Taxation Laws Amendment [B29-2015]: consideration of options

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Finance Standing Committee

04 November 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

Documents awaited: ASISA submission [awaited]

The National Treasury  presented on tax and retirement reforms. Government intended to proceed with the changes to the tax treatment of retirement fund contributions. The percentage limit was to be increased to 27.5% for all funds, but limited to R350 000. There were two annuitisation options:
- Option 1  was to continue with the implementation of the annuitisation requirement (and recognising vested rights) for all provident funds on 1 March 2016.
- Option 2 was to delay by one year the annuitisation requirements for provident funds to 1 March 2017, but to allow a limited deduction for provident fund members (10 to 15%).

The Minister had allowed a short consultation period (27 October - 2 November) on the two options. Industry associations were in favour of Option 1, but labour federations felt that all elements of retirement reforms had to be postponed until the social security paper was released. Submissions in favour of Option 1 felt the increase in the annuity threshold upon retirement from R75 000 to R247 500 would exclude more provident fund members from the effect of annuitisation, which created a longer phase-in period. National Treasury asked the Finance Standing Committee to propose an amendment to the 2015 Taxation Laws Amendment Bill (TLAB) to implement Option 1. The 2013 Taxation Laws Amendment Act amendment would become effective from March 2016 with a higher de-minimis of R247 500.

In discussion there was concern about lack of support for Option 1 from trade union federations. It was remarked that communication about retirement reforms was lacking, with people resigning because of rumours that their pensions were going to be tampered with. There was a lack of financial literacy amongst people. It was suggested that one sector was not to be considered at the expense of another. The Chairperson told Treasury that the Committee was cautious, not because proposals lacked merit, but because of the volatility of the economic situation. The Committee also needed time to decide about political management. It was decided that a subcommittee had to be formed to engage with the difficulties. A Parliamentary Legal Adviser suggested that there could be further submissions and consultation, though it did not have to take the form of public hearings. Voting on the Bill was deferred until the following week.

Meeting report

Briefing by the National Treasury on tax and retirement reforms
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, said government  intended to proceed with the changes to the tax treatment of retirement fund contributions. The percentage limit was to be increased to 27.5% for all funds, but limited to R350 000. There were two annuitisation options:
- Option 1 was to continue with the implementation of the annuitisation requirement (and recognising vested rights) for all provident funds on 1 March 2016, but with a possible increase in thresholds.
Option 2 was to slightly delay by one year the annuitisation requirement for provident funds to 1 March 2017, but allow a limited deduction for provident fund members (10% to 15%).
On 27 October 2015 the Minister allowed a short consultation period until 2 November, on the two options. There were 23 submissions from industry associations, administrators and consultancies, three labour federations and a non-profit organisation. Four submissions did not support Option 1, one supported Option 2, while the other three felt that all elements of retirement reforms had to be postponed until the social security paper was released. Submissions that supported Option 1 felt that the increase in the threshold to purchase an annuity upon retirement from R75 000 to R247 500 would effectively exclude more provident fund members from the effect of annuitisation, which created a longer phase-in period. The 2013 amendments were already well known to trustees and members. The National Treasury asked that the Finance Standing Committee propose an amendment to the 2015 TLAB to implement Option 1. The Taxation Laws Amendment Act amendment would become effective from March 2016 with a higher de-minimis of R247 500.

Mr A Lees (DA) asked if the consultations that took place over the preceding five days could really be called that. He asked if there had been real consultation. The implementation date had been delayed before and there might be further delays. He asked about inputs received over the preceding five days by the industry. He was not opposed to the implementation of Option 1, but the question was whether the industry was ready. It could impose an undue burden on industry. There would be an impact on the Government Employment Pension Fund. He asked why only some people received the benefit of tax deductions. He felt that capping was counterproductive. It flew in the face of encouraging savings. The process would be dealt with. It was the first time that the Money Bills Act would be used for the current purpose.

Ms P Kekana (ANC) remarked that Treasury had to respond to public servant challenges. There was a lack of clarity amongst public servants and broader engagement with them was needed. People had resigned because they were concerned that their pensions were going to be tampered with. Pension reform was needed. Treasury had relied too much on the unions. There had to be a bigger outreach programme. Treasury had to go the extra mile to mount a serious outreach programme. The Minister had to interact with the public at a larger gathering. She was not entirely clear about the options. There were areas of overlap. It might be required to add some clauses related to social security. Public confidence was needed. There had to be no hidden bad surprises. All areas central to Treasury had to be synchronised. The public had to be informed about progress. People were being hit by many things. There were implications for the poor. Pensions were close to people’s hearts. Things had to jell.

