comply.

Supporting small businesses – Grant funding
The Income Tax Act did not provide tax relief for grant funding aimed at supporting and developing small business. TLAB 2014 allowed tax relief for entities which provided grant funding for small business development and made grants in the hands of small businesses tax exempt.

Reducing the distribution requirement for funding Public Benefit Organisations (PBOs)
Funding conduit PBOs were currently required to distribute 75% of their donations received during a specific year. Several PBOs had indicated that the 75% distribution requirement was too restrictive and affected their sustainability adversely by preventing them from building up reserves. TLAB 2014 proposed that the conduit PBO distribution requirement be reduced to 50% and some conditions be placed on the use of undistributed funds.

Allowance for land conservation in respect of nature reserves or natural parks
Government provided incentives to encourage private land owners to preserve biodiversity through conserving threatened or depleted ecosystems to support critical species habitats. Basing tax deductions on basic taxable income instead of land values did not benefit low income landowners equitably. The amendment proposed to delink the current incentive for nature reserves / national parks from treatment as a section 18A donation, instead allowing for a straight line deduction over 25 years based on cost acquisition of land and improvements thereon unless the market value exceeded the cost in which case the deduction would be determined with reference to the lesser of municipal value or market value of the land.

Refinements to the employment tax incentive
Mr Axelson said employers have asked for more clarity on the methodology to calculate the value of the incentive that an employer could claim for part-time employment. It was proposed that fulltime remuneration be determined with reference to 160 hours in a month. If an employee worked less than this, the salary was grossed up to what it would be if they had worked 160 hours. The incentive value was calculated and then grossed down. A cap was placed on the amount of the incentive that could be rolled over and the cap was intended to only impact on non-tax compliant employers. To avoid a cap on compliant firms and allowing firms to receive the reimbursement when they become compliant, it was proposed that the rolled over amount was ring-fenced and paid when the firm became compliant. If the firm was not compliant within six months, the amount was lost.

Transfer pricing secondary adjustment
In 2011, South African transfer pricing rules were aligned with the Organisation for Economic Co-operation and Development (OECD) transfer pricing rules. The alignment also introduced a secondary adjustment in the form of a deemed loan. It was proposed that the amount of the secondary adjustment be deemed to be a dividend. In other words, where a South African subsidiary undercharges its foreign parent, the shortfall would be determined to be dividends paid by the South African subsidiary to its foreign parent. That deemed dividend would be subjected to Dividends Tax.

Zero rating of goods for agriculture, pastoral or other farming purposes
SARS Senior Manager: VAT Research, Mr Reevash Rampal, said the current VAT legislation zero rated some supplies of goods used or consumed for agricultural, pastoral or other farming purposes. The concession was intended to provide cash-flow relief to the agricultural sector when VAT was introduced, but it created a systemic weakness and had been open to abuse. The amendment sought to repeal the provision; however the industry was of the view that it would negatively impact on cash flow, increase costs of financing and was likely to have negative impacts on food prices and food security. The TLAB included a provision that allowed the Minister of Finance the discretion to determine the implementation date by way of a notice, but the implementation date could only take place 12 months after the promulgation of TLAB 2014.

Withdrawal of the ability to claim a notional input VAT in the case of precious metals
A VAT vendor who acquired second hand goods, including goods made from precious metals, from a seller who was not a vendor, was currently entitled to claim a notional input tax deduction. SARS had detected that VAT vendors were abusing this provision to obtain fraudulent tax deductions. It was proposed that second hand goods made from precious metals be excluded from obtaining the notional input tax.

Relevant material and information gathering by SARS - TALAB
SARS Senior Specialist: Legal Unit, Ms Katinka Smit, said SARS’ information powers were extended in the Tax Administration Act to prevent protracted disputes around entitlement to information and consequent waste of resources. A clarification of the application of the concept of 'relevant material' was now proposed so that SARS had access to all the information it required as part of a tax audit or review.

