Draft revenue Laws Amendment Bill: hearings

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Finance Standing Committee

16 September 1999
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Meeting report

PORTFOLIO COMMITTEE ON FINANCE

PORTFOLIO COMMITTEE ON FINANCE
17 September 1999
DRAFT REVENUE LAWS AMENDMENT BILL: HEARINGS

Documents handed out:
Vat Guide for vendors
COSATU Submission
The Life Offices' Association of South Africa Submission
South African Institute of Chartered Accountants Submission
Spoor and Fischer Attorneys Submission
Irvin & Johnson Limited Submission
Ben-Schoeman Geldenhuys Submission
Joint Submission by the Banking Council and Securities Lending Forum
Pick 'n Pay Retail Submission
[SUBMISSIONS AVAILABLE HERE ON 27/9/99]

SUMMARY
Presentations were made by COSATU, The Life Offices' Association of South Africa, South African Institute of Chartered Accountants and Spoor and Fischer Attorneys on the Draft Bill.

MINUTES
Mr K Louw from the South African Revenue Services (SARS) said that a few minor changes had been made to the Draft since the Committee meeting on Tuesday 14 September 1999. The following parties gave presentations to the Committee :
- COSATU
- South African Institute of Chartered Accountants,
- The Life Offices' Association of South Africa, and
- Spoor and Fischer Attorneys.

COSATU
Mr Coleman, Head of COSATU Parliamentary Office, gave the presentation on behalf of his organisation.

Mr Louw responded to issues raised in the COSATU presentation by saying that drafts to previous bills have been sent to NEDLAC but the response was that NEDLAC does not deal with technical issues and therefore no draft of this particular bill was sent to NEDLAC as it is also very technical.

Mr K Andrew (DP) said that in the COSATU presentation objections are made for the removal of VAT zero rating on frozen vegetables. He expressed the view that a considerable amount of canned food is consumed by people in the rural areas and not as much frozen vegetables.

Mr A Feinstein (ANC) asked SARS how they arrived at the position that frozen foods are not purchased by "the poor" and therefore consequently concluded that Vat zero-rating on these goods should be removed. Mr Louw responded that having received complaints from canned food producers an investigation was initiated. Investigations showed that there was definitely a prime price on frozen vegetables and the conclusion was that the poor do not use them.

Prof Turok (ANC) expressed the view that more consultation pertaining to this draft is necessary. He asked SARS whether they have more information than what is currently made available to MPs on taxation of companies.

SARS agreed that a lot more could be done in terms of consultation and an undertaking was made to approach NEDLAC. On the question of information, SARS said they are busy with a comprehensive study of taxation of companies and once completed a presentation will be made to the Committee.

On the COSATU presentation the Chairperson concluded that the issue is frozen food and asked that adecision on the exemption on frozen food be withheld for the time being. Mr Louw said that SARS wants to bring down the number of zero-ratings that do not directly benefit the poor.

South African Institute of Chartered Accountants
Mr B Croome, Chairperson of the Taxation Committee of the South African Institute of Chartered Accountants, gave the presentation.

Mr Louw's response to issues raised by Mr Croome was that progress has been made in deleting obsolete material in the definition of dividend.

The Life Offices' Association of South Africa
Mr T Hartwig, Convener, Mr A Meiring, Convener and Mr G Joubert, Acting Executive Director of The Life Offices' Association of South Africa (LOA) presented.

In response Mr Louw said that there are a number of uncomfortable issues raised by the LOA, which SARS finds difficult and to which it is very reluctant to concede. There might be an element of double taxation in transferring, but there are other issues agreed upon relating to double taxation. SARS is prepared to explore transitional arrangements, but as far as ratio and transfer is concerned, they feel very strongly about it.

The Chairperson said that in order to avoid problems pertaining to consultation, both parties (LOA and SARS) should meet and go into discussions around the transitional arrangements.

Spoor and Fischer Attorneys
Mr C Bull and Mr C Lavizzari presented the submission.

In response to the issue of awareness raised by Spoor and Fischer Attorneys, Mr Louw said that the draft was made available to the South African Law Society, as SARS does not communicate with individual law firms.

Furthermore some of the submissions made do corroborate the problems experienced by SARS, especially with the valuation of trademarks.

Mr Andrew (DP) asked Spoor and Fischer Attorneys whether trademarks depreciate in value and asked SARS why expenses in registration of trademarks are not deductible. Mr Bull said that trademarks do depreciate in value but its value is difficult to determine as it depends on the particular trademark.