The Chairperson commented that he had a Masters degree in Sociology, and had spent 21 years in Parliament, and still could not understand the language Treasury used. Treasury had to be clear. Mr Van Rooyen was better qualified to understand the terminology. The Bill could not be voted on yet. He had told Mr Dumisani Jantjies of the Parliamentary Budget Office that nothing would be done without the PBO looking at the Bill. There were technical and political issues. Exemption from the National Assembly plenary session could be obtained so that Members could meet on the Bill. Terms like “de minimis” had to be made clear. The Committee could not agree to what it did not understand.

Mr B Topham (DA) said that he wanted to ask a stupid question.

The Chairperson told him that there were no stupid questions, only stupid parties.

Mr Topham noted that he formerly belonged to the ANC.

The Chairperson asked what made him move to the DA.

Mr Topham replied that he felt that the ANC needed strong opposition.

The Chairperson remarked that Parliament was becoming more distant from the people. Parliamentarians were elected to govern and legislate. Treasury had to  report on what the industry was saying, and the industry also had to be allowed to speak for itself.

Mr Topham asked about the difference between pension and provident funds. In the past, contributions to a pension fund meant tax deduction for the employer. He asked why the figure was R247 000 for the provident fund and R350 000 for the pension fund. He was opposed to capping. Pension funds were stock investors.  There was no annuity for the first year, for people who went for the provident fund. Service providers had to be asked to keep track or record of prior contributions with no tax deductions. It could cost millions to change systems. He asked if the distinction between the two types of contribution could be accommodated. There had to be catching up upon contributions made without tax deductions, in the short term.

Mr D Van Rooyen (ANC) asked about possible impact on low income earners. He also referred to the legislative timetable for the rest of this term. According to the parliamentary schedule, legislative matters had to be tabled in the House in the following week. The Select Committee had to support amendments. There was not enough time to attend to political considerations. He agreed that voting could not take place today. It could be requested that tabling of the Bill in the National Assembly be shifted from 10 to 18 November. However, the NCOP had to be engaged. There had to be presentations to party caucuses.

The Chairperson remarked that there were content issues. The same party could hold different views. A party study group had to decide. The NCOP was not to be inconvenienced.

Mr Van Rooyen said that reliance on foreign direct investment and lack of savings were important factors. Parliament had supported the amendments and allowed the Bill to go back to NEDLAC. There was no consensus between the labour federations and Treasury. Reduction on state reliance beyond retirement was an issue. The people had to be taken along. Most people were not financially literate. He agreed that communication had to be intensified. These issues were not put to the people in a straightforward manner.

Ms Tobias said that what was currently happening was a household challenge. The question was how to ensure that people received a certain percentage of benefits. There might be people who would want to abuse the system. Government wanted to teach the people to save for their retirement, but some workers had three or more families to support. There was a need to invest money, but money also had to be part of growth. It was not a large part of the population that was affected. Not everybody had a provident fund. Everybody had to be taken on board. Treasury had a social responsibility. Wrong decisions could have an adverse effect on the poor. The past had to be redressed, and trade-offs had to be made. Trying to make people save was a small step towards a bigger goal. She asked where the compromise was, in that instance. Realities on the ground had to be looked at. The industry was not committed to development goals. Industry had to be taken on board to find a solution. Some teachers who took retirement severance packages had to be head-hunted back. There was a hospital that had the best trauma unit in the country, where all the nurses were above 60. A lot of work had been done but there had to be fusion.

Mr Topham asked if the Committee wanted provident and pension funds to be the same. They had been created differently for a purpose. People had to be given a chance to choose.

Ms D Mahlangu (ANC) remarked that there were public servants who resigned because of the perception that government was going to tamper with their pensions. Prevention was better than cure. She agreed with Ms Kekana about the need for road shows, ideally in all nine provinces. The means of communication had to improve.

Mr Momoniat replied that there was no way government could protect people. There had been a session on retirement reform and social security reform. No paper would solve all the problems. The focus was on working people who were saving for retirement. Provident and pension funds would become equal. People had to decide about how much long-term and how much short-term savings they wished to make. If someone wanted to be able to take money out it was a short-term investment. The financial sector offered too many choices, there were too many funds. The system had to be consolidated and made simpler. Trustees had governance problems. Trustees had to communicate to members but failed to do so. Trustees depended on administrators. The Government Employees Pension Fund (GEPF) was not affected by reforms after 2013.

