Taxation Laws & Tax Administration Laws Amendment Bills: public hearings; Steinhoff Committee Resolution

This premium content has been made freely available

Finance Standing Committee

21 August 2018
Chairperson: Ms T Tobias (ANC) (Acting)
Share this page:

Meeting Summary

The Committee adopted a resolution to summon the former Chief Executive Officer of Steinhoff, Mr Marius Jooste and the former Chief Financial Officer, Mr Ben la Grange, to give evidence before the relevant committees of Parliament about the nature, causes and consequences of the sudden collapse of Steinhoff’s share value that resulted in investors and pension funds losing billions of rands, and thousands of jobs being threatened internationally and in South Africa.

The Committee held public hearings on the Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB). The following stakeholders gave submissions: South African Institute of Tax Practitioners (SAIT); South African Institute of Chartered Accountants (SAICA); PricewaterhouseCoopers (PwC);

Association for Savings and Investment South Africa (ASISA); Office of the Tax Ombud; Law Society of South Africa; Old Mutual Finance; Coronation Fund Managers; Bowmans; Southern Africa Venture Capital and Private Equity Association (SAVCA); and Real People Group.

SAIT made a submission on the proposed amendments to the TLAB. SAIT noted the proposed amendments to the Tax Administration Act (TAA), which would see a notice of commencement of an audit or verification being needed. Treasury proposed that a taxpayer must be provided with an “audit engagement letter” by SARS to ensure that the taxpayer is notified at the start of an audit as part of efforts to keep all parties informed. SAIT welcomed this proposal as a step in the right direction. However SAIT reiterated that the notification requirements should apply to all SARS actions that may result in an assessment, including a “verification”. The Promotion of Administrative Justice Act requires that any administrative body gives a person “adequate notice of the nature and purpose of the proposed administrative action” and “a reasonable opportunity to make representations”. Therefore, SAIT recommended that the requirement for notification of audit is extended to apply equally to verification (or inspection) processes so that SARS officials and taxpayers both understand the correct position in law, with reference to the tax legislation only, without having to also be aware of administrative justice laws. A notification of verification/ inspection is as important as a notification of audit when it comes to a taxpayer’s entitlement to refunds (as well as for VDP). SARS need not authorize a refund until a verification, inspection or audit of the refund has been finalised so a taxpayer needs not to be notified to know why the refund is withheld. It was recommended that the term “notice of commencement of an audit” is used to be consistent with the section dealing with voluntary disclosure. SAIT also recommended that the legislation should stipulate the timeframe for the notice.

SAICA highlighted concerns mainly on diesel rebate and VAT set-offs, tax practitioner regulations and dividend stripping, as proposed by Treasury in TLAB. On diesel rebates and VAT set-offs, SAICA expressed concern that payment liability within 30 days due to customs audit would create VAT underpayment for rebate amount as Vendor has no ability to pay gross payment generated by SARS system on net basis. On proposed tax practitioner regulations, SAICA welcomed proposal that SARS will enforce tax compliance and that it will apply equally to all Registered Controlling Bodies (RCBs). However, there was concern that this should not be a prohibition to register for whole of section 240(1) (i.e. RCB and SARS), just para (ii) with SARS otherwise administration retained with RCB. Also, there were concerns that there is: no specific review process to address SARS compliance monitoring system anomalies; no prescribed notice period for refusal to register or deregister; no obligation on SARS to inform RCB of deregistration or refusal to register; no mechanism to on-bulk transfer high volumes of taxpayers or inform taxpayers of TP deregistration and; no relief or time line extensions afforded for taxpayers whose TP was deregistered. Therefore, SAICA recommended that proposal should be withdrawn and postponed until after RCB/SARS workshop 27-28 August 2018. It further recommended that compliance notice and review of compliance transgression should be aligned to a fair procedure, including alignment of debt suspension provisions, and that impact on affected taxpayers should be accommodated.

PwC took the Committee through concerns it had about the various amendments to the TLAB. Firstly, on tax treatment of Collective Investment Schemes (CISs), the proposal will have a disastrous effect on savings and growth. As per the proposal, effectively, investments held by a collective investment scheme for less than 12 months will be treated as being held on revenue (and not capital) account. The effect would be that if a distribution is made to a unit holder by a CIS and that distribution is derived from the sale of, for example, shares by the CIS that were held for less than 12 months, the unit holder will be taxed on the distribution on revenue account (i.e. as if the distribution is proceeds from “trading” by the CIS). The proposal was problematic as it undermines general principles of capital versus revenue; and ignores facts and circumstances. The proposal will have a severe and long-term impact on investment and saving (and therefore economic growth).

ASISA expressed concern about the lack of consultation on such a significant tax amendment. As always, ASISA made itself available to work with the authorities to investigate various options to improve certainty for clients, members and the broader economy. ASISA requested that the amendment to Section 25BA of the Income Tax Act, per paragraph 47 of the TLAB be withdrawn. Outline of headline concerns for ASISA members was as follows: incongruent tax policy consequences; tax equity for the investor; conflicted duties of the manager; treating customers fairly; impact on the financial markets; and equal penalty for dissimilar transactions. The proposed amendment to Section 25BA in the 2018 TLAB will have a significant impact on saving in

South Africa. It will undermine policy consistency, negatively differentiate South Africa from CIS taxation in other jurisdictions, encourage withdrawals in favour of less regulated saving and promote externalisation to foreign CIS. ASISA has been actively advocating for improved certainty across the tax system for all long term saving portfolios. This has included representation to the Davis Tax Committee. However, the proposed amendment did not include consultation on how this might be achieved, any impact assessment and is highly selective in its application.

