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FINANCE PORTFOLIO COMMITTEE
29 February 2000
REVENUE ISSUES & TAX PROPOSALS
Documents handed out
Presentation by the Department of Finance (included in the minutes)
Presentation by SARS (email firstname.lastname@example.org for document)
Administrative implications of the 2000/2001 budget by SARS (email email@example.com for document)
Submission & Supplementary Submission by Ernest Mazansky
Tax Reform: The 2000/01 Budget in Perspective
Presentation by Themba Tshikovhi
The Department of Finance and the South African Revenue Service explained the new tax policies, explaining the operation of Capital Gains Tax, the phased move toward residence-based tax and the closing of certain tax loopholes.
This was followed by assessments of the new tax policies by Lynette Olivier, Ernest Mazansky and Themba Tshikovhi.
The Minister of Finance, Mr Trevor Manual, in his introductory comments noted that the this year's budget introduces one of the most comprehensive sets of tax reforms ever undertaken and will alter the way the tax system in this country works. He said the proposals were generally supported across the board and that Mr Gordhan, acting commissioner of SARS, would inform the committee regarding SARS readiness to implement the new policies.
Budget 2000 : Revenue issues and tax proposals
Ms Maria Ramos, Director General: Department of Finance, presented.
Key tax proposals - overview
- Reform to Personal Income Tax rates and brackets
- Increase interest income exemption
- Announce introduction of capital gains tax
- Phased move to residence-based income tax
- More generous tax regime for non-profits
- Graduated tax rate for qualifying SMEs
- Closing corporate tax loopholes
- Tax depreciation allowances for certain permanent structures
- Higher sin taxes; lower soft drinks duty
- Departure tax on international air travel
- Diesel fuel rebate
Revised estimate 1999/00
Revised estimate - key elements
SARS had improved their collections and broadened their tax base, plus they had been a real wage growth in the country. Thus, in spite of the cuts on PIT, the collections of SARS was still going to increase as a result of the new tax proposals:
- Total tax revenue - Â R5,7 billion
- Personal income tax - Â R5,5 billion:
- Real wage growth
- Improved collection by SARS
- Decline in anticipated mining tax:
- Mature industries
- Lower sales volumes
- Taxes on property includes demutualisation charge \ Â 26,2%
The ratio rose during the previous decade because of wider social services. Internationally, our situation is comfortable and meets the needs of a developing economy:
- 1983/84 = 19,5%
- 1994/95 = 22,8%
- 1999/00 = 24,7%
- 2002/03 = 23,8%
Composition of tax revenue
- PIT share: 30% Â 40%
- Company tax: 17% Â¯ 15%
- Gold mines: 9% Â¯ 0,1%
- Company (+STC): 17% Â¯ 11,6%
- GST/VAT: 20% Â 25%
- Excise duties: 9% Â¯ 5%
- Fuel levy: 1% Â 8%
Composition of tax revenue:
South Africa is primarily reliant on personal income tax. The focus this year has been on reducing the tax burden on individuals, and in this regard the PIT cuts have been significant. Ms Ramos said that it would take some time for greater equity to be brought into the tax system:
PIT rates and brackets
Personal income tax cuts
Ms Ramos stated that some people have said that the bulk of the relief goes to high income earners. She denied that this was the case. She said that the tax relief is aimed at that bracket where ''the bulk of the taxpayers are trapped'' which is those who are earning between R80 000 - R90 000 per year. The high income groups, however, will also get relief. She continued that the tax relief is ''not just impressive in nominal terms'', but that ''everyone is getting five percent relief in real terms''. The choice that the Department has made is to go with bigger cuts on PIT, and to take a more moderate stance with interest exemption:
- Tax threshold:
- R21 111 taxpayers under age 65
- R36 538 taxpayers age 65 and over
- Tax cuts, taxable income of:
- R30 000 = 19,6%
- R100 000 = 9,7%
- R300 000 = 8,9%
- Cumulative relief of R25,3 bn since 1995
- Interest income exemption raised:
- R3 000 for everyone
- R4 000 for taxpayers age 65 and over
The move to this type of taxation will broaden the tax base and limit the scope for tax avoidance:
- Implemented from 1 January 2001
- International best practice
- Broaden the tax base
- Limit scope for tax avoidance
- Interim measure - taxation of foreign source dividends
Capital gains tax
This will broaden the tax base and bring South Africa in line with international practice. Ms Ramos said that, ''although it is not a big money spinner, it will bring equity into the income tax system'':
- Introduced from 1 April 2001
- Broadens tax base
- Improves efficiency and equity of income tax system
- Brings South Africa's tax system in line with international best practice
Taxation of Non-profit Organisations
The scope of ''public benefit" organisations have been broadened by bringing more institutions into the net (example: primary schools and organisations caring for the aged). These organisations will receive special tax-exempt status:
- Seek broader definition of "public benefit organisations" that enjoy tax-exempt status
- Broaden scope for tax-deductible donations:
- Pre-primary schools
- Primary schools
- Organisations providing HIV care
- Organisations caring for abandoned, abused and orphaned children
- Organisations caring for the aged
- Increase deduction limits for individuals:
- Greater of 5% of taxable income of R1000
Graduated company tax
