Taxation Laws Amendment Bill; Tax Administration Laws Amendment Bill: policy issues; Venda Pension matter

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Finance Standing Committee

10 October 2017
Chairperson: Ms T Tobias (ANC) (Acting)
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Meeting Summary

National Treasury and the South African Revenue Service (SARS) gave an update on the steps taken in addressing the key issues raised during the consultation process on the 2017 Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB).

Since Treasury and SARS last briefed the Committee, a series of meetings had taken place with stakeholders. Key issues raised during consultation process on TLAB included: repeal of foreign employment income exemption; tax relief for Bargaining Councils; addressing the circumvention of anti- avoidance rules dealing with share buy-backs and dividend stripping; tax implications of debt relief; exclusion of impairment adjustments in the determination of taxable income in section 24JB; and extending the application of controlled foreign company rules to foreign companies held via foreign trusts and foundations. On the TALAB, issues raised were principally on PAYE; the spread of PAYE cap on deductible retirement fund contribution over year; and fraudulent refunds – hold on taxpayer’s refund by banks.

On the tax relief for Bargaining Councils regarding tax non-compliance, Treasury wrote to the 47 Bargaining Councils requesting information regarding the following: nature of funds managed by the Bargaining Councils; PAYE treatment of payments made by the Bargaining Councils to their members; and income tax treatment of investment income received by the Bargaining Councils. 22 Bargaining Councils responded, and the summary of the responses was as follows: employers of the members of some Bargaining Councils are withholding PAYE in respect of contributions made to the Bargaining Councils, therefore, Bargaining Councils do not withhold PAYE on payments made to their members; some Bargaining Councils received a Non-Binding Ruling from SARS and were applying the tax treatment in terms of the Non-Binding Ruling; some Bargaining Councils received an income tax exemption letter from SARS and were applying the tax treatment in terms of the income tax exemption; some Bargaining Councils were not aware that there is a PAYE obligation in respect of payments made to their members; and some Bargaining Councils were not aware that there is an income tax obligation in respect of investment income received by them.

SARS received comments on the spread of PAYE cap on deductible retirement fund contributions over a year. To clarify application of annual monetary cap on contributions to retirement funds, the 2017 TALAB proposed that the R350 000 be spread over a tax year for PAYE purposes. However, some stakeholders felt the proposed spreading means that a person who exceeds the R29 167 monthly cap in a single month but not others will not be able to benefit from unused amounts in other months. The comment had been initially not accepted. However, SARS switched from not accepted to partially accepted as it was moving in the direction of a cumulative cap. Therefore, spread application of cap for PAYE purposes on cumulative basis for portion of the year of assessment had been revised. For example; if employee is employed by employer for seven months during 2018/19 tax year a cumulative deduction limitation of R204 167 (R29 167 X 7) will apply in the seventh month.

Members indicated that the public seemed not to have been made aware of the revised proposals. They suggested that Treasury issue a press statement to inform the public about the revised proposals. The Democratic Alliance expressed concern about the tax relief for Bargaining Councils by stating that it was effectively an amnesty for non-compliance. Treasury and SARS should ensure that Bargaining Councils are compliant going forward. The Acting Chairperson suggested the tax relief for Bargaining Councils matter be deferred for discussion on a later date, and Members agreed. She urged Treasury to communicate effectively. The scope of communication should be broadened to ensure messages reach all taxpayers

Secondly, Treasury updated the Committee on the Venda pension matter. On its background, around 1992, the Venda pension fund underwent a privatisation exercise. Some fund members managed to cash out their savings whereas a sizeable membership submitted that it was underpaid and hence pushed for redresses through the Public Protector. Upon release of the Public Protector report, Treasury had been clear that if there were any miscalculations and underpayments during the privatisation process, the State was willing to correct and reimburse the members concerned. To that extent, Treasury requested documentation submitted by the aggrieved parties to the Public Protector as evidence. 7000 records had thus been received and collated into individual files, out of the 24 000 who worked for Venda local government at the time. The information was largely varied and inadequate. However, it had been submitted to the actuaries for analysis and benefit ascertainment. Therefore, Treasury was still awaiting the findings and would release a comprehensive report by the end of November.

The Parliamentary Legal Advisor said the Public Protector’s recommendations had to be implemented. The Public Protector’s findings indicate the pension fund members were prejudiced because of maladministration. It stated that the privatisation of the Venda pension fund suited nobody but the employer. Therefore, Parliament had to report on the matter as per the Public Protector’s recommendations. There was no challenge against the Public Protector’s report; it had just not been implemented. The report had set timelines and, from a factual point of view, Parliament and Treasury had missed some of the timelines. In terms of the report, some of the individuals involved had been waiting for some form of redress for the past 20 years. The report requested that Parliament assist Treasury with the implementation mechanisms. Therefore, the Committee was required to exercise oversight and monitor the implementation of the Minister’s plan. Procedurally, the Committee would need to liaise with the Portfolio Committee on Justice and Correctional Services to monitor implementation as per the plan submitted by the Minister of Finance.
 