The Office of the Tax Ombud proposed the amendment of Section 16(1) (b) Of the Tax Administration Act, which reads: “The mandate of the Tax Ombud is to—… review, at the request of the Minister or at the initiative of the Tax Ombud with the approval of the Minister, any systemic and emerging issue related to a service matter or the application of the provisions of this Act or procedural or administrative provisions of a tax Act”. As matters therefore stand, the Tax Ombud (TO) cannot launch a review at his or her own initiative; he or she must first get prior “approval of the Minister” even if such matters fall squarely within the TO’s mandate. The Office was of the view, and therefore proposed, that the words “with the approval of the Minister” be deleted from section 16(1) (b). This proposal was on the basis of the following reasons, amongst others: In terms of section 14(5) of the TAA, the TO is accountable to the Minister and in terms of section 19(1)(a), must report directly to the Minister. The Minister does therefore have inherent powers to query any possible abuse of mandate by the TO.

The Law Society gave a submission on the proposed amendment to section 11(j) of the Income Tax Act. It had been advised by taxpayers who have made some calculations of the impact of the proposed changes that they are materially onerous. In simple terms they will be required to pay substantial additional amounts of tax on amounts that they will not collect. This gives rise to a permanent and material funding cost, which is unjustified. It is currently proposed that the IFRS9 Taxpayers be given a 25% codified allowance irrespective of their individual circumstances, and that the discretion available to the Commissioner in the current section 11(j) will be deleted entirely. The Law Society submitted that there is a fundamental conceptual problem with the “one-size-fits-all” approach: Firstly, the proposed amendments do not distinguish between taxpayers with different circumstances such as their business model, or the accuracy of their doubtful debt provisioning; and the proposed amendments do not take cognisance of the particular “buckets” of debt / stages of delinquency of debt (as IFRS9 does) and which many of the taxpayers’ systems do in fact identify, with great accuracy. It was submitted that the greater the accuracy of the prediction that the debtor will default, the greater the allowance ought to be, as there is no justification for requiring the taxpayer to pay any amount of tax on an amount which is highly unlikely to be recovered. The same percentage allowance therefore cannot be applied across all levels or stage of delinquency. Section 11(jA) correctly recognises this.

Old Mutual Finance made comments on clause 11(j)- Doubtful Debt Allowance of the 2018 TLAB. Old Mutual Finance expressed concerns with the proposed tax change, particularly the proposed tax treatment of non-bank lenders differs from that of bank lenders. Bank lenders would receive doubtful debts allowances of up to 85% of their impairment provisions, with non-bank lenders receiving a capped 25% allowance of their impairment provisions. This means that non-bank lenders would have to pay “cash taxes” on 75% of amounts that have “accrued” to them but which will never be actually received, only getting a tax deduction in later years. The different tax treatment is not justifiable, and creates unfair competition. The effect of the decrease in the current allowance to only 25% would cause some of the branches to become unsustainable resulting in closure; effectively taking away a legitimate financing avenue for people that are unable to acquire bank loans and furthermore will result in job losses. Old Mutual Finance would reconsider expanding its branch footprint, curtailing further employment and reduction in capital expenditure. The economic impact is significant at a time when unemployment rates are very high and national government is urging and incentivising employers to create more employment opportunities. Old Mutual Finance believed that it would be fair for non-bank lenders to be taxed in the same way as bank lenders, and for the impact of the new reduced tax allowances to be phased in over five years, so as to be affordable.

Coronation Fund Managers, in submission, recorded its objection to the proposed introduction of a one-year holding period rule with regards to the characterisation of income earned by collective investment schemes. This proposed rule will have far-reaching implications that will be detrimental to millions of ordinary South Africans. It will undermine capital formation by incentivising informalisation of the savings pool and externalisation of assets from South Africa. Coronation urged the policymaker to reconsider the repeated requests made by organised industry to conduct proper technical research into the issues at hand before changing revenue laws in a manner that will have significant unintended consequences. We reiterate our preparedness to assist National Treasury and the South African Revenue Service in any way required as part of this process.

Bowmans gave a submission on the TLAB, with particular focus on the proposed changes to treatment of doubtful debts tax allowance. Currently, taxpayers are entitled to a tax allowance for debts that SARS considers doubtful. This is based on SARS’ discretion, and various tax rulings have been issued. This is an important tax provision, to address the mismatch between the taxation of income, which is ordinarily on an “accrual” basis, and bad debts which are ordinarily deductible on a “realised” basis. The doubtful debts tax allowance addresses this imbalance, by giving a tax allowance inter alia for “income” that has “accrued”, but which is anticipated to not be recoverable. This prevents a taxpayer having to pay tax on amounts that have not been, and will never be, received. However, Bowmans was concerned about the current proposal in TLAB 2018 to replace the discretionary allowance (which may be as high as 100% of the relevant doubtful debts) with a flat rate of 25% of the relevant doubtful debts.

SAVCA gave a submission on the proposed amendments to Section 12J of TLAB. SAVCA believed that the Section 12J incentive has positively contributed to South Africa in directing much needed capital and skills to growth businesses, SMMEs and priority areas to stimulate economic growth, job creation/retention and innovation. Proposed amendments were, however, extremely far reaching and do not address only the perceived abuse, but threatens the existence of probably all approved VCC’s. SAVCA was concerned that enormous damage is being done to market sentiment around 12J, which could be irreversible. SAVCA urged National Treasury to act promptly to create policy certainty, with narrow interventions that stamps out abuse whilst provides extreme clarity in terms of what is acceptable, thereby providing improved certainty for investors. The Association was of the view that if this is achieved, a far better outcome could emerge from this process. A failure to achieve this outcome in a very short period of time would jeopardise the good that has been done and the significant investments to date by Treasury to use policy to drive key national priorities and would undermine public trust in policy setting, rendering future policy and incentives ineffective. SAVCA recommended that Treasury engage further with VCCs deploying the Non-Pooled Fund Model in order to provide clarity on acceptable practices that enable the SMME ecosystem benefits to continue whilst curbing any potential abusive practices.