Proposed revisions to provisional tax system
Ms Smit provided an overview of the proposed amendments to the provisional tax system. These amendments would align exemptions from payment of provisional tax for people older and younger than 65 and increase the threshold to R30 000 for taxable income derived from interest, rent, etc. It would ensure that certain amounts included under “gross income” were excluded from “basic amount” due to the irregularity of these amounts and it would also resolve the problem of rebates not taken into account when an underestimation penalty was calculated. The repeal of the penalty for not submitting a provisional tax estimate as a late underestimation of provisional tax might result in penalties.

Compulsory tariff determinations
It was proposed that liquor manufacturers be compelled to apply to SARS for tariff determinations on their alcoholic beverages to obtain certainty on the appropriate tariff classification and excise duty rate applicable to their products. Existing tariff determinations for existing beverages would continue to apply until their ultimate re-determination or confirmation.

Exchange of information for customs and excise purposes
It was proposed that the exchange of information of provisions of section 50 specifically deal with the automatic exchange of information and the uses to which such information might be put. The proposed amendments empowered the Commissioner to specify conditions under which information would be exchanged.

Preventing the unlawful use of SARS intellectual property and automatic exchange of information
Fraudulent or misleading use of SARS names and logos had become prevalent and was aggravated by their improper and unauthorised use in domain names, the internet and social media. Amendments were proposed to broaden SARS’s protection against unlawful use of its intellectual property and to protect the public from fraudulent schemes. Amendments were also proposed to improve the framework for automatic exchange of information and related to due diligence obligations on third parties.

Reportable arrangements and tax clearance modernisation
It was proposed to include tax evasion under the term “tax benefit” to provide greater certainty as to what was meant by a “tax benefit” for purposes of the reportable arrangement scheme. Other amendments sought to clarify reporting obligations of the promoter of an arrangement and all the participants when the reporting obligations arose. The current tax clearance legislation was largely built around the model of a tax clearance certificate. Proposed amendments catered for a full transition to a real time confirmation of a taxpayer’s compliance status.

Additional Slides
The additional slides dealt with the increase in the general fuel levy and the increase of 12 cents per litre was less than the increase applied in 2013/14. The increase for the Road Accident Fund (RAF) levy of 8 cents per litre was equal to the adjustment in 2013/14 and the effective date for both levies was 2 April 2014.

Discussion
Mr V Mtileni (EFF, Limpopo) said employees were being taxed on a month to month basis, as well as on the lump sum amount when pensions were paid out. He asked why employees were being taxed twice. The same principle applied to widows or widowers who were taxed heavily when they have lost their loved ones. He asked if SARs was monitoring or regulating companies in their administration of pension funds and he wanted to know what sort of qualifications were needed to administer such funds. Mr Mtileni said he served at a municipality for a five year period and contributed about R24 000 to the pension fund. At the end of the five year term that money had accrued no interest. Most companies responsible for administering pension funds were aware that most people did not know how pension funds worked and people were then easily misled. The Vhembe District Municipality had employees that had been transferred from Water Affairs and had great difficulty in getting a clear answer on when and how their pension funds would be paid out. He asked who regulated these processes. He asked for clarity on the proposed repeal on the zero rating of goods for agriculture, pastoral or other farming purposes amendment. He asked what sorts of penalties were imposed on companies who did business in South Africa and took a chunk of the money and invested it in a foreign country. It meant that South Africa’s resources were used to turn a profit, but those profits were invested in other countries.

Mr Morden replied that the income tax system worked on the basis that employees paid on their annual income as well as on a monthly basis. In order to arrive at the taxable income, various support structures were provided by government such as turning the payment to medical aid schemes into credits. Equally government incentivised individuals to save for retirement. Money was paid to a company to invest the money and the money increased over time and that money was not taxed. In the end it was fair that out of all that money that went through the system, a part of that money was recouped by the system. Certain concessions had been made, because from this year onwards, the first R500 000 of the lump sum would be tax free. If in an addition to the lump sum, the person also had an annuity, the likelihood increased that that person would fall within a lower tax bracket. The widow or widower situation was a difficult matter. The tax system taxed individuals on their total income and there was no marriage taxation. The pension fund of the deceased meant an increased income for the living and in most cases it meant a higher tax bracket. The Financial Services Board (FSB) regulated pension funds and any issue pertaining to those funds should be directed to the FSB.