Mr Louw responded that registration of trademarks is not an annual event and it is linked to capital that is why they are not tax-deductible.

The Chairperson suggested that SARS and Spoor and Fischer Attorneys should meet to discuss the submission made. Mr Bull said that he has no mandate and suggested that the Association of Property Rights should be approached for discussions. Mr Louw said that SARS is prepared to meet and does not object to the suggestion. It was agreed that the parties would meet.

The Chairperson said that several more organisations had shown interest in making presentations, but since some issues had been covered in the meeting held on Tuesday 14 September 1999, several withdrawals have been received. Since there were no further matters to discuss the meeting was adjourned.

Appendix 1:
South African Institute of Chartered Accountants Submission: Revenue Laws Amendment Bill

1. The South African Institute of Chartered Accountants Taxation Committee (SAICA) welcomes the opportunity to raise certain issues dealt with in the Revenue Laws Amendment Bill. It must be stated at the outset that the comments made herein have been raised with the South African Revenue Service (SARS) since the draft Legislation was submitted to SAICA on various dates.

2. Income Tax Act of 1962: Amendments

2.1. Buy-back of shares in a company

2.1.1. SAICA supports the amendments clarifying the position of Secondary Tax on Companies where a company repurchases its own shares from its shareholders. Where reserves are appropriated to purchase a company's own shares, the Secondary Tax on Companies should, in our opinion, become payable and the amendment is therefore supported.

2.1.2. The dividend definition is a highly complex one and covers some four pages of legislation. SARS is urged to review the definition with a view to making it more understandable. It is hoped that this will be done In the near future.

2.2. Income Tax -section 96

2.2.1.It has been proposed that section 9B(1) of the Act be amended to provide that

the taxpayer must have held the share prior to disposal as a listed share for a

continuous period of five years. The Explanatory Memorandum on this amendment

states;

"It has always been the practice of the Commissioner to apply section

9B in this manner and the amendment

2.2.2. It is submitted that by virtue of the fact that the Commissioner is seeking to amend the section along the lines proposed indicates that them was a lacuna in the Act and that shares held for a period of five years, even though not as a listed share for five years, could have been argued as falling within section 9B. It could happen that a taxpayer held shares in an unlisted company for four years, the company Is subsequently listed and after a further period of one year, the shares are disposed of after a total holding period of five yearn. in such a case it is submitted that a taxpayer could successfully argue that the disposal fails into that provisions of section 96. The amendment to section 96(1) should therefore only apply in respect of any share acquired on or after the date of promulgation of the Act. The Commissioner's practice in this regard is, with respect, irrelevant - what matters is what the legislation says and means.

2.3. Section 1O(1)(e) of the income Tax of 1962, as amended

2.3.1. The proposal to amend section 10(1)(e) of the Act must, in principle, be welcomed in that the anomaly that was in existence before, will now be removed by virtue of the fact that a section 21 company will now qualify for partial exemption from income tax. Previously this was not the case and the amendment will resolve this problem. SARS is also urged to proceed with the finalisation of the practice note dealing with the taxation of body corporates, share blocks end similar organisations.

2.3.2. Unfortunately the amendments do rot allow a loss on levies to reduce tax payable on investment income. SAICA does not agree with the amendments in this regard.

2.4. Section 11(gA) of the Act

2.4.1. The Commissioner SARS has proposed amendments dealing with the deductibility of expenditure on intellectual property and more particularly, expenditure incurred in the creation, production, registration or acquisition of trademarks,

      1. The 1999 Budget Review did not make any reference to the fact that section 11 (gA) of the Act was to be amended in the manner that SARS now proposes. It is submitted that prior notice of this amendment should have been given so that the implications thereof could have been property evaluated. The deduction was first allowed in 1967 and to summarily remove the deduction will act as a disincentive to expenditure on the development of trademarks. SARS is seeking to draw a clear distinction between the tax treatment of expenditure incurred on trade marks, copyrights, patents, designs and other intellectual properly.
      2. The amendment appears motivated by the fact that a number of transactions have taken place whereby businesses are disposed of with the selling price being allocated as to moveable assets, goodwill and intellectual property rights. Because of the current wording in the section it is possible to claim the deduction of expenditure in acquiring trade marks and indeed other intellectual property.

2.4.4. It is suggested that the tax treatment of intellectual property be looked at holistically and more carefully than merely removing the deductibility of expenditure incurred on trade marks.

2.4.5. SARS is therefore urged to review the tax treatment of intellectual property more fully than the amendments introduced at this stage both from a taxability and deductibility point of view.