Real People Group gave a submission on the proposed changes to Section 11(j) of the TLAB, which provides relief to taxpayers where it is likely that debts owed to them will not be repaid. , the tax allowance for doubtful debts is determined with reference to the accounting treatment, and the same IFRS standard regulates the accounting provisions for both, and the same auditors using the same practices, sign off on both. Both employ sophisticated statistical techniques to determine provisions for doubtful debts. Insofar as capital, both have capital regimes, albeit one set by the South African Reserve Bank and the others by the capital providers/funding structures. Therefore there was no reason for differentiation. Non-bank lenders lend proportionately more to the unsecured market, consideration needs to be given whether the percentages proposed in section 11 (jA) even if allowed for non-bank lenders, would be adequate or requirement for a new Section, say 11 (jB). Real People would welcome a thorough consultation process and in order to determine the most appropriate allowance for non-bank lenders, with particular reference the Developmental Credit Industry. Were the draft legislations as currently proposed enacted the outcome would impact the sustainability of the Real People business and other developmental credit providers, whilst providing an unfair advantage to the banks.

National Treasury addressed concerned about the proposed changes to treatment of VCCs. The obtaining reality was that as at February this year, there were about 103 approved VCCs with R2 billion invested among them. However, only about R500 000 was invested on qualifying companies- a mere 29% of the amount invested in VCCs goes to qualifying companies. Treasury had noted the comments on the best way to deal with the abuse of VCCs and these would be taken into consideration, and incorporated in the response document. Treasury gave assurance that it had noted the comments and was going to take the legitimate concerns into account.

Members spoke about the impact of tax avoidance on tax collection. They asked about the correspondence currently being generated by SARS, the unintended consequences of the VAT increase on crypto-currency, the factual reporting by auditors and how to deal with Collective Investment Schemes. Further, they noted concerns about insufficient consultation.

Meeting report

PMG missed the first part of the meeting where the Committee adopted the resolution

Adoption of Committee Resolution on Steinhoff (Jooste and La Grange subpoena)

The Committee agreed to a resolution to summon the former Chief Executive Officer of Steinhoff, Mr Marius Jooste and the former Chief Financial Officer, Mr Ben la Grange, to give evidence before the relevant committees of Parliament about the nature, causes and consequences of the sudden collapse of Steinhoff’s share value that resulted in investors and pension funds losing billions of rands, and thousands of jobs being threatened internationally and in South Africa.

The hearing will take place on 29 August 2018.

Mr D Maynier (DA) moved for the adoption of the resolution.

Ms D Mahlangu (ANC) seconded, and the resolution was adopted.

Submissions on Taxation Laws Amendment Bill (TLAB) & Tax Administration Laws Amendment Bill (TALAB)

South African Institute of Tax Practitioners (SAIT) submission

Ms Erika de Villiers, Head of Tax Policy, SAIT, gave a submission on the proposed amendments to the TLAB. SAIT noted the proposed amendments to the Tax Administration Act (TAA), which would see a notice of commencement of an audit or verification being needed. Treasury proposed that a taxpayer must be provided with an “audit engagement letter” by SARS to ensure that the taxpayer is notified at the start of an audit as part of efforts to keep all parties informed. SAIT welcomed this proposal as a step in the right direction. However SAIT reiterated that the notification requirements should apply to all SARS actions that may result in an assessment, including a “verification”. The Promotion of Administrative Justice Act (PAJA) requires that any administrative body gives a person “adequate notice of the nature and purpose of the proposed administrative action” and “a reasonable opportunity to make representations”. Therefore, SAIT recommended that the requirement for notification of audit is extended to apply equally to verification (or inspection) processes so that SARS officials and taxpayers both understand the correct position in law, with reference to the tax legislation only, without having to also be aware of administrative justice laws. A notification of verification/ inspection is as important as a notification of audit when it comes to a taxpayer’s entitlement to refunds (as well as for VDP). SARS needs not authorise a refund until a verification, inspection or audit of the refund has been finalised so a taxpayer needs not to be notified to know why the refund is withheld. It was recommended that the term “notice of commencement of an audit” be used to be consistent with the section dealing with voluntary disclosure. SAIT also recommended that the legislation should stipulate the timeframe for the notice.

On the refinement of debt benefit rules refined, the “concession or compromise” limited to realisation events, was welcomed. SAIT also welcomed that the substitution of a debt will not per se trigger a debt benefit. However, problematic areas remain: the case in point being the dormant company exclusion, which is too narrow. Dormant company exclusion is limited to South African group companies only; all other forgiveness of debt due by a dormant company will still trigger tax. This makes it difficult to wind-up dormant companies where they owe money to a person outside the South-African group or a third party. Dormant companies would have forfeited their assessed losses and any recoupment will give rise to tax which they may not have the money to pay. SAIT suggested that the dormant company exclusion should apply to all debt to the dormant company from anyone.

On proposed changes to the treatment of collective investment schemes (CISs), SAIT proposed that the disposal of financial instruments within 12 months be deemed to be income of a revenue nature and taxable
Such income would be subject to normal tax at the marginal rates of the investors if distributed to them (it is inconceivable to retain this in CIS with 45% tax rate). The proposal will result in inequity between investors in CIS versus other financial products and create severe distortion in the trade conduct of portfolio managers. SAIT viewed the proposal as significant and requested extensive consultation and analysis of the impact on the broader economy, the CIS and related industries before implementation.

