Revenue Laws Amendment Bill [B6-2016]: briefing, consideration and adoption

NCOP Finance

16 March 2016
Chairperson: Mr C De Beer (ANC)
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Meeting Summary

The Committee was briefed by National Treasury on the Revenue Laws Amendment Bill and considered and approved the Bill, with the DA dissenting. The Bill provides an amendment to the Taxation Laws Amendment Act to postpone the commencement date from 1 March 2016 to 1 March 2018 for certain provisions dealing with the annuitisation of retirement benefits for provident funds. This retirement reform was aimed at preserving retirement savings, instead of allowing beneficiaries to withdraw and spend them.

Misconceptions on retirement reforms
The biggest of those misconceptions was that Government was taking away or nationalising people’s provident funds without their consent, this was further exacerbated by the false reporting that government employees had been resigning because they would be affected by the retirement reforms even though there had been no changes to the Government Employees Pension Fund (GEPF) to date.

What are the facts?
The new law would not amend pre-retirement preservation that meant that withdrawals on resignation would not be affected in any way. GEPF and all other pension funds would not be affected by the new laws.

Can the entire 2015 Taxation Laws Amendment Act be scrapped?
Most important if there was to be a scrapping of the Act, this would mean a rejection of the revenue proposals in the Budget, and could lead to funding problems and would allow for tax abuses to continue.

Risks with 2016 Revenue Laws Amendment Bill:
What if there is no agreement after two years?
National Treasury said that Government had stated that if no agreement on annuitisation was reached by 2017, then the tax deduction for retirement contributions would fall away as it could not postpone that process for the third time.

How do we prevent perverse outcomes? Creation of new provident funds instead of pension funds in order to bypass annuitisation would place the whole retirement framework at risk.

The Committee commented that there could be a big backlash from the risks inherent to the 2016 Revenue Laws Amendment Bill if there was no consensus by 2017; trade unions and other stakeholders did not want the a postponement but complete rejection of the retirement reform; it was a misconception that it was only the unionised work force that misunderstood the Taxation Laws Amendment Act. Members asked for clarity on:
- the means test for the old age grant
- what Treasury meant by annuitisation would still be law even if 2015 Taxation Laws Amendment Act was not signed into law.
- the implications of Treasury stating that scrapping the Taxation Laws Amendment Act would mean a rejection of the revenue proposals in the Budget, and could lead to funding problems and would allow for tax abuses to continue.
- The actual date of release of the comprehensive social security paper?

Meeting report

Revenue Laws Amendment Bill [B4-2016]: briefing
Ms Yanga Mputa, Chief Director: Tax Policy, National Treasury, spoke about the misconceptions of the
retirement reforms. The biggest of those misconceptions was that Government was taking away or nationalising people’s provident funds without their consent. This was exacerbated by the false reporting that Government employees had been resigning because they would be affected by retirement reforms even though there were to date no changes to the Government Employees Pension Fund (GEPF).

The facts are that the new law would not amend pre-retirement preservation that meant that withdrawals on resignation would not be affected in any way. GEPF and all other pension funds would not be affected by the new laws.

Can the entire 2015 Taxation Laws Amendment Act be scrapped? It was most important that the Taxation Laws Amendment Act not be scrapped as this would mean a rejection of all the revenue proposals in the Budget, and could lead to funding problems and would allow for tax abuses to continue.

Mr Chris Axelson, Director: Personal Income Taxes and Savings, Treasury, looked at the risks associated with the Revenue Laws Amendment Bill:

What if there is no agreement after two years?
He said that Government had stated that if no agreement on annuitisation was reached by 2017, then the tax deduction for retirement contributions would fall away as it could not postpone that process for the third time.

How do we prevent perverse outcomes?
Creation of new provident funds instead of pension funds in order to bypass annuitisation would place the whole retirement framework at risk.

Discussion
Ms T Motara (ANC: Gauteng) commended the work done by the Chairpersons of the Select and Standing Committees on Finance in mediation with stakeholders over and above what Treasury had been doing, as it minimised a lot of the tension between the stakeholders in that process. The Committee did support the retirement reforms. However; both Finance Committees had warned Treasury that if it did not simplify and communicate clearly the ramifications of what it was doing, the outcome was as had occurred. She hoped that Parliament and stakeholders at the National Economic Development and Labour Council (NEDLAC) together with Treasury could get to a place where they were communicating the same message about those reforms within the two year postponement period.

Ms Motara said that although she was cognisant of the unforeseen circumstances resulting from postponement of retirement reform as reported by Treasury, she was cautioning Treasury not to expose itself to other non-essentials at that stage, because going forward Treasury could find itself in a situation where people were continuing to shift the goal posts as was happening now because of annuitisation. Other areas of concern could arise during the two year period, so that despite releasing the social security paper and dealing with the annuitisation debate, other ramifications could crop up that would extend the process unendingly. If Treasury was saying that at some point retirement and provident funds had to be harmonised and reformed in such a way that the tax benefits would be the same, everyone had to work towards that. How that was done had to have a conclusion. She asked Treasury to explain the means test for old age grants, as she was still unclear about that.

