Revenue Laws Amendment Bill: briefing

Meeting report

Opening remarks by Mr Martin Grote (National Treasury)
Mr Grote told the committee that the issues they are dealing with are extremely complex and also boring. He said that he had to go through this exercise to see that the initial tax policies, which are steeped in economic and fiscal principles, are reflected in the technical corrections that this Bill deals with.

The new Bill is a reflection of the huge volume of legislation, which was coming at taxpayers over the last two years. The Bill does not reverse prior policy calls. What it does is make them clearer or adjust them because some things had not worked.

Mr Grote gave members the assurance that the proposed Bill is not a new layer of taxes coming in. It is designed to help taxpayers. Most of the changes made were in favour of taxpayers. Many of the changes made were direct results of complaints by taxpayers and the Treasury is trying to make matters less complex.

An economic issue that Mr Grote wanted to highlight is Company Reorganisations that are intended to flatten the structure of very intricate complex group company arrangement schemes and free up resources, which is a good thing for the economy because it enhances efficiency. The Treasury is very sensitive and sympathetic to proposals by the industry when certain issues come up, and as long as those transactions do not translate into an outflow of capital and if the activities enhance South Africa, the Treasury would welcome it.

Explanatory Memorandum on the Revenue Laws Amendment Bill, 2002
Mr Kosie Louw (SARS) went through the proposed amendments clause by clause in the Explanatory Memorandum. He noted that Prof Keith Engel (Treasury) would deal with the latter parts of the Bill such as residence-based issues, currency issues, corporate rules and the credit division. The following are comments made by Mr Louw in addition to what he read in the Explanatory Memorandum:

Clause 1:
Clause 1 is an amendment to the Marketable Securities Tax Act which links to the corporate rules which Prof Engel will get to later.

Clause 2:
This is the first amendment to the Transfer Duty Act. It is one of the budget proposals that had not been dealt with in the first Bill earlier in the year. It deals with the issue of leakage as far as the transfer duty is concerned where different vehicles were used to avoid the payment of transfer duty. This could have been done in three ways:
- Fixed property could have been put in a company itself, a private company. When the property is moved into the company transfer duty is till paid. Once it is in the company the property itself is not disposed but the shares in the company are disposed of and instead of paying transfer duties only a small stamp duty, which is only a quarter percent, is paid on the value of the share being transferred instead of the maximum 8% where the value exceeds R300.000. Thus there is a huge difference.
- The property could have been put in a close corporation, which is basically the same type of mechanism. The further advantage of a close corporation was that when a membership of a close corporation is sold, there is no stamp duty at all. The transfer duty is then avoided in full.
- The third vehicle people use is a trust that people. Properties were put in a trust and in most instances it was a discretionary trust where the beneficiary only had a contingent right and not a vested right to the property itself. When the property was sold or when there was a change in ownership, all that would happen was the contingent beneficiary would be changed with another beneficiary or somebody would be added. Again transfer duty was being avoided.

To trigger a transfer duty there must be property being disposed of and there must be an acquisition of that property. As far as the interest in a company and a close corporation are concerned, both the membership and the share is not property so the definition had to be fixed as far as property is concerned to include these types of holdings in these CCs and companies. Not all companies could be included; therefore there is a definition of what is a residential property company. It is mainly a company that only holds private dwellings, holiday homes or something of a similar nature. It excluded basically all types of business premises and more than 50% of the value of such a company must consist of property of a private nature.

As far as trusts are concerned the definition of "transaction" was amended, to include in those circumstances where there is a substitution of such a contingent beneficiary to also incorporate that.

Clause 3:
As far as the liability is concerned, in the case of transfer duty it is always the purchaser who is liable for transfer duty. As far as these specific type of transactions are concerned they propose that the liability for transfer duty be extended so that when a purchaser does not pay the transfer duty, the company's public officer can be held responsible for the duty.

There may still be some refinements to be made. The definition of "property", and the situation of a vested right, will be looked at again.

Clause 5:
This is the first amendment to the Estate Duty Act, 1995. It is an amendment to Section 4 that deals with the deductions in terms of the Estate Duty Act.

