2022 Draft Tax Bills: National Treasury & SARS briefing

Meeting report

The Chairperson welcomed the Select Committee on Finance to a meeting to consider the 2022 draft Tax Bills presented by National Treasury (NT) and the South African Revenue Service (SARS).

2022 Draft Tax Bills

National Treasury Overview

Ms Yanga Mputa, Chief Director: Tax Policy, NT, introduced the presentation, which included the proposed changes based on public submissions received. The Bills covered in the meeting consisted of the following 2022 Bills:

·         Draft Rates and Monetary Amounts and Amendments of Revenue Laws Bill (Rates Bill);

·         Draft Revenue Laws Amendment Bill;

·         Draft Taxation Laws Amendment Bill (TLAB);

·         Draft Tax Administration Laws Amendment Bill (TALAB);

The NT had facilitated public submissions through workshops with stakeholders, written submissions and public hearings before drafting a response document.

2022 Draft Rates Bill

Mr Mpho Legote, Director: VAT, Excise Duties and Subnational Taxes, NT, took Members through the excise adjustments made in the 2022 financial year budget. 

Increase in excise duties on alcohol and tobacco

There was a general increase in the excise duty on alcohol and tobacco by between 4.5 and 6.5%. NT noted that in the previous years, there had been an 8% increase across all excisable products.

Temporary relief on fuel levy

Mr Chris Axelson, Chief Director: Economic Tax Analysis, NT, said that some changes were made to the general fuel levy after the budget, which were included in the Rates Bill. He explained that this was to try to alleviate some of the price pressures from the very large increases in petrol and diesel, resulting from the Russia-Ukraine conflict.

NT provided for four months of general fuel levy relief, after which there was a reduction in oil prices.

Delaying the increase to the Health Promotion Levy by one year

Mr Legote said that in the 2022 budget, the Minister of Finance had announced an inflationary adjustment to the Health Promotion Levy. After consultation with the Minister of Trade, Industry and Competition and the Minister of Agriculture, the effective date has been changed to 1 April 2023.

2022 Draft Revenue Laws Amendment Bill:

Mr Basil Maseko, Director: Savings, NT, said that the two-pot system had been created to enable fund holders to have access to their retirement savings. This had come as a result of the impact of COVID, when many people had been retrenched.

This system applied to all types of funds. Within this system, the structure of the retirement system would remain the same in that contributions and growth would be exempt, and tax would be payable only when a withdrawal was made. The two-pot retirement system was set to start from March 2023.

(Please see slides 20 –22 on the savings pot, retirement pot and vested pot of the two-pot retirement system).

NT spoke on the proposed changes to the two-pot retirement system after public and industry consultation. The proposed changes included:

-       Postponement of the implementation date to 1 March 2024.

-       Seeding capital under the two-pot system.

-       Participation in the two-pot retirement system was mandatory for all funds, and funds must provide a savings pot.

-       Application of the two-pot retirement system to defined benefit funds.

-       Withdrawals permitted from the two-pot retirement system during retrenchments.

-       Clarification that the pots were components within the relevant fund.

-       Reflection of the intention that the R165 000 de minimis apply on a cumulative basis to amounts subject to annuitisation.

-       Impact of the two-pot system on Section 37D deductions contemplated in the Pension Funds Act.

-       Application of the two-pot retirement system on “legacy retirement annuity products.”

-       Participation of provident fund members over the age of 55 as of 1 March 2021 in the two-pot retirement system.

-       Deduction of costs under the two-pot system.

-       12-month withdrawal period from the savings pot.

-       R2 000 minimum withdrawal amount from the savings pot.

-       Commutation of small balances from the savings pot.

2022 Draft TLAB: Electronic nicotine and non-nicotine delivery system

Mr Legote said that the Minister of Finance had announced government’s intention to start taxing electronic nicotine and non-nicotine delivery systems. In 2021NT published a discussion paper outlining the policy design for taxing electronic nicotine and non-nicotine delivery system.

The NT had initially planned to apply an excise tax on the nicotine content and liquid solution to the electronic nicotine and non-nicotine delivery system. During the public consultation processes, stakeholders highlighted that the system would be quite complex to administer.