Mr F Essack (DA: Mpumalanga) asked for clarity on what Treasury meant by: “Annuitisation would still be law even if 2015 TLAA not signed into law”. He referred to the concern of the Association for Savings and Investment South Africa (ASISA) that any change in the Act’s implementation would cause administrative difficulties as that industry had prepared to implement the Act as legislated. He asked how Treasury was handling that concern. He asked for elaboration and the implication of the Treasury statement that: “scrapping or not passing the TLAA would mean a rejection of the revenue proposals in the Budget, and could lead to funding problems and would allow for tax abuses to continue”. How did Treasury propose to contend with the disadvantages of the tax proposal in the next 12 to 18 months? If he were to suddenly get less take-home pay down the line, as a layman his interest would be only on the less take-home pay and not on the dynamics of how and why the system worked like that. Could Treasury comment briefly on those disadvantages as well?
There certainly would a big backlash in terms of the risks with this Bill if no consensus was reached as alluded to by Ms Motara. How was Treasury proposing to ensure consensus within the prescribed two year period? What was the actual date of the release of the comprehensive social security paper?

The Chairperson said that constant regular feedback briefing to the two Finance Committees would be needed from the Minister on the postponement of annuitisation in the Bill.

Mr O Terblanche (DA: Western Cape) said that he was not convinced that some trade unions and other stakeholders actually wanted the retirement reforms. There certainly was a sentiment that citizens wanted to deal with their own financial matters. He agreed with Ms Motara that the retirement reforms were necessary.  

Mr V Mtileni (EFF: Limpopo) recalled that before the law was passed, he had commented that most of the time Members of Parliament were being used as rubber stamps, as they were not part of major decisions. In the long run when these decisions backfired, MPs would be the first to be identified for the provision of remedies such as this Bill. When laws were being considered for adoption, MPs had to at least be given documents with content that they can work on. He repeated Mr Essack’s sentiments on the Bill’s postponement of annuitisation as people were still resigning because of the continuing confusion.

Mr S Mohai (ANC: Free State) said that there had to be agreement that the responsibility to legislate resided with MPs. Therefore, theirs was the greater role to navigate through the concerns that stakeholders were presenting to Parliament as the responsibility of MPs. MPs had to be comfortable that they were in charge of the process that Treasury was presenting on the day hence Parliament created public hearings for stakeholders to give inputs. In that way, the two year deferral of the annuitisation had to be welcomed so as to facilitate greeter consensus and to allow for more consultation. The Committee had to find a way of dispelling rumours around retirement reforms. The Committee had heard what trade unions were saying about over indebtedness of workers and how that would impact on workers’ retirement in the short term. However, the Committee was appreciative of the intention of the law in the long term, which was that there was a need for savings as retirement savings were important. His view was that if Parliament directly spoke with workers and their trade unions on those retirement reforms there would be progress in making the Taxation Laws Amendment Act be understood for what it was. It was a very important piece of legislation, because it stood to address development in a major way. Workers had to contribute to their retirement, which was the message the MPs had to pass on. There was no need to say MPs were rubber stamps because stakeholders had the right to enquire fully to their satisfaction and MPs had to own that consultation process.

The Chairperson said the role of MPs in that process actually started when they left Parliament to engage their constituencies to explain the retirement reforms.

Ms Motara said that it was a misconception that it was only the unionised work force that misunderstood the Bill as she had firsthand experience that when the President had passed the Taxation Laws Amendment Act into law. She had taken her car for a service, the service consultant had been quite agitated although he did not belong to any union, because of the what had been communicated about the Act.

Ms Mputa clarified the statement that ‘annuitisation still remaining law even if 2015 Taxation Laws Amendment Act had not become law’, saying that retirement reforms had started in 2013 when the law on annuitisation and tax harmonisation was passed. Parliament asked in 2014 that the date be postponed by one year to allow Treasury to continue engaging within NEDLAC with COSATU. What had been postponed then was the effective date of the law. In 2016 when Treasury was doing consultation, it had decided to increase the de minimis amount from R75 000 to R247 500 and that was the only change that had occurred in 2015 for 2016.

When one said that not passing the Act would mean a rejection of the revenue proposals in the Budget, she explained that the 2015 Taxation Laws Amendment Act did not only have the retirement reforms but had other budget proposals as mentioned by the Minister of Finance in his Budget Speech. That was what scrapping meant; all those proposals would be out. Such a situation could not prevail which was why Treasury could not scrap the entire 2015 Act.

Responding to Mr Mtileni’s question, she said that Parliament had requested Treasury to do further consultation for the following two years and to insert that into the Bill which Treasury did. The Minister would then report back to Parliament on the 31 August 2017. Parliament thereafter would still determine whether to proceed or not. Treasury had published papers before the retirement reforms had been passed into law, explaining what was required to be done. There had been a lot of meetings with NEDLAC as well and the report in that regard had been submitted to Parliament by Treasury.