Lastly, on taxable capital gains, Treasury proposed that any taxpayer who makes a taxable capital gain when they sell an asset will have to register as a provisional taxpayer. The explanation given was that the tax must be collected during the year and not only on assessment to address problems with collecting any tax debt arising from that gain. However, registering and complying with the provisional tax system is confusing and difficult for unsophisticated taxpayers. Most high-earning taxpayers will already have to be registered for provisional tax and therefore pay provisional tax on capital gains. The potential loss to the fiscus does not seem to justify the extra complexity and administrative burden associated with the provisional tax system as well as having to deregister afterwards. SAIT believed this proposal will not result in the effective, efficient and economic use of resources and recommended that it not be implemented.

South African Institute of Chartered Accountants (SAICA) submission
Mr Pieter Faber, Senior Executive, SAICA, highlighted concerns mainly on diesel rebate and VAT set-offs, tax practitioner regulations and dividend stripping, as proposed by Treasury in TLAB. On diesel rebates and VAT set-offs, SAICA expressed concern that payment liability within 30 days due to customs audit would create VAT underpayment for rebate amount as Vendor has no ability to pay gross payment generated by SARS system on net basis. Diesel rebate is not a “tax” as defined in the TAA and is not subject to section 191 TAA set-off provisions, thus it is not legally allowed. The diesel rebate delay invariably creates two disputes, one for customs on any audit and another for VAT for underpayment. Therefore, SAICA recommended that diesel rebates as set-off should be incorporated into TAA and SARS systems to avoid automatic VAT underpayments due to rebate claim delays. Alternatively, VAT 201 should be amended to remove diesel rebate as set-off item but separately claimable.

On proposed tax practitioner regulations, SAICA welcomed the proposal that SARS will enforce tax compliance and that it will apply equally to all Registered Controlling Bodies (RCB’s). However, there was concern that this should not be a prohibition to register for whole of section 240(1) (i.e. RCB and SARS), just para (ii) with SARS otherwise administration retained with RCB. Also, there were concerns that there is: no specific review process to address SARS compliance monitoring system anomalies; no prescribed notice period for refusal to register or deregister; no obligation on SARS to inform RCB of deregistration or refusal to register; no mechanism to on-bulk transfer high volumes of taxpayers or inform taxpayers of TP deregistration and; no relief or time line extensions afforded for taxpayers whose TP was deregistered. Therefore, SAICA recommended that proposal should be withdrawn and postponed until after RCB/SARS workshop 27-28 August 2018. It further recommended that compliance notice and review of compliance transgression should be aligned to a fair procedure, including alignment of debt suspension provisions, and that impact on affected taxpayers should be accommodated.

On proposals to deal with dividend stripping, SAICA expressed concern that the override of the corporate restructuring rules has been hugely problematic for legitimate transactions. The use of an 18 month test for subsequent corporate rollovers lengthens the effect of the test to 36 months which is too long. SAICA had recommended the rectification of the override should therefore take effect on 18 December 2017 (the date of promulgation of the TLAA of 2017) and not prospectively. Lastly, the current proposal should be simplified as the high-value company “scheme” mentioned in the Explanatory Memorandum would in any event not make commercial sense for taxpayers to implement.

PricewaterhouseCoopers (PwC) submission
Mr Greg Smith, Senior Manager: Tax Policy, PwC, took the Committee through concerns PwC had about the various amendments to the TLAB. Firstly, on tax treatment of Collective Investment Schemes (CISs), the proposal will have a disastrous effect on savings and growth. As per the proposal, effectively, investments held by a CIS for less than 12 months will be treated as being held on revenue (and not capital) account. The effect would be that if a distribution is made to a unit holder by a CIS and that distribution is derived from the sale of, for example, shares by the CIS that were held for less than 12 months, the unit holder will be taxed on the distribution on revenue account (i.e. as if the distribution is proceeds from “trading” by the CIS). The proposal was problematic as it undermines general principles of capital versus revenue; and ignores facts and circumstances. The proposal will have a severe and long-term impact on investment and saving (and therefore economic growth).

Amendments to Real Estate Investment Trusts provision to address technical issues were urgently needed. There were critical issues with the provisions that deal with real estate investment trusts (“REITS”), which affect the efficient operation of the REIT regime. Many are purely of a technical nature – no policy issues; merely removal of unintended anomalies – and many are relatively uncomplicated. REIT regime was introduced in 2012 – these are mainly technical issues around implementation of the regime that should have been sorted out within one or two legislative cycles. Implications of not resolving these issues timeously include: perceptions that South Africa’s regulatory environment is inflexible and unfriendly towards investment; and that taxpayers need to make use of expensive advisors to interpret their way through technical problems created by uncertainty.

Mr Smith noted the importance of Venture Capital Companies incentives as they play a vital role of entrepreneurs in boosting economic growth and creating jobs by starting and growing businesses, and imperative to reduce poverty, inequality and vulnerability of small businesses. Also, entrepreneurs need capital to start and grow businesses. Section 12J plays an important role in this context as it has: allowed capital to be raised from sources that would not otherwise have invested in SMMEs; encouraged more private equity and venture capital funds to invest in SMMEs; and brought capital to SMMEs and has created sustainable jobs. The purpose of the incentive would be to address the problem of a shortage of capital available to SMMEs by incentivizing investment in SMMEs. Often, abuse arises where, in all probability, the relevant investment would have been made even if the incentive were not available (the incentive being used merely as a “sweetener”) – examples: holiday homes, purchase of capital equipment. Effect of abuse was that incentive will not be sustainable and could ultimately be withdrawn (negative effect on SMMEs, job creation, poverty and inequality reduction). However, there are commercial and legitimate reasons for the use of different classes of shares (and the use of different classes of shares is, in many circumstances, even regarded as commercial best practice) – not all uses of different classes of shares are abusive. Notably, simply removing proposals would not assist as abuse will continue, affecting sustainability of the incentive and/or revenue pressures elsewhere. Also, the proposals could not simply be promulgated as currently formulated as this will essentially be the same as removing the incentive entirely. Therefore, PwC identified the need for: clarification of the underlying policy; identification of what the abusive schemes are; as well as introduction of measures that support the policy and that specifically target abusive schemes.