In 2022, the Minister announced a flat rate of R2.90 per millilitre of nicotine solutions. The Minister, who was advised by SARS, said that the effective date for this would be June 2023, to ensure the administration systems were put in place.

2022 Draft TLAB: Carbon Tax

Ms Sharlin Hemraj, Senior Economist, NT, briefed Members on the background to the Carbon Tax and its design structure. On the Carbon Tax design structure, the current rate of tax was at R144 per ton of carbon dioxide equivalents. The tax was designed in a way to provide transitional support measures and assistance to industries as they transitioned their activities.

Allowances ranged from 60% to 95%, covering combustion, fugitive and industrial process emissions. Process emissions from the iron, steel, cement and chemicals sectors qualified for a maximum tax-free allowance of 95%, while electricity qualified for a 90% allowance. This took into account the difficulty in reducing emissions because they were intrinsic to specific processes.

The effective tax rate ranged from R6 to R50. A key part of the design of the tax was that it included revenue recycling measures to cushion the impact on households and energy-intensive businesses.

NT said that there were two incentives in place. These included the Energy Efficient Tax incentive, and electricity generators like Eskom were allowed to offset electricity generation levies against the Carbon Tax, including purchases of renewable energy.

On Carbon Tax rates, Ms Hemraj said that public comments had expressed concerns about the potential volatility of the rand-dollar exchange rate and the potential for higher tax rates being implemented. It was proposed that Carbon Tax rates be reflected in rands.

NT had said it would use the average exchange rates published by the South African Reserve Bank (SARB) from August 2021 to July 2022. It proposed periodic adjustments to these rates to take into account global carbon pricing developments.

Headline rates ranged from R159 to R308 per ton carbon dioxide equivalent in 2026, and R462 per ton carbon dioxide equivalent in 2030. The effective rates were much lower because of tax-free allowances and other applicable deductions.

It was also proposed that the TLAB extend the electricity price neutrality deduction to include commercial, institutional and agricultural emission activities and the treatment of similar activities. It was proposed that the request to extend the sequestration deduction beyond the paper, pulp and print sectors should include sawmilling activities. Therefore, it was proposed that the carbon sequestration deduction be extended to include activities for wood and wood products.

NT said that concerns around the potential abuse of this system had been reduced because there were specific guidelines developed by the Department of Forestry, Fisheries and the Environment (DFFE) around verifying these issues. It reported that the industry was working on a specific protocol to register some of these timber producers and verifying the emission savings for those activities.

Ms Mputa said the Carbon Tax was one of the biggest tax proposals after the two-pot system. NT had tried to accommodate as many submissions as possible.

Income Tax

Individuals, savings and employment

Mr Zalisile Ndzala, Deputy Director: Legal Tax Design, NT, said that the proposed amendments involved catering for instances where a performance-based payment was dependent on a suspensive condition by the employee in the informal sector. Another proposed amendment involved tax annual exclusions being based on a 12-month basis, rather than an apportioned number of days.

The final key amendment concerned reducing the de minimis amount while maintaining flexibility and clarifying that a de minimis did not apply when an individual transferred 100% of the retirement amount.

General Business Tax

Ms Mputa highlighted that two proposals had had their effective date postponed during the 2021 Tax Bills review. NT had postponed clarifying the definition of “contributed tax capital” (CTC) to 1 January 2023. Based on the proposals, a solution had been found to address the issues that impacted general business.

On the definition of collateral arrangements, NT said that around five meetings were held with taxpayers. However, it felt that no changes were required to be made in the legislation. It also had meetings with taxpayers and the SARB regarding High-Quality Liquid Assets (HQLA). The changes from 2021 would continue, with the effective date coming into effect on 1 January 2023.  

Mr Arno Kotze, Director: Legal Tax Design, NT, said after public consultation, it had been agreed that there must be equal distribution of CTC to all shareholders within a clause. NT would revert back to a system to identify specific transactions and distributions. This would assist companies with legitimate buy-backs or the redemption of shares.

Impact of IFRS17 insurance contracts on the taxation of insurers

Ms Mputa said that changes had been made to long and short-term insurers due to changes to the International Financial Reporting Standards (IFRS) through the introduction of IFRS17. NT noted that four meetings had been held with taxpayers and individual insurance companies. It highlighted that the impact of short-term insurers differed from the impact of long-term insurers.

