Taxation Laws Amendment Bill: deliberations

Meeting report

FINANCE PORTFOLIO COMMITTEE
19 March 2001
TAXATION LAWS AMENDMENT BILL: DELIBERATIONS

Chairperson: Ms B Hogan

Documents Handed Out
SACOB memorandum of comment (Appendix 1)
Taxation Laws Amendment Draft Bill [2 March 2001 version]
SARS Summary of Comments on the second draft of the Capital Gains Tax Bill

SUMMARY
The SARS presented the committee with a synopsis of additional submissions made on the draft Taxation Laws Amendment Bill as well as their responses to these submissions. SACOB presented a plea for indexation. The committee also dealt with other new submissions, but the likelihood of them impacting greatly on the Bill seemed unlikely. The draft Bill will be finalised by 23 March and will be voted on 30 March by this committee. In conclusion the Committee Chairperson commented that the impact of the submissions on the draft Bill had been considerable.

MINUTES
South African Revenue Services (SARS)
Mr Kosie Louw, SARS legal advisor, presented to the committee a summary of the comments that they had received on the Bill and what SARS response to these comments were. These had a direct link to the amendments that had been made to the second draft of the Bill (dated 2 March 2001).

For detail on the commentary and the respective responses please refer to the attached document.

The Chair asked SARS how they were dealing with the submissions that they had received after they had published the amended Bill on 2 March.

Mr Louw stated that many of the issues that are raised in the new submissions have already been covered by the amended Bill. He added that there was a lot of overlap with issues that have already been dealt with in earlier submissions.

Jukskei Crocodile Catchment Area Committee of Residents Associations and Mr T. Williams
Mr Louw went over new submissions from the Jukskei Crocodile Catchment Area Committee of Residents Associations (JCCA) and from Mr T. Williams.

The issue raised by the JCCA was for the primary residence exclusion to be amended to apply to farms in rural areas. Mr Louw’s response was that their first available option was that if their farms were small business enterprises, they would then qualify for the small business exceptions. The second option was that if their primary residence is located on the farm then they would be entitled to the primary residence exception.

Mr Louw informed the committee that Mr Williams wanted a provision to be included in the Bill that allows for capital gains on certain investments for persons over the age of 60 to be disregarded in certain circumstances. This would allow them the opportunity to restructure their investments for retirement. In his response, he emphasised that unfortunately SARS was unable to allow such a provision as capital gains for both the young and old must be treated equally.

The Chair stated that the South African Chamber of Business (SACOB) asked if they could address the committee on the issue of indexation. The Chair asked if the committee had objections to the request. The committee had none.

South African Chamber of Business (SACOB)
Dr Ewald Wessels, the Immediate Past President of the Cape Chamber of Commerce and Industry felt that the lack of indexation in the Bill was their major concern. Especially if South Africa was to encourage foreign investment. He stated that SARS response to including indexation in the Bill was that it was firstly too complex and secondly that the US example illustrated that it would not be viable.
Dr Wessels felt that Capital Gains Tax (CGT) should be indexed to inflation. The only complexity was deciding on what index to use. The Consumer Price Index (CPI) would suffice and it could be included in the Bill. He felt that it was inappropriate to compare South Africa to the US example, as our situations are totally different. The focus should be on the South African context.
Over the last ten years capital had flooded into the USA whereas in South Africa capital had flooded out of the country.

For detail on the submission please refer to the attached document.

The Chair felt it incorrect of SACOB to make a statement that SARS only looked at the US example. She knew for a fact that SARS has had exhaustive debates on various international experiences and their relevance to the SA context. The Chair stated that it could not be said that SARS did not do their job.

Mr Martin Grote (National Treasury) stated that tax had never been and never will be the driver for investment in South Africa. He added that many countries like the USA and Germany have CGT, yet it could not be said that they lack investment. Mr Grote felt that there were enough incentives for every kind of taxpayer, even those over the age of 60 years. Unfortunately SARS and the National Treasury would not be able to accommodate the request of Mr Williams.

The Chair stated that even though she appreciated SARS comments on the Bill, the issue of when outstanding matters were to be finalised still remains.

Mr Louw stated that they hoped to finalise matters by Friday, 23 March 2001.

The Chair stated that the impact of the submissions on the Bill has been amazing. It had refined the Bill to a large extent. Formal consideration of the Bill is on Friday, 30 March 2001.

The meeting was adjourned.
Appendix 1
SACOB
Taxation Laws Amendment Bill 2001 (2 March) Memorandum of Comment.

1. Introduction.
1.1 SACOB represents some 40000 businesses throughout South Africa that are either directly affiliated to SACOB or are affiliated by virtue of their membership to the eighty Chambers of Commerce/Business that operate countrywide. Whilst acknowledging the opportunity being given to comment on the Bill, it has to be said that the time period allowed (ten days) is insufficient to obtain a mandated view from this broad membership. This is a matter of singular concern to SACOB, for this Bill proposes to introduce far-reaching taxation legislation that deserves more than superficial study in order to understand its nuances and its effects.