Association for Savings and Investment South Africa (ASISA) submission
Mr Thabo Khojane, Executive, ASISA, expressed concern about the lack of consultation on such a significant tax amendment. As always, ASISA made itself available to work with the authorities to investigate various options to improve certainty for clients, members and the broader economy. ASISA requested that the amendment to Section 25BA of the Income Tax Act, per paragraph 47 of the TLAB be withdrawn. Outline of headline concerns for ASISA members was as follows: incongruent tax policy consequences; tax equity for the investor; conflicted duties of the manager; treating customers fairly; impact on the financial markets; and equal penalty for dissimilar transactions.

The proposed amendment to Section 25BA in the 2018 TLAB will have a significant impact on saving in
South Africa. It will undermine policy consistency, negatively differentiate South Africa from CIS taxation in other jurisdictions, encourage withdrawals in favour of less regulated saving and promote externalisation to foreign CIS. ASISA has been actively advocating for improved certainty across the tax system for all long term saving portfolios. This has included representation to the Davis Tax Committee. However, the proposed amendment did not include consultation on how this might be achieved, any impact assessment and is highly selective in its application. These points are explained below:

Conflicted duties of the manager
Portfolio managers are employed to manage money in a prudential manner. ASISA believed that fiduciary duty should be the manager’s primary focus, rather than tax optimisation. A tax hurdle will now impede those decisions whether related to asset allocation, liquidity provision or the use of financial instruments as insurance against loss. For example, untaxed investors such as retirement funds will have unit holdings in the same portfolio as taxed unit holders. When weighing an investment outcome, how does the manager balance the interests of the two types of taxpayers? Investment professionals should focus on generating the best investment ideas for their investors. We believe that the proposed changes will negatively affect risk-adjusted returns and conflict managers.

Treating customers fairly
ASISA expressed concern that, currently, SARS has the discretion at any time to retrospectively raise a tax liability against an investment portfolio and recharacterise what was considered capital gains as ordinary revenue. This places the Financial Services Provider in a precarious predicament. In terms of Section 7(1) (xi) of the General Code of Conduct for Services Providers and their Representatives under the Financial Advisory and Intermediary Services Act no 37 of 2002, such providers and their representatives need to disclose all material tax considerations to a prospective client. It is difficult for this duty to be discharged, given the absence of symmetrical certainty for the portfolio manager in legislation or regulation.

Equal penalty for dissimilar transactions
The proposed time based rule affects all manner of transactions, including unit holder withdrawals, portfolio rebalancing, index tracking, hedging and transactions directed at efficient portfolio management (for example purchasing a derivative to gain economic exposure to a share in lieu of holding the physical). It does not solve selectively for a concern about trading. We have compiled a technical submission for National Treasury and SARS, which provides details and examples of these transactions.

Impact on the financial markets
Mr Khojane indicated that ASISA members have not had the required time within the submission deadline to attempt to model the impact on financial markets. Managers have made submissions suggesting that liquidity will be adversely affected. ASISA had no doubt that assets of R2.3 trillion in CISs are systemically significant. The artificiality of the 12 month period could introduce a ‘lock-in’ effect within the market and potential price distortions in the asset pricing model (prices have a time bias). ASISA has employed the services of an independent actuarial consulting firm to model transactions for the CIS industry to attempt a quantitative impact assessment. This unfortunately cannot be completed within the submission deadline.

Office of the Tax Ombud submission
Adv Eric Mkhawane, Chief Executive Officer, Office of the Tax Ombud, proposed the amendment of Section 16(1) (b) Of the Tax Administration Act, which reads: “The mandate of the Tax Ombud is to—… review, at the request of the Minister or at the initiative of the Tax Ombud with the approval of the Minister, any systemic and emerging issue related to a service matter or the application of the provisions of this Act or procedural or administrative provisions of a tax Act”. As matters therefore stand, the Tax Ombud (TO) cannot launch a review at his or her own initiative; he or she must first get prior “approval of the Minister” even if such matters fall squarely within the TO’s mandate.

This was a compromise provision introduced in January 2017, following the proposal by the TO for a provision to enable the Office to launch a review on the TO’s own initiative. The initial proposal by the TO did not have the wording “with the approval of the Minister”. Their inclusion, apparently on SARS’s insistence, was a compromise to what the TO had initially proposed. For reasons that it never articulated, SARS was seemingly not comfortable with the TO’s proposal, presumably for the unfounded fear that the Ombud’s powers would be abused. The Office was still of the view, and therefore propose, that the words “with the approval of the Minister” be deleted from section 16(1) (b). This proposal was on the basis of the following reasons, amongst others: In terms of section 14(5) of the TAA, the TO is accountable to the Minister and in terms of section 19(1)(a), must report directly to the Minister. The Minister does therefore have inherent powers to query any possible abuse of mandate by the TO.