Meeting report

National Treasury Update on the TLAB and TALAB consultation process
Ms Yanga Mputa, Director: Legal Tax Design, National Treasury, stated that since Treasury and SARS last briefed the Committee, a series of meetings had taken place with stakeholders. Key issues raised during consultation process on TLAB included: repeal of foreign employment income exemption; tax relief for Bargaining Councils; addressing the circumvention of anti- avoidance rules dealing with share buy-backs and dividend stripping; tax implications of debt relief; exclusion of impairment adjustments in the determination of taxable income in section 24JB; and extending the application of controlled foreign company rules to foreign companies held via foreign trusts and foundations. On the TALAB, issues raised were principally on PAYE; the spread of PAYE cap on deductible retirement fund contribution over year; and fraudulent refunds – hold on taxpayer’s refund by bank.

Treasury’s draft Response Document included amendments to the proposal to remove the foreign income exemption (section 10(1) (0) (ii)) to mitigate the impact of the measure on lower income South Africans abroad. The revised proposal included a R1 million threshold, whereby foreign remuneration earned by South Africans abroad up to R1 million will be exempt; a postponement of the effective date by one year to 1 March 2020; whilst the 183/60 day criteria remains. Since publication, some stakeholders believed the number of days could be extended to beyond 183 days and some requested that the allowance for a foreign tax credit on PAYE be legislated rather than be done through a SARS directive. The additional relief was generally welcomed. On the transfers after retirement to preservation funds proposal, the draft Response Document accepted that post-retirement transfers could not only be made to retirement annuity funds but also to pension preservation funds and provident preservation funds. Due to the difficult legislative amendments required and that there was little time for public comment on the changes, it was proposed that this amendment still goes ahead but is included in the draft legislation in the following year .

On the tax relief for Bargaining Councils regarding tax non-compliance, Treasury wrote to the 47 Bargaining Councils requesting information regarding the following: nature of funds managed by the Bargaining Councils; PAYE treatment of payments made by the Bargaining Councils to their members; and income tax treatment of investment income received by the Bargaining Councils. 22 Bargaining Councils responded, and the summary of the responses was as follows: employers of the members of some Bargaining Councils are withholding PAYE in respect of contributions made to the Bargaining Councils, therefore, Bargaining Councils do not withhold PAYE on payments made to their members; some Bargaining Councils received a Non-Binding Ruling from SARS and were applying the tax treatment in terms of the Non-Binding Ruling; some Bargaining Councils received an income tax exemption letter from SARS and were applying the tax treatment in terms of the income tax exemption; some Bargaining Councils were not aware that there is a PAYE obligation in respect of payments made to their members; and some Bargaining Councils were not aware that there is an income tax obligation in respect of investment income received by them.

Subsequently, Treasury and SARS held a meeting with the Clothing Industry Bargaining Council, which has about 850 employers and 56 000 members. During the meeting, the Council submitted that Treasury and SARS should provide clarity regarding PAYE treatment and income tax treatment of Bargaining Councils. On the way forward, Treasury indicated the current proposal in the 2017 TLAB on the relief for Bargaining Councils will remain in place. In order to obtain the relief, non-compliant Bargaining Councils will be required to come forward and declare information to SARS; and moving forward, clarification will be made regarding PAYE treatment and income tax treatment of Bargaining Councils.

Discussion
Mr A Lees (DA) noted the changes made by Treasury but said there was still a lot of noise in the public domain- he cited that he had been receiving countless emails from stakeholders. People were aware of the initial proposals but seemed not to be aware of the revised proposals. He suggested that Treasury issue a press statement to inform the public about the revised proposals. He expressed concern about tax relief for Bargaining Councils. It was effectively an amnesty for non-compliance- “The good guys paid their taxes whereas the bad guys stand to benefit from the amnesty.” Treasury and SARS should ensure that Bargaining Councils are compliant going forward.

Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, noted Mr Lees’ concerns. Treasury would devise a means of ensuring messages on the revised proposals are received by the public when it formally tables the Bills during the medium term policy budget statement. Treasury would also explore the possibility of using social media platforms to reach out to the public. The non-compliance of bargaining councils was evidence of management and governance issues that needed to be addressed. Non-compliance could be a symptom of a deeper problem. Mechanisms should be put in place to make sure the ultimate eligible members were identified. Also, Treasury was exploring the possibility of engaging the Department of Labour to also assist in this regard.