The specific deduction that is being amended deals with the accruals of property to mainly public benefit organisations (PBO). As it reads at the moment the deduction will only apply where the accrual tax plays by way of request and these accruals could take place in other forms for example a donation mortis causa that will only come into effect on the death of the donor.

Clause 6:
The amendments to the Income Tax Act commence here. Most of them are merely consequential amendments. As a result of the new Collective Investment Schemes Control Act there are quite a number of consequential amendments that will have to be made.

An important amendment is the one made to "dividend" in subclause (f). The first one is a consequential amendment as a result of the new Collective Investment Schemes Control Act. The second one is a policy change that was announced in the budget. The definition of "dividend" is to be changed to include profits of a capital nature for liquidation distributions.

The next important policy change in subclause (l) is an amendment to the definition of a "pension fund" in the Income Tax Act

Clause 7:
This clause contains all the provisions in terms of which the Commissioner has discretionary power and it makes that discretionary power subject to objection and appeal. What is merely being added are new provisions, in which discretionary powers were built in, which should also be subject to objection and appeal.

Clause 8:
This deals with the secrecy provisions. Last year a provision was brought before Parliament in which the secrecy provisions were relaxed in certain circumstances. The circumstances were in the case of a serious tax offence or where there was a type of environmental or public safety risk. Under those circumstances the Commissioner may provide information to the National Police Commissioner and National Director of Public Prosecutions.

Clause 11:
There are three amendments in this clause that deal with Section 8 of the Income Tax Act. (See document)

Clause 12:
These are amendments to Section 9, which deals with all the circumstances in terms of which income is deemed to be from a Source in South Africa. The rules that are provided here are there to provide clarity where Capital Gains Tax are concerned.

As far as non-residents are concerned, SARS could only tax their Capital Gains on immovable property held in South Africa or assets that belong to a permanent establishment in South Africa. The difficulty was determining the source of that fixed property or assets attached to a permanent establishment. Now clarity is provided to say that in the case of immovable property the Source rule is where the property is situated. If the property is situated in SA then the Source of the Gain will be in South Africa.

Clause 18:
This clause deals with all the exemptions in the Income Tax Act. A sentence giving TEFSA (Tertiary Education Fund of South Africa) exemption is being deleted since TEFSA has ceased to exist.

Clause 22:
This clause contains the amendments as far as the Strategic Investment Program is concerned. Important amendments are made to the definitions of "industrial assets" and "industrial projects".

Clause 36:
This clause deals with an amendment to Section 64B of the Income Tax Act. The most important one is in paragraph (c) where the capital profits distributed on liquidation will be included in the definition of "dividend". Before it was not a dividend and therefore there was no STC. The consequence of this amendment is that the Capital Gains from the 1^st of October are pulled in.

Clause 46:
Mr Louw reminded the committee of a provision that was introduced last year that when a resident does not disclose all its foreign assets, then the government can impute an income to those assets. The imputed income is calculated by applying the official rate of interest. There was some uncertainty as to which official rate of interest must apply as there are two types prescribed in the definition. Here it is clarified that it is the one that is attached to the local interest rate and not foreign rates.

Clause 101:
This measure gives effect to a budget proposal of the Minister earlier this year where he stated that as far as certain bio diesel products or other environment friendly fuels are concerned, they should be subject to a lower fuel levy. It was around 70% of the normal rate.

Corporate Reorganisation: Briefing by Prof Keith Engel (National Treasury)
The following are introductory remarks Prof Engel made on corporate reorganisation.

Prof Engel again emphasised that the overall policy had not changed. He told the committee that company organisation was the area where the most pressure was because they originally put in company reorganisation rules in order to promote company reorganisations. The reason they needed to do this was when you have a company reorganisation it is a Capital Gain event. Whenever you introduce Capital Gains Tax you have to have company reorganisation relief. If you do not you have regime that is not internationally competitive.

The problem that they had was that the regime that they had originally designed, turned out not to be complete. Because the regime was not complete, you find that in current law a number of reorganisations have been held up waiting for the change. These amendments were designed to get those reorganisations moving again.

Prof Engel presented only half of his presentation due to time constraints. The briefing will continue on 25 October.