Revenue Laws Amendment Bill: proposed amendments by ASISA & IRFA

Meeting report

Association for Savings and Investment South Africa (ASISA) Submission
Ms Adri Messerschmidt (Senior Policy Advisor at ASISA) said she would highlight a few items that it believed were not addressed in either the 2023 Bill or in the future 2024 Draft Bill and which were needed for the smooth implementation of the two-pot retirement system due on 1 September 2024. Treasury had accepted certain changes to the 2023 Bill approved in the National Assembly which were largely achieved in the 2024 Draft Bill but some drafting changes were still required (see submission for all 15 points). Some of these were:

- Ceasing to be a SA tax resident after 01 March 2021: This was about protecting vested rights. The pension provident and preservation fund members current rights to an immediate withdrawal would not be retained in the two-pot system contrary to what was confirmed by Treasury when it presented to the National Assembly.

- Exclusions: ASISA provided a list of funds and categories of members that should be excluded from the two-pot system. Some of these have been included in the Bill and others not. This is a drafting oversight.

- Members’ contracts within a retirement fund: The Treasury Response document stated that amendments would made to the draft legislation “to ensure that the policy intent that the various components can exist on a per contract basis is fully expressed.” This has not been achieved.

- Several other drafting errors needed to be fixed such as the use of “member” and “employee”.

- On the non-members spouse transfers, the member’s pension interests should be split across the non-member’s spouse in three components in the same proportion when there was a divorce.

- On the maintenance awards, the 2023 Bill provided for reductions in terms of Section 27(d) of the Pension Funds Act to be taxed under Schedule 2. This was correct for all Section 37D deductions except for maintenance awards which were taxed under Section 7(11) of the Income Tax Act. The 2024 Draft Bill aimed to correct this but was unsuccessful, creating a further problem in the process.

Treasury response
Mr Chris Axelson (Acting Head: Tax and Financial Sector Policy at Treasury) thanked ASISA for the comments. Treasury would consider those comments and look at them. He was not sure how easy it was to make all of those changes, but he could defer to his colleagues who tried to get these things right and in line with what it said it would do in its responses. If there were technical changes to be made it would make them.

The Chairperson said ASISA was at fault here as it had not said much at the 15 March public hearing but now it came to the Committee at the last minute. Treasury need time to respond. Parliament was criticised but he found many times that civil society did not come to the party. He gave Treasury until 14:00 the next day to adequately respond. Did Treasury need more time to look at what ASISA has raised?

Mr Axelson replied that it was a little difficult to tell. He had told ASISA that every year Treasury tried to make technical amendments to the legislation through the regular legislative process. This was where it tried to get the policy right. There were always little intricacies in tax legislation which it did try to fix. Sometimes it could not fix everything in the first go if it was too difficult. It would try do what it could but he could not promise it could fix everything by tomorrow.

The Chairperson asked how big these issues were. The Revenue Laws Bill came to the Committee every year. He was not sympathetic to ASISA. What was happening was unnecessary and he was irate about it. Are these major issues?

Mr D Ryder (DA, Gauteng) saw the Chairperson’s perspective. It would have been helpful for the Committee to have this information on 15 March. He knew ASISA had said on the 15 March it was still checking the differences between the 2024 Bill and the previous version of the Bill. He did think the Committee had to pass a Bill that was as correct and useful as it could be.

Mr Ryder sympathised with Mr Axelson who was in a difficult position. It was a short presentation from ASISA, but it was quite impactful and raised some key points. He had not applied his mind to this and neither had Mr Axelson and it would be difficult to respond immediately. Treasury had to look at the knock-on impacts and the implication of what was proposed. It appeared that the Committee would not be in a position to move forward this afternoon on the Bill as planned. It would need to give Treasury an opportunity to evaluate what was submitted. Perhaps Treasury could have a meeting with ASISA. The submission was brief but quite far-reaching. He did not have anything else to add because he did not have in-depth understanding of the ASISA inputs.

The Chairperson asked ASISA about its clumsy delayed response.