Adv Mkhawane pointed out that building confidence in the tax system was at the heart of the Office of the Tax Ombud. The Office should be seen to be independent; not compromised in any way. Time is of essence, and the time it took the Office to get ministerial approval before investigations were instituted was very long, which meant that investigations took too long to complete, to such an extent that taxpayers lose confidence in its work. To put it bluntly, the Office, in its current form, was like a call centre within SARS. He reemphasised the need for more independence and added that a new model was being discussed with the Minister, and would be brought before the Committee in due course.

Discussion
Mr A Lees (DA) noted SAIT’s comments about notifications to taxpayers by SARS. In its opinion, was the correspondence currently being generated by SARS understandable by any layperson? What were SAICA members’ experiences? The content of the correspondence was important. What would be the unintended consequences of the VAT increase on crypto-currency? PwC asked for concrete proposals on how to deal with VCCs and foreign income employment section, which was quite controversial the previous year. 

The Acting Chairperson spoke about the impact of tax avoidance on tax collection. The TLAB and TALAB seek to improve efficiency in tax collection and nipping leakages. Cases where share classes are being manipulated to avoid payment of taxes is rampant such that arguments should be about how this could be circumvented. She noted concerns about insufficient consultation. Was there sufficient consultation with stakeholders on the part of Treasury? How would it be ensured that small businesses also benefit from the incentive schemes? She emphasised the need for an impact assessments and analyses around this. Interesting arguments had been raised.

Ms de Villiers agreed that at the moment correspondence from SARS could be improved. Taxpayers get electronically-generated standard letters which at times do not deal with taxpayer specificities. VAT on crypto-currency was a very technical and a difficult one, but leakages on input tax were expected. She believed there must be international precedence to guide this grey area. On revenue leakages, one of the challenges has been that it is very hard for SARS to effectively deal with tax avoidance and it has often left to Treasury through legislation.

Mr Smith said there was need to move to a purposive approach to dealing with abuse within Venture Capital Company (VCC) regimes. Treasury ought to go back and identify what constitutes abuse and ensure the provisions are specifically targeted to cases of abuse. A systemic problem could not be addressed through a blunt tax instrument. It should rather be addressed through robust regulation. He added that virtually no VCCs will be compliant with section 12J if the proposed amendments are promulgated.

Mr Khojane acknowledged that there are minority cases where individuals use CIS vehicles to avoid taxes. However ASISA believed that this was a tiny minority and there were other mechanisms which could be well-applied to achieve the same end. More importantly, there were better ways and far more targeted means to deal with this. It was in the interest of all economic players to have certainty.

Law Society of South Africa submission
Mr Robert Gad, Chair: LSSA Tax Committee and Director of ENSAfrica, gave a submission on the proposed amendment to section 11(j) of the Income Tax Act. It had been advised by taxpayers who have made some calculations of the impact of the proposed changes that they are materially onerous. In simple terms they will be required to pay substantial additional amounts of tax on amounts that they will not collect. This gives rise to a permanent and material funding cost, which is unjustified. It is currently proposed that the IFRS9 Taxpayers be given a 25% codified allowance irrespective of their individual circumstances, and that the discretion available to the Commissioner in the current section 11(j) will be deleted entirely. The Law Society submitted that there is a fundamental conceptual problem with the “one-size-fits-all” approach: Firstly, the proposed amendments do not distinguish between taxpayers with different circumstances such as their business model, or the accuracy of their doubtful debt provisioning; and the proposed amendments do not take cognisance of the particular “buckets” of debt / stages of delinquency of debt (as IFRS9 does) and which many of the taxpayers’ systems do in fact identify, with great accuracy. It was submitted that the greater the accuracy of the prediction that the debtor will default, the greater the allowance ought to be, as there is no justification for requiring the taxpayer to pay any amount of tax on an amount which is highly unlikely to be recovered. The same percentage allowance therefore cannot be applied across all levels or stage of delinquency. Section 11(jA) correctly recognises this.

The proposed 25% allowance implies that taxpayers who report under IFRS9 to their shareholders are inaccurate 75% of the time, whereas anecdotally we have been informed by many of them that their provisioning is generally 90-95% accurate in predicting future debtor behaviour. This is information which listed companies prepare in line with a single set of world-wide standards, used to report to their shareholders and stake holders. It is inconceivable that the implied probability of inaccuracy (75%) can be a constant regardless of having observed more loss events in later stage delinquency. Arguably, many IFRS9 Taxpayers apply the same single standard and the same amount of rigour in quantifying and classifying their debtors as do those who fall under section 11(jA) and, with respect, there seems no logical reason for the difference in treatment. Currently, the section 11(j) discretion would allow SARS in appropriate cases to apply similar principles to those contained in section 11(jA) to a broader set of taxpayers, on a case by case basis. The proposed removal of the discretion makes this impossible. Moreover, the removal of the discretion closes the door to one important method of resolving categorisation disputes about which debts are “bad” and which are “doubtful”, and will result in increased litigation between SARS and taxpayers.

On way forward, one solution would be to expand the ambit of section 11(jA) to cover taxpayers who, just like “covered persons”, have the systems to divide delinquent debtors into the relevant delinquency buckets (discussed above) and are required to report in terms of IFRS9. It could be achieved by an amendment to the definition of “covered person”. Alternatively, the IFRS9 Taxpayers require a model which approximates the methodology of section 11(jA) with whatever appropriate modifications are required. The Law Society understood that many taxpayers are willing and able to workshop this with National Treasury if the opportunity were to be extended. It strongly submitted that the current discretionary regime should be retained until an appropriate legislative regime has been work-shopped and considered fully by all affected parties. It was acknowledged that there is a desire to move to a self-assessment system, which makes discretionary provisions problematic. It might be that a hybrid approach could be considered, whereby a codified percentage allowance is the default method, but provision is made for SARS to grant a ruling to depart therefrom, in order to achieve a fair and reasonable result.