Treasury wanted to present on indebtedness, as this was a challenge. It was not only student debt that had to be dealt with. The public service was even more indebted than miners. There were vultures who descended on the public service. Retirement reform was not a new issue. Not going ahead with the Bill brought uncertainty. Treasury was concerned about savings. There were administrative issues. Most administrators were saying that delay was the worst option. Delay would cause fragmentation of pension funds. Members of retirement funds were not to be left to vultures who wanted to sell policies to them. People did not know how to handle lump sums. The question was how paternalistic government was to be. It could be made more difficult to withdraw pension money when changing jobs. There was a need for better communication and financial education. The question was where to draw the line, as far as savings was concerned. Currently there was none. He advised that annuitisation be proceeded with. Benefits to fund members were powerful.

Mr Olano Makhubela, Chief Director: Financial Investments and Savings, Treasury, added that provident and pension funds were the same. Treasury wanted all retirement vehicles to look the same. There had to be decent benefits, once a person was in retirement. Fund members had to be helped to have a regular income on retirement. There was a context in which the concept of provident funds had emerged. Workers had concerns about pension funds. These were seen to be opaque. There had to be more transparency about member protection issues. There were scams that targeted pensioners. A member with a large lump sum from a provident fund was an easier target. A regular income provided protection. Treasury had seen the social security paper. There was alignment and synchronising in Treasury.  There were options of using the national fund or to piggyback on the current system. The current system would not disappear if there was a national system.

Mr Chris Axelson, Director: Personal Income Tax, replied to questions about consultation. The industry was met with and there was long consultation. Concerns were written down. Annuitisation would not impact on the GEPF. The benefit fund would be a 6.7% gratuity on resignation. It was based on how long one had been with the fund and the final salary. The higher tax deduction increase made more available to contribute to the annuity fund.

Mr Momoniat added that the recent consultations were genuine. They went beyond just receiving submissions. Unions were met with individually. The Minister convened a NEDLAC labour constituency meeting. Even if there were differences, engagement would continue. Hardly any worker would be affected in the following year by annuitisation, and it would take a long time to reach the annuitisation point of R247 500.

Mr Axelson added that provident fund members would contribute as from the following year. Only when the fund reached 247 500 did it become necessary to annuitise. He explained that the R350 000 was the limit on tax deduction one could get on a contribution in any particular year.

Mr Momoniat said that there was a debate about a higher or lower threshold. The industry wanted it lower. If lower, more people would have to annuitise.

Mr Makhubela said that there were two groups among those who followed the trend to resign in the previous year. There was a group who were misinformed and reacted to false rumours. That group could be dealt with through better communication. A second group was informed, but  continued to resign. That tendency might persist.

Mr Topham asked about the situation of someone who had R2 million in a provident fund in March 2017, and then resigned. He asked if an additional R350 000 or R247 000 would be available as a lump sum. He asked if the whole of the R350 000 would be annuitised, with the R2 million paid out under the old rules.

Mr Momoniat replied that the R350 000 was an annual deduction, whereas the R247 000 was what was finally saved.

Mr Axelson added that if such a member resigned, currently the whole fund could be taken as cash. If the member retired, the R2 million would be a vested right in the provident fund and the member would not have to annuitise. The additional R350 000 was above the R247 500 mark, which meant that it would have to be annuitised, with one third paid out as a lump sum. There would be no tax on that amount.

Mr Momoniat noted that there was the loophole of resigning at 59 years and 11 months, to take the full amount. There was a real need to deal with the preservation problem. The unions were saying that people were unemployed and they were supposed to live like a pauper to die like a king. However, it had to be difficult to withdraw the entire amount in one go, which was deemed to be out of proportion.

Mr A Lees (DA) asked if it emerged from consultations that the industry was ready for the Bill to take effect in March 2016. With regard to the R350 000 capping, he suggested that people would put additional money elsewhere. He asked how vertical cross-subsidisation could occur. He asked if Option 1 had been discussed with industry.

The Chairperson noted that the ground rules required that people had to be invited to speak. Properly a submission was made to which Treasury had to reply, and then the entity could reply to that. Industry was present in the meeting, but the unions were not. It was not possible to have more public hearings. In the past the Executive would be asked to give the Committee all its submissions. There were market sensitivities. The Committee would want to look at these submissions. It had to be known what COSATU was saying.