Mr Axelson said there had been a lot of stepped up regulations within tax reform and pension and retirement funds. If an employer did not actually contribute to a pension fund, but was deducting from an employee’s salary, this had been changed to a criminal offence. A lot of what happened in a pension fund was dependent on the trustees of that specific fund. The FSB was working with National Treasury to create trustee toolkits to train trustees to effectively manage the money. The rules of the fund should be clear because the Government Employees Pension Fund (GEPF) had had a rule before 2013 that if you left your position before five years, no interest would be accrued on the amount paid into the fund. This rule had been changed since last year.

Mr Rampal said a farmer that was registered for VAT was entitled to apply to SARS to obtain six particular goods as acquisitions. It entitled the farmer to buy at a zero rate from any supplier and these particular goods were animal remedy, animal feed, pesticides, seeds in the form of cultivation, plants in the form of cultivation and maize. These goods were generally supplied to the farmer as input costs to run his farm. It had been found that the farmer who got this concession granted by SARS in the form of endorsing his VAT 103, colluded with other to purchase goods free of tax and it created a systemic problem. It also happened that farmers colluded with suppliers where goods were purchased at a zero rate. It would also be a buy back at the same time with VAT charged at the ‘buy back’ level. It came out in the industry engagements that SARS was not sympathetic to the challenges of farmers, but even though farmers were allowed to submit tax returns every six months, over 80% of farmers chose to submit returns monthly or bi-monthly. The theory that they would be out of pocket if the zero rated rules would be removed was a bit of a misnomer, because the 14% VAT would still be paid on the submission of those returns. Another objection was that SARS took too long to pay out, but figures suggested that the time for receipt of a refund was one week. The possibility of an increase in finance costs was also raised, but it was found that finance houses did not use VAT in determining risk to afford loans to farmers.

Mr F Essack (DA, Mpumalanga) referred to the tax free savings account and he asked if this account was not too prescriptive, because how much of an incentive could there be if the limit was R30 000 with a 40% penalty if the system was abused. There used to be a 12.5% dividend tax levy and he asked what became of that prescription. There was very little mention of trusts and he asked if it meant that everybody was ‘happy and satisfied’ with the status quo.

Mr Morden said the tax free savings account was essentially an incentive for people to save. Wealthy people did not really need this type of incentive to save, because they had sufficient money to save. Research had shown that most countries put a limit on such an account, because the target population was middle income people and it was also to ensure that such a venture was not too costly to the fiscus, because tax revenue would be lost. R30 000 was deemed to be a fair amount and equally people that did not want to adhere needed to be discouraged. In the United Kingdom people were forced to reverse additional investments, but that could be quite cumbersome and the 40% penalty seemed to be a clearer discouragement for non-adherence. The secondary tax of 12% had been abolished in favour of dividend tax of 15%. Information would be provided on trusts to the Committee at a later stage.

Mr S Mohai (ANC, Free State) asked for clarification on the proposed repeal on the zero rating of goods for agriculture, pastoral or other farming purposes amendment and the research and development incentive. He asked if some light could be shed on the Mark Shuttleworth tax issue.

Mr Morden said the Patent Act had a very complex definition on what ‘innovation’ was and it proved to be very difficult to express in law. DST guided National Treasury in this process and the Committee would be informed of developments. The Mark Shuttleworth case was a South African Reserve Bank (SARB) case where an exit charge for taking money out of the country was levied. The High Court ruled that the charge was legitimate, but the Supreme Court differed in the sense that the Money Bill procedures were not adhered to. It was important to follow the law to the letter when imposing charges or taxes.

The Chairperson said the three Bills, in the format of a report was now before the Committee and it would go to the House the following week.

The Committee agreed to the three Bills: the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B12-2014], the Taxation Laws Amendment Bill [B13B-2014], and Tax Administration Laws Amendment Bill [B14-2014], without amendments.

The Chairperson thanked everyone and the meeting was adjourned.

 

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