ASISA Response
Ms Messerschmidt said the clumsiness came from timing and the urgency in getting legislation passed so the two-pot system could be implemented. When this Bill was published in November 2023, it had deficiencies that had to be corrected so the two-pot system could be implemented efficiently. This was why ASISA made the Annexure C submission on 24 November 2023 which it also provided to the Select Committee. It discussed the Annexure C submission with Treasury. Subsequently, Treasury issued a 2024 Draft Bill to address the identified deficiencies ASISA discussed with it at the end of last year. The timing was difficult because the 2023 Bill was in Parliament and the 2024 Draft Bill was already published on the Treasury website to fix the 2023 Bill currently before the Committee. If amendments could be made, she summarised the amendments that ASISA believed should still be addressed in the 2023 Bill. There were issues that could be dealt with later when the 2024 Draft Bill came to Parliament. However, with the current 2023 Bill, the two biggest concerns are sorting out the directives required from the South African Revenue Service (SARS) for savings withdrawals and clarifying that the components should work on a per contract basis. These two were worth highlighting so when the 2023 Bill was passed, the two-pot implementation could happen as soon as possible. This was the only reason ASISA approached it this way. It had thought it would be possible to make these two key amendments to the 2023 Bill in the NCOP Committee and that was why it made the submission that it discussed with Treasury. The difficulty was in the timing. There was a 2024 Draft Bill that was fixing a 2023 Bill that was not yet passed. That was the reason for the ASISA submission at this stage.

The Chairperson said he did not understand what she was saying about the Bill process. What was happening here was normal, this Bill went to the NA and Treasury had every right in terms of the Constitution to make changes, which it did. So it was the same Bill with amendments, it was not a new Bill. He asked ASISA if these were the same issues that were submitted to the NA and rejected or if they were new amendments being proposed.

Ms Messerschmidt explained that these amendments were not proposed to the NA. The Bill was already approved at the end of last year by the NA when ASISA drafted these proposed amendments. She recapped that usually legislation would be published to fix legislation that was already passed. In this case, Treasury had published a Draft Bill to fix a Bill that was not yet passed. This was why the timing was so difficult for ASISA.

In response to the Chair asking if she was referring to the Pension Fund Bill, Ms Messerschmidt said she was referring to the Revenue Laws Amendment Bill.

The Chairperson said he did not follow what she was saying; perhaps other Members did. This was because she spoke about terms the Committee members were unfamiliar with. This was a Bill that was amended and ASISA had every right to raise what it wanted. Nothing stopped the Committee from making changes but the NA could reject everything the NCOP Committee proposed. ASISA would have persuade the NA if the NCOP Committee agreed to its proposed amendments. The Committee would meet on Tuesday 26 March to give Treasury time to respond. He asked Treasury if it could respond by 14:00 tomorrow.

Treasury Response
Mr Axelson responded to the ASISA comments saying he agreed with what ASISA proposed. Treasury put forth this 2023 Bill which had been going through the parliamentary process. The Bill had to go through quickly so the two-pot system could be implemented by 1 September 2024. However, after the November 2023 Bill was accepted by the NA, there were public comments that the system could be a lot quicker and efficient if the SARS directive criteria were changed and a few other things. These were then proposed in the 2024 Bill, which was a completely new Bill to try and improve it and make it more efficient. Ideally, it would be great to put all these in the 2023 Bill, but it was difficult to do this because significant changes to the current Bill would have to be made. And the current Bill was needed to get through so the system could be implemented. Treasury thought it was okay to do so in the 2024 Bill and hopefully deal with it before the sitting occurred. He understood where ASISA came from. He did not think it would derail the whole new regime if it did not include these things in the 2023 Bill. It would have been nice, but it did not have to. If those were the two main issues, he did not think it needed to delay the meeting until next Tuesday because Treasury considered it and it was in that 2024 Bill. He welcomed hearing other views.

The Chairperson said Mr Axelson was a bit clearer on the matter now. He saw the differences and why the terms ASISA used carried a different resonance than he understood it to be.

Mr Nhlanhla Radebe (Director: Business Financial and International Tax at Treasury) agreed with Mr Axelson. It would be better to finalise the 2023 Bill and then look at the 2024 Draft Bill. At the moment, the 2024 Bill was not in front of Parliament.

Discussion
The Chairperson understood what he was saying. This was a very unusual issue confronting the Committee in his recall since 2014. If the ASISA comments had merit, he did not see why the Committee should not process them. It would save much bother down the road. Perhaps not all its concerns were fundamentally important, but those that could be identified. He preferred this, but did not know how other Committee members felt. The Committee was taken by surprise by ASISA and now there was something new in the mix. It was not realistic to think the Bill could be voted on tomorrow. It was not the end of the world; the Committee could vote next Tuesday 26 March as there was still the Pension Fund Bill to come. He asked to be guided by Committee members. He did not have a specific view.