1.2 In the light of the aforesaid, this memorandum of comment is at best cursory and has not been subject to the normal SACOB mandating process. Despite SACOB’s continued opposition to the proposed taxation measure, the comments set out below are intended to ensure that the legislation will at least be reasonably workable, balanced, and structured in a manner that will not impose too onerous an obligation on the taxpayer and the taxation administration.

1.3 SACOB believes that the tenor of the legislation exhibits an unfortunate absence of balance between the interests of Revenue and the interests of the taxpayer. In other words there is a marked measure of inequity throughout the Bill whereby if there is any possibility of tax leakage the legislation seeks to prevent it at the expense of the majority of law-abiding taxpayers (the proverbial sledgehammer to crack a nut approach). This perception together with the skepticism over the capacity of SARS to implement what is an extremely complex piece of legislation gives substance to SACOB’s warning that the effect of the legislation will not be conducive to the fostering of an enhanced tax morality in South Africa – an area in which the Minister of Finance is anxious to enlist the support of organized business.

1.4 The decision not to include an indexation provision is a matter of concern to SACOB and suggests that the authorities underestimate the affect that this will have. It has been argued that indexation will add further to the complexity of compliance
and that by keeping the rate low (25% individuals, 50% corporations) the affect will be minor. This is an unsatisfactory compromise. Unfortunately, experience shows that such rates have a tendency to be increased. Sacob must stress that should this come about the necessity to incorporate an indexation provision will be further enhanced. The Treasury authorities must accordingly take note of this request.

2. Text Issues. (Page numbers refer to the Bill released on 2 March)
2.1 Page 11. Clause 12. The figure on the second line must be changed from (8) to (11). This amendment does not cater for loans secured in a foreign currency where interest rates differ. Furthermore, the amendment does not take into account the fact that commercially it is possible for a taxpayer to obtain loans from institutions at rates lower than the official rate and then to on – loan this at a rate higher than the taxpayer is paying, but at a rate lower than the official interest rate. Although there is no commercial donation, the Income Tax Act deems it to be a donation. This clause needs either, some discretionary power provision or, a range of rates within which there will deemed to be no donation. Alternatively, it could be a donation to the extent that the taxpayer making the loan is paying interest to someone at a higher rate.

2.2 Page 11. Clause 13 (e). The legislation only allows for the time-based apportionment method. SACOB submits that a market value method to controlled foreign entities (CFE) should be allowed.

2.3 Page 32. Clause 5 (2). The proposed exclusion of R50000 must be considered in the context of the likelihood of double taxation being incurred. Even though Estate Duty has been reduced from 25% to 20% (Clause 7 sub section (1)) the reduction is unlikely to effect adequate compensation.

2.4 Page 35. Clause 12 (2). Cessation of residency triggers a CGT obligation, which may result in an adverse cash flow penalty. The perception will be that there is a deliberate attempt to impose hardship on prospective emigrants. Further research for an effective and suitable compromise should be undertaken. For example, a financial guarantee provision could be devised which would allow such persons to meet their CGT obligation in a manner that is acceptable to both the Revenue and the taxpayer.

2.5 Page 37. Clause 15. Personal use assets such as aircraft, boats, etc, are subject to CGT in cases where a gain arises over the base cost. Capital losses against these assets are to be disallowed. Sacob submits that where assets are to be subject to CGT, there must surely be a case for allowing a capital loss offset.

2.6 Page 38. Clause 18. In respect of the provision to disregard capital losses incurred in the exercising of options, it must again be pointed out that circumstances (for example in the case of a corporate take-over where a participant in a share option scheme is forced to take up full transfer of a counter, for disposal to the new shareholder) can give rise to capital losses being incurred which cannot be offset against any section 8A gains. This reinforces the perception that the legislation contains an unfair bias against the taxpayer.

2.7 Page 41. Clause 23. In determining Base Costs, the legislation employs an argument that distinguishes between personal assets used for enjoyment and personal assets used for income generation. In distinguishing between the supposed ‘characteristics’ of these two types of assets, an argument is advanced for disallowing certain acquisition costs from inclusion in the Base Cost of the asset. This argument will be challenged. Again this is illustrative of the point made in Par. 1.3.

2.8 Page 54.Clause 37. The wording of this rule is couched too widely. The regulation should be restricted to transactions in which mismatches are used to secure an income tax or Capital Gains Tax advantage.

2.9 Page 54. Clause 38. This regulation will also affect genuine transactions where there is no tax-planning motive. Although the regulation is restricted to relatives as distinct from connected persons, it still encompasses arm’s length transactions. The disallowance of capital losses in respect of asset disposals to relatives constitutes another instance of the concern expressed in Par 1.3.

2.10 Page 58. Clause 45. Some clarity is required in this section to provide for circumstances where a primary residence is developed into a share block scheme.

2.11 Page 63. Clause 56. SACOB contends that the amounts set out in sub - clause (1) and (3) must be raised to realistic levels. In proposing levels of R5m and R0.5m respectively, the architects of this Bill seem to be out of touch with reality.

3.Conclusion.
The above points have been made after a fairly superficial study of the Bill and after discussions with SARS. In the time allowed to comment, it has not been possible for the broad membership of SACOB to be consulted. Without doubt other issues will come to light, which will be deserving of amendments to the legislation.

Johannesburg March 2001