This will apply to a ''small business corporation'' and the Department has provided a definition of what what this is. They did this because they were trying to ensure that not everyone can convert themselves into a small enterprise for the purpose of taking advantage of a better tax dispensation. Ms Ramos said that SARS will be tough in this regard. She noted that anything in tax legislation is open to abuse, and that tough measures will be taken against tax evasion. The purpose of this proposal is to create an environment for small and medium-sized enterprises to flourish. It is important that these enterprises do well for various reasons, including the fact that they have a big role to play in job creation. This proposal will complement what is already in place from the Department of Trade and Industry:
- 15% tax on first R100 000 of taxable income
- Small business corporation (SBC):
- All shareholders - natural persons
- Gross income < R1 million
- Shareholders only have interest in one SBC
- No more than 20% of income from "investment income" or "personal service income"
- Encourage small business development and job creation, but prevent tax avoidance
A number of depreciation allowances have been made in respect of permanent structures. This again opens up a range of potential avoidance schemes. For this reason, strict rules will apply to qualify for depreciation concessions:
- Depreciation allowances:
- Oil and gas pipelines = 10% of cost a year
- Electricity and telephone transmission lines, as well as railway lines = 5% of cost a year
- Strict anti-avoidance:
- New and unused structures
- Structure used directly by taxpayer in ordinary course of business
- Not available if core business does not use structure, eg financial sector
The Department hopes to improve equity by eliminating tax loopholes. These loopholes undermine the integrity of the tax system, will be closed as they arise. Three big loopholes have already been closed (example, restraint of trade):
- Improve equity by eliminating tax loopholes and thereby the scope for tax arbitrage
- Matching income accrual and expenditure deductions
- Restraint of Trade payments
- "Employment companies"
Repatriation of pension fund surpluses
In respect of pension funds, large surpluses have accrued, and the repatriation will be taxed in full:
- Â± R80 billion surpluses in pension funds
- Subject to FSB regulation, employers can register rules allowing repatriation
- Tax treatment:
- Repatriation taxed in full
- Cannot use assessed loss to offset the repatriation
Specific excise tax changes
The tax on tobacco and alcohol has increased, while the tax on soft drinks has decreased:
- Tobacco - 50% total tax incidence:
- Cigarettes Â 15,5%
- Pipe tobacco Â 56,1%
- Cigarette tobacco Â 40%
- Cigars Â 74,2%
- Wine, spirits and beer Â 5,5% (nil in real terms)
- Sorghum beer no change
- Soft drinks Â¯ 4c/l
There have been adjustments in the fuel levy. In certain circumstances (related to shipping) there will be a diesel fuel rebate (to increase the international competitiveness of the South African industry):
- Tax adjustments:
- Leaded and unleaded petrol Â 5c/l
- Diesel Â 3c/l
- Diesel fuel rebate:
- Coastal shipping and fishing
- Total rebate = 89,4c/l
- Improve international competitiveness
International departure tax
International air travel will be subject to departure tax, but not domestic travel. Note, however, that international travel is not subject to VAT, while domestic travel is:
- R100 a passenger on international air travel
- No tax on domestic travel:
- International air travel is not subject to VAT, but domestic travel is
- Impact on tourism:
- Increased on-budget allocation for tourism
- Tourism growth is robust and should not be affected by this tax, which has international precedents
Tax reform and economic growth
The tax reforms are designed to increase economic growth and to contribute to an improved tax base:
- R9,9 billion PIT relief:
- Increased PCE + multiplier effects
- Reduction in household debt burden
- Increased personal saving
- Increased interest income exemption:
- Relief for small savers and pensioners
- Potential boost to individual saving
- Graduated rate structure for SMEs:
- Encourage development of this vital sector, including tourism, small-scale manufacturing
- Job creation - follow from Job Summit
- Depreciation of permanent structures:
- Incentive for infrastructural development in South Africa and the SADC region
- Encourage public-private partnerships
- Diesel fuel rebate - Â¯ 89,4c/l:
- Improved international competitiveness of SA industry
- Recapitalisation of fishing fleet ( boost to local manufacturers)
- Duties on soft drinks - Â¯ 4c/l:
- Approximately 10 000 - 12 000 new jobs in grassroots economic empowerment programmes
Future tax reform
The Department wants to ensure that the tax regime is conducive for growth. Ms Ramos said that South Africa must keep in touch with global taxation trends. In terms of future tax reforms, one of the concepts that Department will look at is the issue of presumptive taxation when appropriate:
- Tax environment conducive to economic growth and social development
- Maintain tax: GDP ratio Â± 25%
- Maintain balance between direct and indirect tax instruments
- Continued focus on equity in tax system
- Cognisance of international best practice in the face on increasing globalisation
Tax reform - key focus areas
- Co-operation with SARS to close tax loopholes
- Presumptive taxation, where appropriate
- Mining tax regime
- Taxation of savings, including retirement funds
- E-commerce - implications for tax system
- Implementation of new taxes announced in this Budget
In conclusion Ms Ramos commented that ''if the only reason for making an investment is based on the tax regime, then there is something wrong with the tax regime''.