Mr Ryder said he always preferred to fix things early rather than after the fact. He wanted to hear from Treasury how much panel beating was needed to the current Bill if the Committee was in agreement with ASISA. It would be best to pass a Bill that was not a placeholder. He understood there was the 2024 Bill on its way which the Committee had not had the benefit of seeing yet. The Bill should be squarely in Treasury’s court at the moment. While he heard ASISA saying it would be best to fix things now, he thought this was always the case. Perhaps Treasury could convince the Committee why it had to push ahead and pass a semi-flawed Bill for the sake of having a placeholder and perhaps getting the other items in place. The Committee would need some convincing on that and he was in the same place as the Chairperson on that.

Treasury response
Mr Axelson said from Treasury’s perspective, it would be nice to have these additional amendments in place to give certainty to industry. These were already put down not in a tabled draft Bill but just as a Bill published on the website. It would be nice to have them in. He was worried about the process for amending a Money Bill from the Committee’s side. Do we need to follow Money Bills Amendment Procedure and Related Matters Act and everything that comes with it? Nothing proposed would change the Fiscal Framework. Therefore a lot of those criteria in the Money Bills Act would not matter. However, it would change some of the administrative systems. Perhaps SARS could respond because it has to do with the administrative systems that SARS would implement. Treasury was worried about the process to get these proposed amendments in now. The comment period only finished on 31 March 2024. If it could be put in now and everybody was happy, then maybe it was worth it. Treasury was on the side of caution by putting them through in a different Bill in order to consult widely enough.

The Chairperson asked SARS and Parliamentary Law Advisor to respond as certain aspects worried him.

SARS response
Adv Franz Tomasek (SARS Head: Legislative Policy Tax, Customs and Excise) replied that from a SARS perspective, it would be nice to have the directive system for the savings withdrawal clarified. This would be a useful development. However, he referred to the saying: perfect being the enemy of the good. The Parliamentary Law Advisor's response was important because SARS would have to go through the process of amendments and then refer the Bill to the NA for it to concur according to NA Rule 330. This would have to be pulled off before the Sixth Parliament rises. This had to be considered.

Parliamentary Law Advisor response
Adv Frank Jenkins, Senior Parliamentary Law Advisor, replied about the proposed amendments to the Draft Revenue Laws Amendment Bill. This was a Section 77 Money Bill so Section 13 of the Money Bills Amendment Procedure and Related Matters Act had to be looked at. The procedural constraint was that the Minister had to be consulted, who had to be given at least 14 days to respond to proposed amendments before the Committee reported to the House. The 14 days could be shorter if the Minister responded quickly and approved and wanted to continue. Section 13 indicated that the consistency of the amendments with the Fiscal Framework should be included in the report and how those amendments would comply with Section 85 on fiscal discipline. This rarely came into play if the Fiscal Framework was not challenged. Section 85 spoke about ensuring there was an appropriate balance between revenue expenditure and borrowing, and that debt levels and debt service charges were kept reasonable to ensure the cost of spending was not deferred to future generations. This had to be in the report. These were the procedural challenges if the Bill were to be changed now due to the shortage of time. If this was what the Committee wanted to do then it could be done. The biggest problem would be the 14 working days for the Minister to respond which was roughly three weeks with the public holidays included.

On Mr Ryder’s question in the chat, if the Bill were amended it went back to the NA. Rule 330 of the NA Rules basically required that such a Bill was prioritised - that could come in handy. The NA would refer it to a committee unless the NA wanted to deal with the legislation in the House. He was not sure if the NA had ever done this but it could be done in the interest of time.

Way forward
The Chairperson advised that ASISA was now saying it was prepared to withdraw its proposals in the interest of time. ASISA would work on the 2024 Draft Bill and engage with Treasury. He suggested a compromise. The Committee had done it before and not on the eve of an election. The Committee Report would state that it agreed with the ASISA proposed amendments, but due to time constraints, it could not go ahead with them. It would therefore commit Treasury to engage before it tabled the Bill this year and it would request that serious consideration be given by the incoming Committee of the Seventh Parliament to accept this Bill and that this report be referred to the National Assembly's Standing Committee on Finance. He asked Adv Jenkins to comment if anything he was saying is problematic in terms of process, the way forward and policy.

Adv Jenkins replied that there was not. If the Committee tried to bind the Seventh Parliament and say what had to be done, this would not hold water.

The Chairperson said serious consideration had to be given.

Adv Jenkins agreed and said this could be done.

The Chairperson said the Committee could bind Treasury to meet with ASISA and settle their differences before bringing the next version of the Bill to the Seventh Parliament.

Adv Jenkins said this was correct procedure.

The Chairperson asked if this was not binding the incoming Committee.

Adv Jenkins replied that it was not.