Ms T Tobias (ANC) said that it was not fair to let those who were present speak, as those who were absent would complain. the Committee had to move forward, based on sector responses. It would not do to look at one sector at the expense of another. Government had to incorporate different views into one. Trade-offs had to be brought together. It was a complex environment. Reports had to be received from Treasury.

The Chairperson said that there were practical issues around readiness, not discussed in the past. A limited response on practical issues had to be allowed.

Mr Momoniat noted that there was a representative of the industry in the meeting, who could comment.

Ms Rose Lightbody said that the Association for Savings and Investment South Africa (ASISA) represented administrators, and payroll administrators to a more limited extent. Some funds had their own payroll administrators. The 2013 Bill had already provided for the Bill to take effect in March 2016. The industry was either ready for that, or spending resources in order to get ready. If there were substantive changes they would have to rework these. She confirmed that Treasury had thoroughly consulted with stakeholders. Consultations were comprehensive and robust. Option 1 was strongly supported during consultation. Treasury could share the ASISA submission with the Committee.

Mr Momoniat said that the macro issue of the R350 000 was not a cross-subsidisation issue. There had to be equity between low and high incomes. The question was how much tax high income persons had to forego. If the income was high, the question was for what did the member get the tax reduction. One could say R450 000 or R550 000, but people would find other vehicles to save, whether that be off-shore or on-shore.

Mr Makhubela said that the threshold had to be as undisruptive as possible. The R350 000 was arrived at through research. Most members could be accommodated through the reforms, with the possible exception of very high incomes.

Mr Lees noted that annuitisation had no impact on the GEPF. He asked if the R350 000 cap applied there.

Mr Momoniat replied that it was possible to exhaust 20%, which made it possible to buy an annuity or another retirement product.

Mr Lees asked if an unused portion could be rolled over.

Mr Axelson replied that when the amount went over the cap it could be rolled over into the following year. There would not be a deduction currently, but when in retirement any amount above the cap had to be paid tax on.

The Chairperson remarked that there was broad agreement about the proposal. It was not the merit of the proposal that was being questioned. The volatility of the economic situation had to be taken into account. The Committee was cautious, though not about merit. Time was needed. The PBO had to look at the submissions. It had to be seen if there was room for compromise. The matter had to be handled well, to prevent overwhelming negative responses. He could understand Mr Momoniat’s frustration, but the Committee needed time to know what it had to do in terms of political management. It was not possible to wait for the social sector reform paper. But it had to be asked if Treasury reforms were in line with it. The Committee had frustrations of its own. The MTBPS and Money Bills Act process moved too fast. He would engage with the relevant authority to move dates back and create more time. He suggested that a small subcommittee be formed to engage with the proposal. It could consist of two ANC members and one DA, to be convened by Mr Van Rooyen. The subcommittee could sit on the coming Friday. The Bill had to be voted on in the following week, on Tuesday.

Mr Van Rooyen expressed concern about the time available to deal with political considerations. He asked if it could be accommodated.

Mr Lees stressed that the subcommittee had to be assisted by Treasury.

The Chairperson noted that the subcommittee would have the same powers as the full Committee, although it could not make decisions. Treasury had to make a full team available, to decide how the proposal had to be politically managed.

Mr Topham referred to the reduction in the revenue basis for the country. It had to be asked how much it would cost the country.

Parliamentary Legal Advisor input
Adv Jenkins noted that there were two relevant sections in the Money Bills Amendment Procedure Act. The fiscal position of the country had to be taken into account. Section 8(5) referred to fiscal rules. If there was to be a change in the fiscal position, and if Parliament amended a revenue bill it had to report that rules were complied with. It had to be asked if there was to be a change in the fiscal position of the current year. If there was to be a change over the MTEF, it had to be reported. Amendments had to suit the fiscal position. The fiscal effect of the proposed changes had to be known. The Committee had to take Section 11 into account. When there were changes in a revenue bill it had to be asked if tax collection would become more difficult. Equity among taxpayers had to be applied. Parliament was not to create new revenue policies that affected the collection of revenue. The aim of the Act was not to create new tax policy, but to deal with problems of oversight. Proposals were made by Treasury but it was the Committee that made the amendments. It had to ensure that revenue raised was consistent. The effect of changes had to be reported. The investment and employment impact had to be reported. It had to be reported that there were considerations which were evidence based. The Minister had to respond to parliamentary committee amendments, but in that case the requirement was met, as the Minister had proposed the amendments.

Mr Van Rooyen said that the Committee might be challenged if it did not respond to the provisions of the Act. Treasury could pronounce about impact on revenue and the fiscal framework. He was not sure how long it would take to consider impacts on the balance between revenue and expenditure.

Mr Lees referred to Section 11(3). Adv Jenkins had said that things were not cast in stone, but “must” was employed, which made it obligatory to adhere to requirements. Requirements had to be worked through. Section 4(a) contained rules for public hearings. It stated that rules for public hearings had to be provided for, but it did not state that the Committee had to conduct public hearings. He asked for a comment from Adv Jenkins about whether the Committee had to conduct public hearings.

Mr Topham reasoned that there was no obligation. There had been formal public consultations. It could be calculated how the fiscal position would be affected. It was known how many taxpayers were in the country. The Bill would only take effect in March 2016. It did not affect the current fiscal year.

The Chairperson asked if Treasury could use the Money Bills Act to introduce amendments. Mr Van Rooyen had mentioned that Treasury was using the Act for the first time.

Adv Jenkins replied that public consultation could be conducted on various levels. There was a constitutional obligation in the parliamentary domain. In the case of Taxation Laws Amendment Bills and Tax Administration Laws Amendment Bills, the procedure was that there were public submissions on draft bills. The courts had decided that the public had to make meaningful inputs, if there were new policy decisions that the public had not seen before. In his view there had been consultation, but the Committee could call for further consultation. People who had submitted in June/July could be asked if they wanted to add anything. Public consultation did not always take the form of hearings. There only had to be compliance with the Constitutional Court finding that consultation had to be reasonable. The Committee could at least invite further submissions. Parliament had to take responsibility for its constitutional obligation. There could be advertisements in newspapers or the website. He noted with reference to Mr Lees’s question about obligation, that “must” in Section 11(3)(a) meant that it had to be assured that the total amount of revenue raised was consistent with the Division of Revenue Bill. There had to be correspondence with the revised fiscal framework.

Adv Jenkins continued with reference to the Treasury bringing the amendments in terms of the Money Bills Act. Formerly it was dealt with in terms of Section 14, if brought by the Minister. It applied only to technical corrections to a bill. It had to be asked if there was a  policy shift. If the Minister brought the amendments, public participation was essential. It could be withdrawn, corrected and re-introduced. Parliament had to know what the public was saying, it was the forum for public participation. The Money Bills Act tied Parliament’s hands so as not to intrude into the domain of finance policy. Nothing prevented the Minister or the Committee to receive issues. Treasury could bring the Bill in, but then it had to be seen as a new part of the Bill, and the public had to comment on it.

Mr Momoniat said that there were no technical changes to the Bill as tabled. The Minister announced and tabled the Bill in July. There were no changes to Option1. Matters could be taken back to where they were in July. There would not be changes in the fiscal situation of the current year.

Mr Van Rooyen emphasised the need for a subcommittee.

Mr Lees said that the Bill had come a long way, but it was not to set a precedent. The Money Bills Act could be used in spite of there being conflict with Section 14, as it was not just a technical change. He asked how long it would take to withdraw and re-submit the Bill.

Adv Jenkins commented that it would become a programme issue. The Minister proposed the amendments in terms of Section 11. The options were out in the public domain. It was prudent to ask stakeholders to submit. It was not wrong for the Minister to propose amendments in terms of Section 11. It did not fall foul of Section 14, which had a specific purpose aimed at technical amendments of the previous year and the year before that. The Minister could propose amendments to the Committee. Some of the amendments had found their way into the draft bill, and others into the tabled bill. The options were out in public. Provisions could be kept as they were, as it would not come into effect in the current year, and could be changed in the following year. The Committee could report to the House that it was satisfied about compliance.

The Chairperson said that the subcommittee could meet that afternoon.

Mr Lees noted that it was not to be a decision-making committee.

The Chairperson said that proposals had to be processed by the coming Friday. He would decide with Mr van Rooyen who was to chair the subcommittee. He would speak to the House Chair and the Chief Whip to exempt the subcommittee from the House on the following day. He asked that Mr Van Rooyen chair the subcommittee.

Mr Van Rooyen asked that Adv Jenkins collapse his advice into a shorter format.

The Chairperson said that the subcommittee had to meet at 14h30. The subcommittee had to look at legal issues. There had been a meeting about policy issues two weeks before. He asked Mr Momoniat that further discussion  proceed from where it was left off at that point.

The Chairperson noted that the Committee had to report to Parliament about research and development.

The Chairperson adjourned the meeting.


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