Short-term insurers had said that they had minimal impact, but long-term insurers were still receiving help stemming from a transitional period in 2015. One insurer, in particular, noted a big impact on their business.

Proposed changes included a short-term insurer phase-in period of three years, while long-term insurers had a six-year period. The long-term phasing-in period should be monitored during the six years, and could be extended if necessary.

Mr Nhlanhla Vilakazi, Director: Supply Chain Management, NT, said that IFRS17 created a restatement of liabilities for long-term and short-term insurers. If IFRS17 exceeded the amount determined for liabilities under IFRS4, there would be a cash impact, which insurers would have to pay.

On short-term insurers, NT said that after consultation, it would take into account the terminology from IFRS17 to be incorporated into the Income Tax Act. It must also consider some of the changes which had emanated from this, which included that certain disclosure requirements under IFRS17 which were not mentioned under IFRS4 had to be catered for.

Other proposed amendments, included that the phasing-in amount, would be changed to exclude premium debtors and policy loans.

Ms Mputa said that the impact of IFRS on income tax was the most substantial change based on the phasing-in period.

2022 Draft TALAB

Customs and Excise Act

Mr Franz Tomasek, Head: Legislative Policy Tax, Customs and Excise, SARS, said that it was proposed that SARS clarify what constituted an invoice before the relevant amendment was made.

On advanced rulings that SARS said that they were committed to through international agreements, this would be in place by 2028. Another change affected importers who had made proper arrangements with SARS for proper payment or submission to obtain their ruling, despite outstanding debts.

Tax Administration Act

To combat the abuse of the tax compliance system, it was proposed that SARS should be allowed to revoke access if there was a material misrepresentation, non-disclosure or potential fraud involved. SARS must provide taxpayers ten days' notice of the intention to revoke access to tax clearance status. This was intended to provide taxpayers with time to prove that they were compliant and returns would be justified.

SARS also defined when a person qualified as a new taxpayer. Other proposed changes included that the effective date was 1 September 2022, and prevention of the doubling up on tax penalties.

Discussion

Mr M Moletsane (EFF, Free State) referred to illicit trading in tobacco and alcohol, and asked whether government had managed to reduce or stop this illegal trade. He asked this on the basis that these dealers were not adding to the tax coffers.

Mr D Ryder (DA, Gauteng) asked for more information regarding electronic nicotine and non-nicotine delivery systems. On the basis of electronic non-nicotine delivery systems being a healthier alternative for ex-smokers, he asked whether nicotine and non-nicotine products would be taxed equally.   

He felt variable remuneration was an important issue which required great focus. When the tax regime for insurance companies changed, big companies would have bigger legal teams. He drew the distinction between beneficiaries of variable remuneration which would not have the same backing or ability to participate in parliamentary processes. He asked for further information on this to ensure that the people seeking remuneration benefited.

He asked whether there had been consultation with the South African Institute of Chartered Accountants (SAICA) regarding implementing the IFRS17 amendments on insurance from an accounting standards point of view. International norms and standards applied to the definition of an invoice, and he asked whether there were international trade agreements which determined what an invoice was.

Advance rulings should be welcomed, as they provide certainty. Mr Ryder was surprised that there was negative feedback regarding this, though he understood that it was about being able to access it properly.

Mr W Aucamp (DA, Northern Cape) said he understood that fuel levies were being increased due to the Russia-Ukraine conflict, when they had been waived for a period. He asked whether many of the levies were still necessary.

He said that the levy system applied to fuel should be reconsidered to eliminate taxes levied on every litre of fuel that was already covered, or could be covered in other ways. He used the example of the Road Accident Fund (RAF) contributions from private insurance, and the effect of deregulation of the industry on cost of fuel. He asked NT what their thoughts were on this.

On the two-pot retirement system, he asked what the reason was for implementing it in 2024. He also asked NT what was meant by "legacy retirement annuity funds."

Concerning the Carbon Tax and incentives provisioned to Eskom, he asked what the incentives or tax-deductible allowances given to private individuals were. Could a regular person put a solar energy system in their home and receive a tax-deductible allowance?