ASISA & Treasury response
Ms Messerschmidt did not agree with the Chairperson’s recommendation. It was in everyone’s interests to pass this Bill. The implementation date of the two-pot retirement system is 1 September 2024 and that date had to be met. It would be unfortunate if this could not happen. If the comments could be addressed in the 2024 Draft Bill, ASISA would engage with Treasury as it did in the past to sort the issues out before the two-pot implementation date.

The Chairperson thanked ASISA and asked it to summarise its key positions in a half page for the Committee to consider including in its Committee Report. It would help if ASISA highlighted the key issues and other points to consider. He asked Treasury for its take on the process proposed.

Mr Axelson said Treasury was comfortable with that. It reduced the risk of a Bill not getting through which would put the 1 September 2024 implementation date at risk. These were good add-ons, but it was safer to get the Bill through now if possible and the additional changes could be made later.

The Chairperson asked the Committee if anyone objected to the process but he could not see any hands up. In the NA did all the parties agree to this Bill?

Mr Axelson replied that this was correct.

The Chairperson said this made the Bill easier to process.

Institute of Retirement Funds Africa (IRFA) submission
Ms Nalandri Andrews, IRFA representative, said that the two points raised by ASISA were the same that IRFA wanted to raise. It agreed with ASISA on implementation based on the IRFA membership feedback.

Discussion
The Chairperson said the actual amendments proposed were fine and IRFA and ASISA could suggest the wording and send to the Committee by Friday noon. The Committee would not do the clause-by-clause consideration of the Bill today. This had to be done next week Tuesday along with the Committee Report on the Bill instead of the Public Procurement Bill which was not being processed in March. Treasury would also brief the Committee on the Pension Fund Amendment Bill. Did the Committee agree to this?

Ms Z Ncitha (ANC, Eastern Cape) said this was okay. Mr Ryder said he was happy with this.

Taxation treatment of withdrawal in two-pot system
Mr Ryder raised the written concern he had sent to the Chairperson on the taxation treatment of withdrawals in the two-pot system being done at marginal rates which were punitive. It undermined the intention behind why the two-pot system was initially envisioned. In the old days when moving from one pension scheme to the other, one would resign and was encouraged to preserve one's savings in a new fund or a preservation fund. This then did not attract any punitive tax. If one chose to take a lump sum out, one was penalised at the marginal tax rate. In the past there was a calculation SARS did where it works out what one’s average taxation rate was and applied it in certain circumstances where it was not intending to penalise an individual for a sudden lump sum payout in excess of normal earnings. He thought his would be a far more desirable outcome noting the reasons for and the spirit in which the two-pot system was initially envisioned. He thought SARS and Treasury were being heavy-handed by applying the marginal tax rate. The Committee had to consider the man in the street who lost their income due to COVID-19 or whatever and found themselves needing to access a portion of their retirement benefit early. He did not feel those people should be penalised. The tax rate should be assessed at this stage.

Treasury response
Mr Axelson spoke about the tax treatment. He put in the chat the link to the 2021 Treasury discussion document where it gave the different tax treatment options. It thought treating at marginal rates did two things. If one fell on hard times and used the marginal rate, then this rate would be lower. It would be automatically lower if one fell on hard times. If there was no income, then the first R95 000 would be tax-free. If the previous withdrawal tax tables were used, they were accumulative over time – it would be taxed potentially at a higher rate than marginal rates if they did not have any income for that year. The other problem was arbitrage for those who earned a lot more. There would be a reduction going into the fund, and if they were a high-income earner, the reduction would be 45%. If this would be taxed at an average or lower rate, then the individual could immediately withdraw the money and arbitrage the tax system at getting that money out at much lower marginal tax rates. Treasury was trying to solve both those issues. It did not think it was penal, it thought it was an appropriate treatment for that. It had considered a variety of options and received comments on those. It landed on this treatment which the Minister announced in the 2022 Budget

Mr Ryder said this was a good response and he thought someone who fell on hard times would have a much lower marginal position. He understood this. He did not know how many people would try to use the two-pot system for arbitrage to avoid taxes. However, it was a good reply.

The Chairperson said he heard Mr Axelson, but said that if someone withdrew R30 000 and expected that amount and ended up with R15 000, it was traumatic. It should be put in the Committee Report that the Committee urged all sector organisations, Treasury and the Congress of South African Trade Unions (COSATU) to inform their members on what this meant. Somebody could decide it was not worth taking out R30 000 if they would end up with R15 000. Education was the answer. He suggested Mr Ryder write down his comments and Mr Axelson could respond in simple language in a quarter of a page. The Committee would consider these issues after the April constituency period so both arguments were aired.

Meeting adjourned.