The Acting Chairperson suggested the tax relief for Bargaining Councils matter be deferred for discussion on a later date. She urged Treasury to communicate effectively. The scope of communication should be broadened to ensure messages reach all taxpayers.

National Treasury briefing continued
Ms Mputa stated that based on public comments as well as subsequent engagements with stakeholders, the following changes were proposed: deleting the proposed sections 19A and 19B in the 2017 TLAB; and amending the current section 19 in the Income Tax Act as follows:
-Delete the current definition of “reduction amount”;
-Introduce a new definition of a “debt benefit” that will tax the benefit to a debtor resulting from a “concession or compromise” of a debt entered into with a creditor; and
-Introduce a new definition of a “concession or compromise”.

The proposed changes introduced in section 19 were welcome. However, the following concerns were raised by stakeholders: multiple shareholdings- the determination of a debt benefit in the case of debt for shares conversions where one shareholder may have multiple shareholdings following a debt to share conversion.
Treasury accepted the comment. Changes will be made in the 2017 TLAB by providing that in determining whether there is a debt benefit, taxpayers should consider the increase in value of all classes of shares that a creditor holds in its debtor.

On limitation of group relief, stakeholders submitted that the group exemption did not cover other scenarios.
The comment was not accepted as the intention was to limit the group exemption to cover debt conversion into equity only.

Some stakeholders believed the proposed definition of a “debt benefit “implies that the change of terms or conditions of a loan would trigger debt benefit. They suggested that this proposal should not be proceeded with. Treasury did not accept the comment. The introduction of the proposed new definitions of “debt benefit” and “concession or compromise” in section 19 was as a result of the withdrawal of the proposed section 19A and 19B in the TLAB , which in turn resulted in the deletion of the definition of “reduction amount”. In order to address some of the concerns, amendments will be made in the 2017 TLAB so that changes in the terms or conditions of a loan agreement regarding interest should not trigger a debt benefit. However, changes in the terms or conditions of a loan agreement that give rise to a change in the market value of a debt claim confer a benefit which in some instances never reverses. This may create a loophole and be open to abuse as connected parties may, for example, be able to defer the recognition of any debt benefit indefinitely by repeatedly postponing the due date for performance of the debtor’s liabilities in terms of a debt restructuring.

Based on comments raised by banks, the following changes were proposed in the 2017 TLAB: 25% of IFRS 9 loss allowance relating to impairment based on annual financial statements, excluding the following 2 categories- 40% of IFRS 9 loss allowance relating to impairment based on annual financial statements as is equal to the difference between the amount of the loss allowance relating to impairment that is measured at an amount equal to the lifetime expected credit losses; and the amount that is in default as determined in terms of the following category; 85% of an amount classified as being in default in terms (including any retail exposure) of Regulation 67 issued under the Banks Act and administered by the South African Reserve Bank; and extending the application of controlled foreign corporation (CFC) rules to foreign companies held via foreign trusts and foundations.

Furthermore, Treasury presented the following proposals to stakeholders:
Option one:
Delete paragraph (b)(i) of the proposed section 9D amendments in the TLAB; retain paragraph (b)(ii) of the proposed section 9D amendment in the TLAB as it is; and amend the proviso to the proposed section 9D amendments in the TLAB as follows:
Insert the word “net” before the word “percentage” in the third sentence of the proviso; delete the word “reflected” and replace with the word “included” in the fourth sentence of the proviso., and delete the proposed section 25BC in the TLAB.

Option two:
Retain paragraph (b)(i) of the proposed section 9D amendments in the TLAB, but make further changes; retain paragraph (b)(ii) of the proposed section 9D amendment in the TLAB, but make further changes; and amend the proviso to the proposed section 9D amendments in the TLAB as follows:
Insert the word “net” before the word “percentage” in the third sentence of the proviso; delete the word “reflected” and replace with the word “included” in the fourth sentence of the proviso; and retain the proposed section 25BC in the TLAB, but make further changes.

Ms Mputa said stakeholders understood the loophole in the current tax legislation regarding the use of trusts to defer tax or recharacterise the nature of income, however, the proposed changes in the TLAB by introducing new section 25BC were too wide and did not address the problem. Subsequently, Treasury revised the proposed changes based on the aforementioned option one. It was proposed that the loophole in the current tax legislation regarding the use of trusts to defer tax or re-characterise the nature of income be dealt with in the 2018 legislative process.

SARS briefing onTax Administration Laws Amendment Bill
Mr Franz Tomasek, Director: Legislative R&D, SARS, said comments were received on the spread of PAYE cap on deductible retirement fund contributions over a year. To clarify application of annual monetary cap on contributions to retirement funds, the 2017 TALAB proposed that the R350 000 be spread over a tax year for PAYE purposes. However, some stakeholders felt the proposed spreading means that a person who exceeds the R29 167 monthly cap in a single month but not others will not be able to benefit from unused amounts in other months.

The comment had been initially not accepted. However, SARS switched from not accepted to partially accepted as it was moving in the direction of a cumulative cap. Therefore, spread application of cap for PAYE purposes on cumulative basis for portion of the year of assessment had been revised. For example; if employee is employed by employer for seven months during 2018/19 tax year a cumulative deduction limitation of R204 167 (R29 167 X 7) will apply in the seventh month.

To improve the effectiveness of combating refund fraud and in response to representations by members of the financial sector, the 2017 TLAB proposed that a bank not be required to notify SARS of suspected refund fraud and then place a hold on the refund amount on SARS’ instruction, but instead enable the bank to notify SARS and automatically place a hold on the refund if the bank reasonably suspects that the payment of a refund into the taxpayer’s account is related to a tax offence.

Some stakeholders felt the proposed amendment goes further than enabling a bank to place a hold on a taxpayer’s account - it required the bank to do so. The obligation to place a hold should not be automatic but should be on SARS’ instruction or at the discretion of the bank after taking into account all factors, including taxpayer representations.

The comment was not accepted. The hold in question was for a short period (maximum of two business days) and narrow (only when a bank “reasonably suspects” a refund payment by SARS had been obtained illegally). Requiring prior consultation with the account holder would render the provision ineffective, given the speed with which amounts can be transferred to other accounts. It is a very short hold and only applied to the said suspicious funds.

Discussion
The Acting Chairperson commended Treasury and SARS for their efforts in dealing with tax avoidance. Growing the economy was paramount and having all economic agents meeting their tax obligations was important.

Mr Lees suggested the Committee get a report on all such suspicious transactions placed and held by banks, and subsequently reported to SARS, for the first six months. The Committee would not want to be confronted with the same challenges of tax refunds not being paid on time. The outcomes of the proposed change had to be monitored to ensure SARS handles such transactions expeditiously.
Venda pension matter
Treasury updated the Committee on the Venda pension matter. On its background, around 1992, the Venda pension fund underwent a privatisation exercise. Some fund members managed to cash out their savings whereas a sizeable membership submitted that it was underpaid and hence pushed for redress through the Public Protector. Upon release of the Public Protector report, Treasury had been clear that if there were any miscalculations and underpayments during the privatisation process, the State was willing to correct and reimburse the members concerned. To that extent, Treasury requested documentation submitted by the aggrieved parties to the Public Protector as evidence. 7000 records had thus far been received and collated into individual files out of the 24 000 who worked for Venda local government at the time. The information was largely varied and inadequate. However, it had been submitted to the actuaries for analysis and benefit ascertainment. Therefore, Treasury was still awaiting the findings and would release a comprehensive report by the end of November.

Ms D Mahlangu (ANC) expressed appreciation on the involvement of the Public Protector on the Venda pension matter. She acknowledged the complexity of the issue- it was difficult to identify all beneficiaries. She suggested the involvement of labour movements who could be having relatively more accurate records. Also, other former homelands had to be looked into as well because they had the same challenges.

Mr Lees asked for an indication on the amount of money to be reimbursed.

Treasury said it was not in a position to estimate the total sum at this stage. Actuaries would determine the amounts involved upon assessment of the 7000 submissions. Treasury would have the figures by the end of October.

Adv. Frank Jenkins, Parliamentary Legal Advisor, said the Public Protector’s recommendations had to be implemented. The Public Protector’s findings indicate the pension fund members were prejudiced because of maladministration. It stated that the privatisation of the Venda pension fund suited nobody but the employer. Therefore, Parliament had to report on the matter as per the Public Protector’s recommendations. There was no challenge against the Public Protector’s report, it had just not been implemented. The report had set timelines and, from a factual point of view, Parliament and Treasury had missed some of the timelines. In terms of the report, some of the individuals involved had been waiting for some form of redress for the past 20 years. The report requested that Parliament assist Treasury with the implementation mechanism. Therefore, the Committee was required to exercise oversight and monitor the implementation of the Minister’s plan. Procedurally, the Committee would need to liaise with the Portfolio Committee on Justice and Correctional Services to monitor implementation as per the plan submitted by the Minister of Finance.

The meeting was adjourned.

 

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