Old Mutual Finance submission
Mr Hafsa Daware, Senior Tax Consultant, Old Mutual Finance, made comments on clause 11(j)- Doubtful Debt Allowance of the 2018 TLAB. Old Mutual Finance expressed concerns with the proposed tax change; particularly the proposed tax treatment of non-bank lenders differs from that of bank lenders. Bank lenders would receive doubtful debts allowances of up to 85% of their impairment provisions, with non-bank lenders receiving a capped 25% allowance of their impairment provisions. This means that non-bank lenders would have to pay “cash taxes” on 75% of amounts that have “accrued” to them but which will never be actually received, only getting a tax deduction in later years. The different tax treatment is not justifiable, and creates unfair competition. The effect of the decrease in the current allowance to only 25% would cause some of the branches to become unsustainable resulting in closure; effectively taking away a legitimate financing avenue for people that are unable to acquire bank loans and furthermore will result in job losses. Old Mutual Finance would reconsider expanding its branch footprint, curtailing further employment and reduction in capital expenditure. The economic impact is significant at a time when unemployment rates are very high and national government is urging and incentivising employers to create more employment opportunities. Old Mutual Finance believed that it would be fair for non-bank lenders to be taxed in the same way as bank lenders, and for the impact of the new reduced tax allowances to be phased in over five years, so as to be affordable.

Coronation Fund Managers submission
Mr Pieter Koekemoer, Executive: Personal Investments, Coronation Fund Managers, recorded Coronation’s objection to the proposed introduction of a one-year holding period rule with regards to the characterisation of income earned by collective investment schemes. This proposed rule will have far-reaching implications that will be detrimental to millions of ordinary South Africans. It will undermine capital formation by incentivising informalisation of the savings pool and externalisation of assets from South Africa. Coronation urged the policymaker to reconsider the repeated requests made by organised industry to conduct proper technical research into the issues at hand before changing revenue laws in a manner that will have significant unintended consequences. We reiterate our preparedness to assist National Treasury and the South African Revenue Service in any way required as part of this process.

The classic canons of taxation are fairness, convenience, efficiency and certainty. The proposed rule fails on all counts. It is unfair as investors in CIS portfolios will incur tax liabilities due to actions completely outside their control, often when others withdraw from funds while they remain long-term investors. It is inconvenient as the characterisation of the income as revenue will be made independent from the intent of the fund investor and as the additional tax may be raised in a year when the investor suffers a loss on his investment. It is inefficient as it will raise a relatively small amount of additional tax revenue but will require a wholesale change to the administrative systems of the industry (assets are valued on a weighted-average cost rather than a first-in-first-out basis as required by the proposed rule) while at the same time disincentivising regulated saving and making revenue collection more volatile. It is uncertain as the amount and timing of income recharacterised is not a knowable component of the specific investor’s gain as well as being divorced from her intentions, making the quantum, manner and purpose of the tax unclear.

It appears that there is a perception that CIS portfolios are only used by the wealthy. Nothing could be further from the truth. Millions of South Africans use these funds to save for retirement, education and emergencies. The retirement income of hundreds of thousands of pensioners are backed by CIS portfolios. These investors make up the bulk of the income taxpayer base and are completely unaware of the implications of this proposed change. There are circa 40 jurisdictions with well-developed CIS regulatory regimes. To the knowledge of this author, all bar one has rejected a rules-based approach as proposed here. The nearly universal recognition is that it is inappropriate to treat regulated long-term investment vehicles aimed at the broad public as potential schemes for profit making. There are better anti-avoidance mechanisms to target the guilty few, rather than raising arbitrary tax liabilities broadly distributed across tax payers from all walks of life.

Bowmans submission
Ms Patricia Williams, Tax Partner, Bowmans, gave a submission on the TLAB, with particular focus on the proposed changes to treatment of doubtful debts tax allowance. Currently, taxpayers are entitled to a tax allowance for debts that SARS considers doubtful. This is based on SARS’ discretion, and various tax rulings have been issued. This is an important tax provision, to address the mismatch between the taxation of income, which is ordinarily on an “accrual” basis, and bad debts which are ordinarily deductible on a “realised” basis. The doubtful debts tax allowance addresses this imbalance, by giving a tax allowance inter alia for “income” that has “accrued”, but which is anticipated to not be recoverable. This prevents a taxpayer having to pay tax on amounts that have not been, and will never be, received. However, Bowmans was concerned about the current proposal in TLAB 2018 to replace the discretionary allowance (which may be as high as 100% of the relevant doubtful debts) with a flat rate of 25% of the relevant doubtful debts.

Banks versus non-bank lenders: unequal tax treatment
Section 11(jA) of the Income Tax Act sets out a doubtful debts tax regime for banks, which is significantly more favourable than the “general” one now proposed. It was submitted that it is unfair to restrict this treatment to banks.  Non-bank lenders are subject to the same regulatory environment as regards lending (both being subject to the National Credit Act).  There is no tax based, or other legally based, reason that justifies the different treatment. A different tax regime creates unfair competition, and does not promote the Constitutional value of equality.

Business and societal impact
The proposed tax regime will significantly negatively impact non-bank lenders, giving rise to increased tax payments on amounts that are never going to be actually received. This drives up the costs of the relevant lenders, making components of their business unprofitable. Likely results include: decreased availability of credit for low income consumers (driving these low income consumers towards unscrupulous and unregulated lenders or “loan sharks”); closure of certain branches or areas of business of non-bank lenders, with corresponding loss of employment; and decreased revenue collections for the fiscus (lower employees’ taxes, and lower income tax because of lower growth of business).