Mr Axelson said that the means test for the old age grant worked on the basis that if one earned above a certain level of income and had a certain asset threshold, then one could ineligible for that grant. The threshold was around R70 000 per year as an individual and about R140 000 as a couple, and for assets it was about R1 million. It was quite large though it excluded an individual’s primary residence. However; it tapered off quickly as well. So if one received income above that of R20 or R30 000, the grant got less and less all the way till it reached zero. That income would count towards the means test so that one possibly would not receive as much or the old age grant at all. That was the perverse effect that Treasury was trying to prevent.

In terms of concern around implementation of the Act, Mr Axelson said that the tax deduction side was of the biggest concern. ASISA had maintained that would have been a big disadvantage to suddenly make a u-turn on that aspect which was why Treasury had gone ahead with tax deductions, so as to limit those issues. Regarding the postponement, the implementation concern was not as severe though ASISA had reported its disappointment together with Business Unity South Africa (BUSA). However, they would still support the postponement as they understood the need for further consultation. From an implementation point of view the postponement on the annuitisation only came into effect when an individual retired and the retirement fund had to decide whether to purchase an annuity or not. Therefore, the increased de minimis amount would have affected far fewer people and would not have affected provident fund members beyond 55 years anyway in the first year in any case. That was why Treasury had agreed to the postponement because the severity that ASISA and others were concerned about was quite minimal.

On whether at the end of the two year postponement period, there was still no agreement: that was why Treasury was highlighting the risks about what then could be done. That was why Treasury had admitted that it could not do away with the tax deduction entirely because for provident funds, the employer contribution had been deductable anyway. In the October 2015 round, Treasury had options it had presented where it had said that it could decrease it to a 10% deduction, what would happen then? Then it could be a smaller reduction in net pay if there was no annuitisation. However, as Mr Essack had alluded, it would be a deduction in take-home pay and that would still face opposition. Therefore Treasury believed that it had to try harder to convince workers of the merits of annuitisation upon retirement. And if there were further concerns, then Treasury would have to address those even if that would be through other reforms, measures or other types of regulation. Only when there was no consensus by mid-2017, would Treasury have to think about other options internally, but first priority was to convince workers about annuitisation. Treasury was quite mindful that it could not keep postponing annuitisation as it had done that twice already which had made some quarters question the credibility of Treasury. Worst case scenario was no consensus; then annuitisation had to be dropped, but then other options had be brought forward. What could not be allowed was for the tax deduction to continue without annuitisation.

Mr Axelson said that the Minister had proposed the end of June 2016 for release of the comprehensive social security paper. The Standing Committee on Finance then would put forward a report where it had said three months from the time of promulgation of the Revenue Laws Amendment Bill. Whether it would be exactly three months from whenever the Bill would be promulgated, Treasury was quite mindful that the paper had to be released soon and that discussion with the Department of Social Development had to be done as a priority.

Treasury certainly concurred that workers were not convinced about annuitisation which was why there still remained such strong opposition. This was why Treasury had to get into the details. Treasury found that further consultation was a good opportunity as only currently, were workers discussing why annuitisation was bad as no one had been talking about that a year ago. The opportunity was for Treasury to put proposals during this round of consultations to say what if annuitisation was fixed in that way; what if something else was done differently at a particular stage and so forth?
 
Treasury agreed with Ms Motara that it was not only unionized workers that misunderstood annuitisation because even editorials of prominent newspapers were still getting it wrong by creating the false alarm that money would be taken if one resigned.
 
The Chairperson said all those interested to discuss these matters were invited to the “Taking Parliament to the People” sessions in April. It was an MP’s responsibility not to catastrophise the law making process because if it were MPs who would start speaking about nightmares, then citizens would be very apprehensive. MPs had to change nightmares to sweet dreams. They had to allay the fears of citizens. There had to be in the finance sector somewhere in the world, models of annuitisation but public officials had to get that information to Parliament so that representatives could also learn.

Committee Report on the Revenue Laws Amendment Bill
The Chairperson tabled the Committee Report on the Revenue Laws Amendment Bill for adoption. He made a substantive amendment to the Report: The National Treasury should also engage stakeholders that are not represented at NEDLAC. He said that this was to broaden the consultation process so that the stakeholders could come to Parliament when the Minister was giving feedback to a joint sitting of the Finance Committees.

Ms Motara moved for adoption of the report.

Mr Essack said that the DA wanted to be recorded as objecting to the Revenue Laws Amendment Bill.

Mr Mohai seconded the adoption.

The Report approving the Revenue Laws Amendment Bill was adopted.

Committee business
The Chairperson noted that there had been several joint meetings with the Standing Committee on Finance.
The minutes of the 16, 17, 25 February and 1, 2, 3, 4 and 8 March 2016 were adopted without amendments.

The Chairperson made a few announcements about briefings to provincial legislatures by members and that the procedure for that could only be sought from the secretariat of the Appropriations Committee.
The meeting was then adjourned.

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