2.5. Section 29A of the Act (Life Insurance industry)

2.5.1. The Minister indicated in this Budge: speech to Parliament that the manner of taxing life insurers was under review and the insertion of section 29A into the Act did not come as a surprise. SAICA. however, supports the continued use of the four funds basis on which to tax life insurers in South Africa.

2.5.2. Section 29(14) of the Act allows selling expenses to be claimed on a rolling average basis such that the taxpayer could claim the average of the current year and the previous four years selling expenses. At the commencement of operation of section 29A there will be a balance of selling expenditure that would not have been allowed as a deduction for tax purposes under section 21. Section 29A unfortunately does not cater for any transitional measures in this regard. It is therefore suggested that section 29A be amended to allow for the unclaimed portion of the selling expenses not allowed in the past to be claimed over a period of time in the future.

2.5.3. Section 29(6) requires the insurer to redetermine the prescribed value in relation to each of its policyholder funds as at the last day of such year. Section 29A(7) requires that a valuation be performed within a period of four months after the end of every year of assessment. Section 29A(15) requires the redetermination within a period of six months. It is submitted that the section should refer to the same period throughout and that to refer to different periods of four months and six months, is undesirable.

2.5.4. Section 64B requires to be amended to take account of the insertion of section 29A into the Act. In particular, section 64B(13)(a) and (b) require to be amended to refer to section 29A.

2.5.5. Section 29A refers to the so-called untaxed policyholder fund of the long-term assurer and this term is a misnomer when one has regard to the tax imposed on retirement funds, currently imposed at a rate of 25% on gross interest and net rentals derived by such policyholder funds albeit under a separate Act. The tax on retirement funds was introduced in 1996 at a rate of 17% on pension, provident and retirement annuity funds and the untaxed policyholder fund as an interim measure until the debate regarding the taxation of the retirement fund industry was completed. in view of the fact that the corporate tax rate is now 30% of taxable income, i.e. after expenses, the rate of 25% on gross interest and net rental income, is before many expenses, is disproportionately high. In addition, finality regarding the tax treatment of the pension fund industry is desirable so as to create certainty in this area. SAICA hopes that the tax uncertainty relating to the retirement fund industry will be finalised shortly.

2.6. Section 75A of the Act

2.6.1. MICA supports the amendment to section 75A(1) of the Act whereby the Commissioner may publish details of tax offenders for general information as opposed to only in the Gazette 2.6.2. SARS is urged and encouraged to utilise this provision so as to ensure increased compliance with the fiscal laws in South Africa.

2.7. Section 39 of Act 20 of 1994

In the Budget Review the Minister indicated that consideration would be given to extending the scope of the rationalisation provisions to unlisted companies. SAICA hopes that the strict requirements of the section will be relaxed to include unlisted groups thereby enabling such groups to rationalise their structures and reduce administrative costs. Having canvassed its members for an indication, the number of groups that would avail themselves of such an exemption and the number of companies that could be removed from the tax register are not insignificant.

3, Value-Added Tax Act, Act 89 of 1991

3.1. Section 23

The underlying rationale for imposing a sub-minimum of R20 000 of taxable supplies is understood but the concern that must be raised in this regard is the manner in which section 23(3)(d) of the proposed amendments will be enforced in practice. The areas where difficulties will arise relate to those businesses with a long lead time, particularly property developers, new mining ventures and similar operations. It is incumbent upon SARS to indicate exactly what it means by the wording used "can reasonably be expected to result in taxable supplies being made for consideration only after a period of time". It is essential that local Receivers of Revenue are properly advised how to enforce this amendment.

3.2. The decision to increase the registration threshold from R150 000 to R300 00 must be supported as this is the first time that the threshold has been reviewed since the Act was introduced in 1991. SARS is urged to adjust the threshold on a more regular basis.

4 Monetary limits in fiscal legislation

4.1. SARS is urged to review the monetary limits contained in fiscal legislation on a far more regular basis. Some amounts have not been reviewed for many years.

4.2. In particular, SARS should increase the limits in the VAT Act pertaining to the issue of abridged and other tax invoices.

5 Conclusion

5.1. SAICA would like to take this opportunity of thanking the Committee for affording it the opportunity to raise the above issues regarding the Revenue Laws Amendment Bill in this forum.

5.2. We would also like to place on record that SARS affords SAICA the opportunity to comment on the draft legislation and that many of the comments made by us are taken into account in finalising the drafting of fiscal legislation.

B J CROOME

Chairman: South African Institute of Chartered Accountants: Taxation Committee

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