Ideally, the tax treatment of doubtful debts should be based on the accounting treatment (IFRS 9), which represents the economic reality of taxpayers. At a minimum, non-bank lenders should be subject to the same basic tax regime as bank lenders (with tax allowances based on a sliding scale of 25%, 40% and 85% of the actual doubtful debts provisions). The new tax proposals should be “phased in” over five years, to minimise the disruptive impact of the higher taxes in the “new regime”.

Southern Africa Venture Capital and Private Equity Association (SAVCA) submission
Ms Shirley Maltz, Executive, SAVCA, made a submission on the proposed amendments to Section 12J of TLAB. SAVCA believed that the Section 12J incentive has positively contributed to South Africa in directing much needed capital and skills to growth businesses, SMMEs and priority areas to stimulate economic growth, job creation/retention and innovation. SAVCA was of the view that Section 12J has proven effective in: raising capital from sources that would not otherwise have invested in the SMME space; enabling more private equity and venture capital fund managers to operate in the SMME space, bringing capital and skills to fill a much needed gap in the market; creating new and sustainable jobs; and stimulating economic growth and innovation. SAVCA acknowledged the urgent need for VCCs to demonstrate social return on investment in support of national objectives and the furtherment of South Africa’s growth. High-level impact numbers from SAVCA members indicate a greater than 180% increase in direct jobs by QC, since investment by the VCC, with indirect jobs showing an even more impressive increase.

In light of the aforesaid, SAVCA’s 2017 submission requested National Treasury to consider tightening the legislation to ensure the capital raised through this incentive flows to the intended recipients and is not abused. SAVCA highlighted the potential for abuse as part of its civic duty and because it determined that growing abuse of the legislation would pose a risk to the sustainability and longevity of the Section 12J incentive. SAVCA supports tighter legislation with narrow interventions that stamps out abuse and provides greater certainty. Proposed amendments were, however, extremely far reaching and do not address only the perceived abuse, but threatens the existence of probably all approved VCC’s. SAVCA was concerned that enormous damage is being done to market sentiment around 12J, which could be irreversible. SAVCA urged National Treasury to act promptly to create policy certainty, with narrow interventions that stamps out abuse whilst provides extreme clarity in terms of what is acceptable, thereby providing improved certainty for investors. The Association was of the view that if this is achieved, a far better outcome could emerge from this process. A failure to achieve this outcome in a very short period of time would jeopardise the good that has been done and the significant investments to date by Treasury to use policy to drive key national priorities and would undermine public trust in policy setting, rendering future policy and incentives ineffective. SAVCA recommended that Treasury engage further with VCCs deploying the Non-Pooled Fund Model in order to provide clarity on acceptable practices that enable the SMME ecosystem benefits to continue whilst curbing any potential abusive practices.

Real People Group submission
Mr Stef Fourie, CEO: Home Finance, Real People Group, gave a submission on the proposed changes to Section 11(j) of the TLAB, which provides relief to taxpayers where it is likely that debts owed to them will not be repaid. He noted that the Bill proposes removing SARS commissioner discretion for non-bank lenders. The proposed legislation would leave Real People with a deduction for tax significantly less than that accurately calculated for accounting purposes under IFRS 9. Compared to the allowance afforded to Banks plus the economic realities faced by the industry, this Bill was inequitable and would impact the sustainability of the business.

In a nutshell, the tax allowance for doubtful debts is determined with reference to the accounting treatment, and the same IFRS standard regulates the accounting provisions for both, and the same auditors using the same practices, sign off on both. Both employ sophisticated statistical techniques to determine provisions for doubtful debts. Insofar as capital, both have capital regimes, albeit one set by the South African Reserve Bank and the others by the capital providers/funding structures. Therefore there was no reason for differentiation. Non-bank lenders lend proportionately more to the unsecured market, consideration needs to be given whether the percentages proposed in section 11 (jA) even if allowed for non-bank lenders, would be adequate or requirement for a new Section, say 11 (jB). Real People would welcome a thorough consultation process and in order to determine the most appropriate allowance for non-bank lenders, with particular reference the Developmental Credit Industry. Were the draft legislations as currently proposed enacted the outcome would impact the sustainability of the Real People business and other developmental credit providers, whilst providing an unfair advantage to the banks.

Discussion
The Acting Chairperson noted Coronation Fund Managers’ submission that CISs were not involved in speculative activities: was this a statement of fact? She added that the accuracy of balance sheets was difficult to establish. Auditors have been found wanting and could not be relied upon anymore in as far as factual reporting was concerned. The recent experiences involving a number of auditing firms was indicative.

Mr Koekemoer replied that collective investment schemes were involved in speculative activities was a matter of dispute, not fact. The fundamental concern was that in virtually every other jurisdiction, the treatment of these schemes was a settled fact. Tax authorities in other jurisdictions do not regulate CISs in this proposed fashion which characterises them as profit-making ventures. He urged further consultations and constructive process which would lead to clarification.

National Treasury input
Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, addressed concerns about the proposed changes to treatment of VCCs. The obtaining reality was that as at February this year, there were about 103 approved VCCs with R2 billion invested among them. However, only about R500 000 was invested on qualifying companies- a mere 29% of the amount invested in VCCs goes to qualifying companies. Treasury had noted the comments on the best way to deal with the abuse of VCCs and these would be taken into consideration, and incorporated in the response document. She assured stakeholders that Treasury had noted the comments and was going to take the legitimate concerns into account.

The Acting Chairperson thanked everyone for their meaningful contributions.

The meeting was adjourned.

Download as PDF

You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.

See detailed instructions for your browser here.

Share this page: