Budget Review 2004: briefing by Treasury and SARS; Budget hearing: Organised Labour and Tax Experts

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Finance Standing Committee

22 February 2004
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

23 February 2004

Ms B Hogan (ANC, NA); Ms Q Mahlangu (ANC, NCOP); Mr N Nene (ANC, Joint Budget)

Relevant documents
South African Revenue Service presentation
National Treasury presentation
Federation of Unions of South Africa (Fedusa) submission
Gobodo Chartered Accountants submission
Prof Matthew Lester (Rhodes University) submission

SARS and the Treasury reviewed the budget in their presentations. Attention was given to the things that are going well and also the issues that are proving problematic. Special attention was given to the retirement fund and gold mining industries.

The Federation of Unions of South Africa's view of the budget was generally positive. Concerns were nevertheless raised over the inadequate health budget as well as the insufficient attention given to savings and the taxation on retirement funds.

The Gobodo Chartered Accountants submission provided an assessment of the Budget tax proposals, an outline of the compatibility of the tax system with the macro-economic framework and assessed the current tax system and economic growth by focusing on Black Economic Empowerment. Prof Lester of Rhodes University provided a review of the 2004 budget and past financial years, looking at recent South African tax collections and tax tables, tax savings, fiscal drag, tax thresholds, corporate tax collections and tax amnesty.

During the discussion Members asked whether Treasury would be reviewing the tax legislation applicable to the retirement fund industry in order to ensure greater levels of savings. Further clarity was sought on the tax measures in place for share ownership schemes, interest income exemptions and possible amnesty for BEE businesses. Also discussed was the need for data on the extent of the revenue that could be collected from the informal economy, the pros and cons of granting blanket amnesty and the possibility of granting such amnesty to BEE small businesses, the figure of R6bn for the retirement fund tax take and the reason for the delay in the future tax dispensation in that sector. Concern was raised that Capital Gains Tax would stifle redistribution and a progress report on the Strategic Investment Programme was requested.

Mr Franz Tomasek (Assistant General Manager: Legislation) and Mr Kosie Louw (Head: Law Administration) represented the SA Revenue Services. Mr Martin Grote (Chief Director: Tax Policy) Prof Keith Engel (Director: Tax Policy) and Mr Elias Masilela (Chief Director: Macroeconomic Policy Unit\ Acting Deputy Director-General) represented the Treasury.

SARS presentation
Mr Tomasek presented and his agenda had five main items:
· Revenue over the past ten years and tax relief for individuals from the three different income groups.
· Growth in revenue since 1994. Here, light was shed on the growth in personal income tax, corporate income tax, value-added tax and excise duties since 1994.
· The revenue budget of 2003/4. The main budget estimates and revenue outcomes for 2003/4 was covered.
· The revenue target for 2004/5 which roughly implies growth from R303.3 billion in 2003/4 to R333.7 billion in 2004/5.
· The 2004/5 budget tax issues. Here, he focused on the improvement and easing of compliance by listing several proposals (see document for details).

Treasury presentation
This presentation by Mr Martin Grote had six main points:
· The tax policy over the last ten years. Key elements were highlighted which included the issue of tax base broadening and tax to GDP ratio.
· The 2004/5 tax relief proposals
· Direct tax: transfer duties, share schemes, deferred payment schemes, government grants and stamp duties fell under this discussion.
· The agenda for 2004/5 regarding direct tax policy reform. The Mineral Royalty Bill was given special attention and the impact thereof was also discussed.
· Indirect tax changes which covered excises on tobacco products and alcoholic beverages as well as the Road Accident Fund levy and other issues.
· Finally, the enhancement of tax administration was discussed (see document for details).


Dr Woods (IFP) commented on the issue of revenue estimation. In previous years there had been overruns and therefore the problem of wrong estimations was ignored due to the focus on tax relief and other sorts of nice things. However, there are methodological questions that arise from it. He referred to Slide 11 where it listed taxes that had underachieved. He asked what had gone wrong with the tax on retirement funds. He also commented that one would expect customs duties to increase by way of increased imports due to the stronger Rand.

Mr Moloto (ANC) commented that in the Budget Review, SARS stated that they are concerned that at a certain level of increased excise duties on tobacco there might be an increase in the production and smuggling of counterfeit cigarettes. What level of taxation would that be? He also enquired what the issues and debates are concerning the gold mining industry.

Mr Grote explained the process of revenue estimation. There is a monthly meeting with the Reserve Bank, StatsSA, and SARS. The overruns have to be seen in the light of the development of SARS. As they got better staff and better systems, there were huge gains to be had. Now it becomes harder and harder. Company taxes are a battle to estimate world-wide. There are overestimation and underestimation models for companies. All their information is compared with that of SARS, StatsSA and the Reserve Bank. Secondary Tax on Companies (STC) is also difficult. There are no rules for boards to declare their dividends.

Mr Tomasek commented that on the customs duties there are two opposing forces to deal with. On the on hand you have a higher volume because the goods are cheaper and on the other side the value at which they are imported has significantly declined. As it is, the volumes did not increase enough to offset the valuation decrease. On smuggling, he commented that at the approximately 50% incidence of tax they are internationally competitive. If it were higher, they would be more concerned.

Mr Grote commented that there is an anomaly in how the current gold mining regime impacts on revenue take. Between 1992 and 2004 the total mining industry paid less tax than beer excise. It is a very complex industry. There is no common approach in the industry.

Ms Hogan asked whether monitoring mechanisms for tax incentives are in place.

Mr Grote replied that they have mechanisms but not to the perfection they would like to have them.

Mr Tarr (ANC) commented that it is hugely interesting how macroeconomic and fiscal policy impacts on revenue. He wondered about the level of communication between SARS, Reserve Bank, StatsSA and Treasury on issues such as inflation targeting.

Mr Grote replied that there are lots of discussions on the impact of macroeconomics on the fiscal framework.

Mr Masilela stated that their view is that inflation targeting is meant to have a medium to long term structural change in the features of the economy. On the fiscal side, they look at the economic impact that inflation will have and at the social impact it will have.

Dr Woods commented on the mining royalties issue. He said that it looks like the industry appreciates Treasury's stance and that all sides are hearing each other.

Mr Nguni (ANC) said it was estimated that in ten years' time, 10% of the economically active population will have contracted HIV/AIDS. What impact will it have on the revenue estimation?

Mr Louw replied that they have not done any specific calculations on this. SARS is currently building a model and they are very sensitive to the issue.

FEDUSA submission
Ms Gretchen Humphries (FEDUSA Parliamentary Officer) said that the Minister had succeeded in maintaining a fine balance between promoting growth and employment on the one hand and economic stability on the other. Growth and stability remain prerequisites for attracting much needed foreign investment. There was however concern about the slow pace of growth of the health budget which would make it impossible to achieve improvements in the health system laid out in the national anti-retroviral treatment plan. Concern was also raised over how little had been done in this year's budget to boost savings and address taxation on retirement funds. The tax-free portion of the lump-sum payout to workers going on retirement had not been adjusted in 15 years. Fedusa believed that the tax rate on rental and interest income should be scrapped in its entirety as it amounted to a double taxation of retirement funds

Dr Woods commented that unemployment is a crucial issue for the unions. He referred to the R15bn Public Works programmes mentioned in the Fedusa submission and asked how critically has Fedusa looked at the proposals for the R15bn Public Works schemes.

Mr Tarr asked about the capacity to implement the Public Works programmes. He wondered whether Fedusa has any ideas on how these programmes can be used to create long term employment versus short term employment.

Dr Rabie (NNP) asked for elaboration on the regulatory burdens for small business mentioned in the submission.

Ms Humphries replied that as part of the Growth and Development Summit (GDS) agreement there are specific tasks set out for government, labour and business as to what they should do to ensure long term employment. Skills training would be the appropriate mechanism where learnerships will be set up through the learnerships programme. These skills would lead to long term employment opportunities. The capacity to implement the Public Works programmes is being dealt with by addressing certain skills areas and performance management within the public service as a whole. There are obstacles in terms of regulatory burdens in the current process of starting a new business. Examples are registering as a taxpayer, dealing with local councils, the payment of levies and so on.

Ms Hogan commented on the debate about savings and the retirement fund industry, saying that one argument for looking at this area is to promote savings. She asked Treasury to respond.

Mr Grote replied that in an ideal situation where you increase your contractual savings and you have no subsequent borrowings and maintain a certain lifestyle, all is fine. Then you would be adding to your savings. However, if you are increasing borrowings to add to a certain lifestyle, you are not contributing to savings. The problem is that SA's taxation on retirement funds has regulatory requirements that are not water tight.

Mr Masilela added that it is very important to understand that retirement funding is not only a tax issue. It goes far beyond that. The problem starts much earlier when trustees decide what sort of investment vehicles they are going to use. Therefore the training of trustees is very important for the correct management of these funds. This is a key issue for the industry.

Afternoon session
Gobodo Chartered Accountants submission
Mr Pagamile Mainganye, Director, presented the submission (document attached) which dealt the review of structured finance transactions, stamp duty and transfer duty, relief provided to share ownership schemes, increase in the interest income exemption, allocations to finance Black Economic Empowerment (BEE), the tax system and economic growth, the agricultural and manufacturing sector and the compatibility of the South African tax system with its macro-economic framework.

The submission also dealt with taxes pertaining to the mining industry and recommended that BEE development be considered when reviewing the tax structure pertaining to the mining industry, and proposed that a differential royalty structure be implemented in these cases in which a royalty agreement existed between Southern African nations and mining companies. Gobodo recommended that a percentage of royalties collected be retained by the communities surrounding the mine so as to assist in the development of those communities, and also recommended that the payment of royalties to a newly-established BEE mining company be deferred until that company was operationally viable.

Prof Matthew Lester (Rhodes University) submission
Prof Lester stated that the 2004/2005 Budget was one of the great achievements of the last ten years, but stated that a budget could not be viewed in isolation but instead as part of a process. In the last few years South Africans have become used to the idea of "a lot of extra money lying around when it came to budget time". He stated that this year for the first time this was not the case, and it was the first time in which government had to scratch for money. He then proceeded with his submission (document attached) which outlined his impressions on the Budget.

The Chair informed Prof Lester that the Committee had been discussing whether the review of tax legislation in the retirement fund industry would assist in contributing to greater savings, and asked Prof Lester to comment on that.

Prof Lester responded that in the euphoria of the first ten years of the new South Africa, no one had done any saving, and had just been spending because South Africans became used to new products and new ideas. It would great if South Africans could save what some families spent on cellphones. He stated that an entire education programme was needed as well as a focal point, because a complete re-hash of retirement planning would get people interested in this aspect. At the moment South Africans were ignorant. One of the great things about Capital Gains Tax (CGT), Retirement Benefit Tax (RBT) or amnesty is that it has made South Africans take an interest in their money. This was important because if this were not done South Africa would be faced with an increasing number of people who could have provided for themselves but were instead dependent on the state, but they did not know where to start.

The problem was that most of them were only starting to plan when they were between the ages of 55 and 60 years. This meant that in responsible planning terms with could not be based on equity, there was insufficient time to develop a sound plan and the end result was a half-baked product. He stated that an awareness programme that was driven by government was needed, and it must impress upon those South Africans with their own income that they must look after themselves and plan wisely. This was vital.

Dr G Woods (IFP) [PC Finance] stated that the Gobodo presentation raised a number of interesting points. He requested SARS and Treasury to respond to the points made with regard to share ownership schemes, interest income exemptions, BEE and also with regard to small businesses.

Mr Kosie Louw, SARS General Manager: Law Administration, replied that some of these ideas would have to be taken back to SARS for consideration. With regard to the employee share ownership scheme it might be difficult to link it to low income earners alone, and instead a definition of "previously disadvantaged individuals" should be sought. This was quite a challenge and it would have to be considered further by SARS. He stated that these were not the only conditions prescribed by SARS as, apart from the condition that it should only be available to low income earners, SARS was of the view that a cap should also be placed on the amount retrievable and thus only a fringe benefit up to a certain value would be exempted. A further condition was that the shares would have to be held for a lengthy period, although the precise length of the period was not yet decided. This was important because if such a condition was not incorporated, South Africans could simply sell the shares off immediately and convert it into liquid cash. This would then defeat the initial intention of this measure.

The point raised by the Gobodo presentation that any gain on shares disposed of should not be subject to CGT, but rather that there should be a deferral was also interesting. He stated that it should be borne in mind that a deferral was already provided for. The fringe benefit should actually be taxed at 100% and the idea is that the shares would not be taxes when they were granted, and this was thus an immediately deferral. Once the shares were finally sold and they were of a capital nature, CGT should then be paid on it. The effective CGT rate was very low at this stage, and for individuals it was only 10%, and individuals would then in any event reap the benefit of no tax when the shares were in fact allocated, and once they were sold eventually CGT at a very low rate would have to be paid.

With regard to the increase in income exemption, Mr Frans Tomasek, SARS Assistant General Manager: Law Administration, responded that this was exactly what the tax free threshold which currently sat at R32 222 achieved. Typically persons who engaged in the informal sector would not be operating through the medium of a close corporation or a company but would instead be conducting business in their own names, and the first R32 222 would be exempt from tax. They already thus had a benefit along those lines.

Mr Mainganye stated that the exemption actually catered for the taxpayers who were trading in their own names, as referred to by Mr Tomasek. He stated that he could not find any fault in providing the same incentives for a small business or for a taxpayer who was trading through a company or close corporation. Here the first R11 000 of his profits could be exempted from tax.

Mr Tomasek replied that with a little tax planning that person could do precisely that: they could simply pay themselves a salary of R32 222 out of the company, which would then be tax free. This was thus possible.

Mr Mainganye agreed, but stated that this should be a direct incentive initially as a form of encouragement.

Mr Tomasek responded that the difficulty of course was that a close corporation and an individual were two different legal entities. Thus if both the company and the individual were granted a tax free amount, two sets of tax free amounts would be available. This then immediately created an incentive to establish a close corporation. He stated that this was not necessarily a bad thing, but SARS already provided South Africans with an incentive to create a close corporation, through the lower small business corporation rate of 15% up to the first R150 000. Thus at the moment the potential for a small business that wished to formalise in order to reduce the tax bill was certainly there, because all the classic tax strategies involving a bit of income splitting by paying oneself a salary and then having some of that amount taxed within the company were available at that end of the market. This could even be more attractive to a small business corporation because of the low starting rate.

Mr Martin Grote, Treasury Chief Director: Tax Policy, stated that he had read the Gobodo presentation with great interest, and it was clear that the commentators each had their own paradigms. The Gobodo presentation was proceeding from the paradigm that target incentives could be used to fine tune the economy and, secondly, that a relocation of incentives would favour SMMEs (as compared to large businesses) to a greater extent than was previously the case. Treasury's tax paradigm however needed to be put into perspective which, together with SARS, provided this huge tax relief benefit that was adequately expressed earlier by Prof Lester. It was based on the paradigm which sought to rid the South African revenue system of tax incentives, to broaden the base and reduce the tax rates. This was successful, and a return to a system which provided a multiplicity of tax incentives was thus cautioned against.

Having said that, there was some work to be done by looking very close at big business incentives, and to examine whether they have in fact created jobs. He reminded Members that the Strategic Investment Programme (SIP) was a R3bn revenue forgone programme with tax deductions in excess of R10bn, but has to date only created 3 402 direct jobs and apparently indirect jobs of 75 000. The creation of the jobs thus came at a major cost. He stated that there was a serious rethink between government, the Department of Trade and Industry and National Treasury to consider whether another incentive could be added, which would be based on the service industry as well as small business. This could be considered further, but tax incentives should still be used sparingly.

With regard to the tax amnesty proposal, Mr Grote stated that the precise nature of the amnesty being referred to must be clarified, because there were many amnesties available. Treasury was however very much concerned by amnesty per se. Treasury understood the need for amnesty for exchange control purposes because that served another purpose, but even in that instance a huge amount of staff were taken out of their normal routine of generating amnesty. Worldwide experience has shown that the announcement of amnesty prevented the revenue collection service from moving on its plateau of revenue collection, but instead a dip was exhibited. This was because resources were taken out into the amnesty effort, which acted as a new type of legislation. The revenue collection service then typically struggled to return to that previous level. Amnesty should thus not always be viewed as a short stop-gap which could be used to pull up the revenue gap.

SARS' administrative efforts to help SMMEs was aimed at easing their compliance burden with regard to service offices. It sought to maintain a constant presence and to roll out that service. He stated that SARS' service monitoring office allowed small businesses to lodge a complaint at minimal cost if they felt they were not treated properly in terms of tax regulations, and they did thus not need to resort to a legal office for relief. The dispute resolution process employed by SARS also served to expedite dispute resolution processes, and it has also gone to great lengths to issue tax guidelines for different categories of taxpayers. He proposed that these measures, linked with the tax policy changes, provided many incentives for small businesses. These included a corporate rate of 15% for a turnover of R5m, there was a CGT exemption for the disposal of a small business in terms of the taxpayer received a one-time exclusion for the first R500 000 capital gains of the small business. He stated that he was of the view that this was a huge benefit.

Treasury also announced the starting expense doubling-up which allowed small businesses to deduct start-up expense of up to R20 000, and could then double that. A deferral for business re-investment was also provided, which granted the taxpayer a deferral period if he sold off his SMME and re-invested. There was thus a cash basis for investors, and there were thus a host of interventions available at the moment which did target SMMEs.

He stated that it should be taken back to their political masters that, at a future re-negotiation of SIP, the entire programme needed a rethink based on just how labour intensive the entire process was.

The Chair agreed with Mr Grote and stated that the Committee was also not of the view that endless tax incentives for SMMEs should be provided. The problem was however that small businesses were really struggling to become tax compliant, and it was a constant struggle. She suggested that Prof Lester and Mr Mainganye were referring to those small businesses who employed a very small number of people but who just did not know how to get into the revenue collection system, or even how to become registered as taxpayers. She asked SARS to indicate whether it was of the view that this was a problem.

Mr Mainganye responded that it was precisely these kinds of taxpayers that he was referring to. He stated that her understood the current incentives that were referred to by Mr Grote, but the point was that the small companies who had substantial assets were never compliant. This was due either to ignorance or to the history of revenue collection and the tax system in South Africa. They were not compliant because they purposefully sought to evade paying tax, but instead they did not come forward because when they finally came forward they were already R10m in debt because they did not pay tax since the business was established. Mr Mainganye stated that it was thee kinds of taxpayers that needed amnesty, and a mechanism should be devised which allowed them to come back into the system.

Prof Lester stated that the offshore amnesty really yielded benefits with the introduction of the Financial Intelligence Centre Act, because South Africans realised that they had to clean up their tax status. The targets here were quite different because, if a tax professional was trying to assist the small business and attempting to register it as a taxpayer only for that person to then pull out, this would infringe the Financial Intelligence Centre Act as well as the Prevention of Organized Crime Act because it was outright theft. Prof Lester stated that the minute the average South African was informed of these possible sanctions "that's it" because they would never come forward to be registered. They would never put their heads above water unless there was an absolutely defined way in which the matter could be resolved. He stated that this was the response he received while conducting numerous seminars throughout the country on this matter.

Ms R Taljaard (DA) [PC Finance] proposed that it would be beneficial to consider bringing the informal economy into the tax base as part of the tax gap project, and thus would thus involve looking at the tax gap more holistically. She stated that data was needed on the exact extent of the revenue available for collection in the informal economy, and how it could be incorporated into the tax gap project in a much more active manner than was currently the case.

Mr Louw replied that this issue had many aspects, and it also created difficult for SARS. In the first instance it created problems in getting such persons into the tax net. At the moment the only framework within which SARS could operate was to send out a message to South Africans that, if they came forward, SARS would be lenient as far as the penalties to be imposed were concerned. This was really the only discretion granted to SARS by the existing legislative framework. If cases were presented which involved a rather large capital bill, SARS could possibly arrange for payment over a period of time.

Secondly was the issue that related to incentives, and this addressed rather adequately by Mr Grote. One of the major issues was not so much the tax incentive issues, but rather the administration and compliance issues regarding the small businesses. It was for this reason that the initiative was taken to announce the creation of the Task Team, which was tasked with considering measures to assist with the administration aspects. Possible solutions could be the introduction of a "one-stop service shop" which people could use to register themselves for all the different kinds of taxes. It could also be decided that small businesses would be required to file less often than others.

SARS had already conducted some initiatives with regard to the requisite forms that needed to be completed by the small businesses, and it had already consolidated various different tax return forms into a single form. Booklets and guides on small businesses were also released to explain not only the tax concepts, but also accounting concepts and procedures. Taxation was not the only issue here because small businesses had to register with other authorities as well, and from this point of view it then became difficult for SARS to co-ordinate all this because not everything was under SARS' control.

Prof Keith Engel, Treasury Director: Legislative Oversight and Policy Co-ordination, stated that there were always discussions on general amnesties, and stated that the primary reason why Treasury limited the last amnesty to a foreign amnesty was because of the unique circumstances that existed at the time. He stated that general amnesties must be handled very carefully, because it could open the floodgates to one amnesty after another. Treasury decided to grant the last foreign amnesty because it was of the view that that particular amnesty was so unique that it would not result in more and more amnesties afterwards.

He reminded Members that the foreign amnesty was a unique instance because the foreign income was being taxed for the first time, people felt better about the new South Africa and wanted to bring money home and many people found that the overseas investments were no longer nearly as attractive as they promised to be. They also found that in the business of cheating government their own advisors were cheating them, and that they wanted some weak control over their money.

He stated that the problem with the kind of amnesty referred to today was that, if it was granted today,. the specific circumstances in its case could very well present themselves again in a few years time. This would then result in more and more amnesties, and this would culminate in the eventual undermining of the taxpayer''s morality. Treasury was very sympathetic to this problem and a solution must be arrived at.

The real concern was the lower end of the market, which involved the small businesses with only one employee. Incentives would not be the biggest issue here, whereas efforts should instead be focused to attempt to formalise that borderline level of the economy which fell in the R50 000 to R100 000 range. He stated that he would be curious about more information on that level of the economy, where the incentives were targeted and not "dead weight loss". Prof Engel stated that one of the concerns he had raised with this was that Treasury would then seem to be giving away revenue without gaining anything. Government would first have to understand the profile of this sector before it proceeded any further, so that Treasury's efforts were effective. Hopefully the Task Team referred to by Mr Louw would achieve this, so that measures that were much more meaningful than just random incentives could be implemented.

Mr Grote added that Treasury had conducted an internal study in 2001on SMMEs in the form of a mini-survey. The companies interviewed stated that they did not have a problem with the existing tax legislation per se, but they did have a problem with the regulatory framework in South Africa and the multitude of tax forms which were not synchornised. They stated that this was the largest compliance burden. He stated that he hoped the Task Team would consider this and propose means by which the various forms could be consolidated into a single form.

He stated that he agreed with Prof Engel that a more individual approach to amnesty should be adopted by SARS, and dealing with them in a lax manner would be far more effective than introducing another amnesty. International norms were very clear on this: if amnesty after amnesty were granted, taxpayer morale will definitely drop. This was the big risk that faced Treasury.

Prof Lester stated that most of these SMMEs were established in the past as a way of dealing in areas in which there were no services, and they thus could not register. They were now faced with a different dilemma because their problem had grown so big that they cannot register.

The Chair suggested that the extent of the problem was not clear at all, as suggested earlier by Ms Taljaard. She stated that Mr Mainganye who dealt with this on a regular basis would be a useful source of information.

Ms Taljaard asked Treasury to indicate just how much of the R6bn on retirement tax take was attributable to the delay on future tax dispensation in this area, how much was attributable to the comprehensive social security concern and how much attributable to the sheer size of the revenue take.

Mr Grote responded that the reason for the delay was a combination of all the factors mentioned by Ms Taljaard. He stated that as he had mentioned earlier at the 2001 conference on the retirement fund tax, Treasury tried to focus merely on the third pillar and to design a tax efficient measure given the resource constraints. Treasury thus decided on a revenue-neutral position. Mr Grote stated that the figure of R6bn was important and it would not be easy to come by at the moment, and stated that the 2004 was probably the most difficult budget with which to devise a well-balanced R6bn relief package.

He stated that this was thus one of the areas in which Treasury was concerned that it needed to find a substitute for this amount, especially as the pressures were building up at local and provincial government level. This is where the big needs were coming forward, and there were not yet any provincial or local government taxes to speak of.

Secondly, in the absence of a broad-based social security system Treasury was facing the individual crises of people within the system, who had accumulated some resources and now needed to access those resources "just to get over this bad hump". He stated that unless these matters were comprehensively addressed Treasury was loathe to come up with a tax system which it would have to revisit again.

Thirdly, Treasury was currently engaged in a process by which, together with SARS and the Financial Services Board (FSB), it would revisit the pension fund regulations which impacted on the manner by which individuals were able to transfer their benefits from one fund to another without losing the benefits. Limits also needed to be set on the size of the lumpsome that could be withdrawn from the fund so that it did not detrimentally affect the long-term sustainability of the fund, because the individual still hoped to representative rewards from that same fund when he reached the retirement age.

Fourthly, Treasury also had a problem with data because it currently had insufficient data that was needed to model for this. Treasury did not have a proper profile of the kinds of individuals involved here, but its discussions with the retirement industry illustrated that there appeared to be much inequity among the low income earners viz a viz the high income earners. Treasury wanted to address this inequality, and it was not simply that Treasury had a hidden agenda in refusing to address this as it just lacked the data.

Mr Grote stated that Treasury also had human resource constraints as it simply did not have sufficient resources to throw at a problem, and there were "simply far too many agendas out there".

Ms Taljaard stated that CGT was often seen as a tax that had a a redistributive component, yet the presentation raised concern with CGT in fact holding up redistributive measures in the economy. She asked Mr Mainganye to comment on this.

Mr Mainganye replied that by the mere implication that there was CGT when assets were sold, it might deter an individual from selling it off where he would have sold normally. Secondly, CGT applied the same regardless, and Gobodo Chartered Accountants would thus submit that the type of assets that were being sold as well as the details of the transaction really needed to be examined. He stated that certain BEE transactions involved the transfer of assets alone, and did not in fact seek to broaden the base of economic ownership. If the transaction involved management billions of Rands these measures could deter the seller from effecting the sale, and this could then impede the redistribution of those assets.

Ms Taljaard asked whether a report had been released on just how effective the SIP had been. She stated that Minister Manuel had mentioned during the hearing on 19 February 2004 that this would involve Koega Development, and requested Treasury to indicate whether any other players would be involved.

The Chair stated that Mr Grote had provided details on SIP, but perhaps he would repeat his input

Mr Grote responded that Section 12G required the Minister of Trade and Industry to report annually to Parliament on the success of SIP, and stated that he was aware that that Department had already drafted that report. He was however not certain when that report would be released by that Department.

The Chair requested Prof Lester to comment on his experiences with tax amnesty.

Prof Lester replied that it was an extraordinary process in that it took quite a long time for South Africans to accept it. But at the end of the day the biggest benefit from the process is probably not financial but purely that people "sleep more comfortably at night", and that government can be seen to have the capacity to work a problem out. This was a different tax environment to the one which existed in previous years, because offences were created and strict penalties were now imposed on transgressors. These measures have been amazingly successful, and all involved should be congratulated for hanging in there and making it work.

The meeting was adjourned.


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