Referring to farm murders and crimes in rural, agricultural areas, he acknowledged that the police could not cope with the crime in these areas. He asked whether the costs placed on people in these areas to keep themselves safe could potentially be deductible, in instances where the police were not able to assist. He clarified that this would be for everyone in these areas, not just farmers.

Ms D Mahlangu (ANC, Mpumalanga) asked what the duration would be for temporary tax relief. She added that Members must also familiarise themselves with the technical complexities of these amendments.

On incentives and pensions, she said that determining beneficiaries and the period of deductions had raised concerns for her.

The Chairperson asked if NT was introducing the TLAB Bill with the February 2023 budget, dealing specifically with the retirement issue.

Ms Mputa said that the Chairperson understood correctly.

The Chairperson asked whether all the other issues, as amended through the Standing Committee on Finance (SCoF) process, would be processed, except the section regarding retirement savings.

Ms Mputa confirmed that the only exception was the two-pot retirement system, as it had a separate Bill.

The Chairperson said that it was a good idea that NT was engaging with unions and other stakeholders on account of the magnitude of the Bill and the unforeseen consequences. He asked whether the unions would be happy with the impact of postponing the two-pot system by a year, considering the global consequences of the Russia-Ukraine conflict.

He asked if the vested pot consisted of everything a person had until now. Must the savings pot have a minimum amount in it, and would the retirement pot be the leftover amount available once a person retires?

Ms Mputa said that the Chairperson was correct in his understanding.

The Chairperson asked whether unions were relatively united in their approach or were there slight divisions they had sorted out amongst themselves.

Ms Mputa said that unions were united in their approach. Discussions had been held with the National Economic Development and Labour Council (NEDLAC) and Mr Matthew Parks, the Parliamentary Coordinator of the Congress of South African Trade Unions, who had been instrumental in providing submissions. There had been some concerns regarding seeding, though that was later resolved.

National Treasury's response

Mr Legote said that government acknowledged and felt concerned regarding the illicit trade of tobacco products and alcoholic beverages problem. This was because it undermined health and the excise policy objectives. However, it noted the significant work conducted by SARS on clamping down on illicit trade on excisable products. This work was coordinated with other law enforcement agencies with the established group in SARS that dealt with the illicit economy. As part of its strategic objectives, SARS aimed to make illicit trade difficult to engage in.

On electronic nicotine and non-nicotine delivery systems, NT acknowledged the claims put forward that vaping products were tobacco cessation products. Currently, these products are not recognised as tobacco cessation products. Unlike existing tobacco cessation products which had been thoroughly tested and authorised, vaping products had not undergone a similar process. The World Health Organisation (WHO), the U.S Food and Drug Administration and a report from the United States Surgeon General in 2020, all did not recognise them as tobacco cessation products.

Mr Ndzala responded on variable remuneration, and said that an amount could not be taxed if the employee was not entitled to it, especially if payment was contingent on a future event happening. He clarified that the future event would have to occur first before the tax could be imposed on the employee.

All employees receiving performance-based payments would not be taxed on the accrual of an entitlement in instances where there was no entitlement at that point. Only if an employee's work had been looked at and reviewed as satisfactory for an entitlement would tax be imposed at this point, as it would be seen as final. 

Ms Mputa said that SAICA had been present for the consultation process. Many comments have been received from the Association for Savings and Investment South Africa (ASISA) and the South African Insurance Association (SAIA). These big insurance companies had chartered accountants in their tax departments. He felt that this consultation had been sufficient. SAICA received most of their comments from insurance companies or tax practitioners.

Mr Vilakazi said that generally, auditors such as Price Waterhouse Coopers (PWC) and KPMG had been involved. He also confirmed SAICA's attendance.

Referring to the TLAB, Mr Tomasek said that the difficulty in defining an invoice was due to it being a commercial document. This posed difficulty in terms of how much detail SARS was able to obtain to determine the correct customs valuation of a product, given the customs valuation rules. The uncertainty in the level of detail in question formed part of why invoices needed to be regulated.  

Mr Axelson said that the fuel levy was the fourth-largest revenue item in the budget. Government had expected to gross R40 billion from the levy, and completely getting rid of it would leave a gap in overall revenue collections. The relief offered for four months in 2022 cost NT R10 billion.

There would be a great loss if they tried to compensate for this levy by increasing VAT rates. NT had put out in a media statement the different options they were considering to try and reduce these prices over the long term.

He said that the Road Accident Fund (RAF) would require reform. Government policy had been trying to move towards a road accident benefit scheme. NT felt that this should be re-tabled in Parliament. This would decrease the cost of running an accident benefit scheme, providing some space to potentially lower the RAF levy in the future.

NT was supportive of moving forward with deregulation by the Department of Mineral Resources and Energy (DMRE). The DMRE had started consultations and issued draft gazettes on those processes. The industry had expressed concerns that this may impact jobs in service stations. It believed that there could be wider economic benefits to households and businesses from the potentially lower prices from deregulation.

He clarified that the deregulation would only be for 93 unleaded petrol in Gauteng. However, after examining this process, deregulation could be looked at for 95 unleaded petrol and across wider areas. The DMRE was conducting a review of the regulatory accounting system which looked at the margins within the fuel price that could potentially go down. On reviewing margins, the actual values would not be important if everything was deregulated, as the prices could adjust in the market itself.

Mr Maseko responded on legacy retirement funds, and said that the date had moved to 2024 because of the big change it would make to the retirement system. The retirement funds would have to change their systems to allow payments, other than at the withdrawal time, when a person retires. This would also require that retirement systems educate their members and staff on how the two-pot system works.

He explained that legacy retirement funds were insurance products whereby, on signing the contract, insurance companies promised what they would pay when one reached the agreed age. Retirement annuity funds created before 2004 were no longer the same structure, and therefore were not considered insurance products like before.

Legacy retirement funds were products for people still paying into an all-generations retirement annuity fund. It aimed to determine how contributions would be split into savings and retirement pots, while ensuring insurance companies maintained the promise made in their contracts.

On the Carbon Tax, Ms Hemraj said that the renewable energy incentives available to Eskom under the renewable energy Independent Power Producers (IPP) programme, were also available to any other electricity generator. Manufacturing, petroleum, iron, steel and cement industries were also eligible to claim the deduction against their tax liability.

This extended to include commercial, institutional, agricultural, forestry and industrial activities. To the extent that these companies purchased additional renewable electricity, this could be offset against their Carbon Tax liability if they were a taxpayer.

Another incentive available for renewable energy projects under the Carbon Tax included an offset allowance. Renewable energy projects with less than 15 megawatt installation capacity could generate credits. These credits could be sold to high-carbon-emitting taxpayers to reduce their tax liability.

These projects could be developed under the clean development mechanism, the gold standard or internationally verified carbon standards. NT was also in the process of finalising a framework for developing a local carbon offset standard that would make it much cheaper for significant carbon developers and taxpayers to generate these credits through renewable projects.

The third incentive for renewable energy was a renewable energy depreciation allowance. This applied at a rate of around 50%, 30% and 20% over the three years for capital instalments that were made. Those costs could be written off over the three-year period.

Solar Photovoltaic (PV) technology had a special dispensation introduced in 2015. That allowance allowed capital investment costs to be written off immediately in one year. That applied to projects aligned with the licensing threshold. Further work was being done on the potential to expand this.

Mr Ryder said there was substantial speculation that another form of tax would replace E-tolls in Gauteng. He asked if there was further information on the matter.

He also asked if there were tax benefits for individuals generating renewable energy.

Ms Mputa responded on the issue of rural safety costs, and said that NT had seen articles that suggested security should be tax deductible in South Africa because the government had failed to keep people safe. She said businesses conducting their business could deduct these costs in terms of general business expenditure in Section 11a. If they had installed security, it could fall under capital allowance, depending on what type of security it was.

However, for individuals, there were currently no provisions for the deduction of security in the Income Tax Act. It was not designed to cover personal expenses in that manner.

Mr Axelson said that in the medium term budget policy statement (MTBPS) the following week, the Minister would address the concerns over E-tolls. The NT was looking into potential incentives for private individuals generating renewable energy, but Members would have to wait for the Minister of Finance to announce this in the budget.

The meeting was adjourned.