Presentation by South African Revenue Service
Mr Gordhan, SARS Acting Commissioner, said that SARS could give administrative effect to the Minister's tax proposals. They have improved their technology but they still face a big challenge in terms of implementation of the administrative aspect of the new policies. Operational and procedural mechanisms and their IT systems will need to change. Additional policing will be required. They are getting positive feedback, as well as criticism, about the new policies and such comments were all welcome. In conclusion, he noted that SARS is generally getting better taxpayer compliance.
Mr Kosie Louw, also of SARS, took the committee through the new tax policies:
Capital Gains Tax (CGT)
This internationally accepted tax is being introduced to enhance equity and as a backstop to the income tax system. The effective date for CGT is the first of April 2001. However, assets acquired before this date will also be subject to CGT if disposed of after the effective date.
All residents and non-residents are liable for CGT. However, non-residents are only liable in respect of immovable property and business assets of a ''permanent establishment''.
All assets specifically not exempted from CGT, are subject to CGT. Some exemptions are private motor vehicles, winnings or prizes, personal belongings and effects. The exemptions are proposed to reduce the impact of the tax on households. Some institutions such as non-profit organisations, are fully exempt.
The effective CGT rates differ in respect of different institutions. For example, the rate for retirement funds is 6.25% while for corporate life assurers, it is 15%.
Certain roll-overs are also excluded from CGT. The following example was used: If a small business is using certain machinery and it is sold at a profit but the money is used to reinvest into the business such as buying new machinery, then the profit made on the old machinery would not be regarded as capital gain. The amount will be rolled over until a subsequent time when the person disposes of the assets and does not reinvest it in the business.
Provision has been made to protect persons who are inheriting from an estate from being subject to double taxation, that is, CGT and estate duty. However, if the heir disposes of the inherited asset, then CGT will have to be paid at the time of the disposal.
A capital gain will be taxed when an asset is effectively disposed of. There can be either a gain (profit) or a loss. This is calculated by deducting the base cost of the asset (actual cost of the asset) from the disposal proceeds (amount sold for). Included in the concept of ''base cost'' are improvements made to the object, incidental costs of acquisition or disposal such as transfer duty.
The valuation of assets will be done by means of time-based apportionment or valuation (if the owner prefers). Listed shares will be valued at their average price on 1 April 2001. There are rules against stepping up the base value of an asset prior to 1 April 2001 in order to increase its market value.
No specific relief for inflation such as indexing or tapering is provided. The reason for this is that only twenty five percent of the gain is taxable for natural persons, and fifty percent of the gain for juristic persons. Thus the rate of tax is low enough to give relief for inflation without the complexity of either indexing or taper relief.
Where an asset is not exempt from CGT, proper records of base costs and proceeds will have to be kept. SARS has released a guide to CGT which will be open for comment until 31 March this year.
Residence basis of taxation
One of the reasons South Africa is moving from a source-based to a residence-based system of taxation is to broaden the tax base. There will be a phased approach to the switch-over.
The basis of this type of taxation is that residents will be taxed on world-wide income [as opposed to the source system, where money is only taxable if it is deemed to be from a South African source. Non-residents remain taxable on South African sourced income.
In terms of this new system, the government will be able to tax foreign dividends from the end of February 2000. Attached to this proposal are various relief measures.
The solutions which the Department put in place to counter corporate loopholes take effect from the end of February 2000.
There is a problem with mismatching between income and expenditure. This happens where expenditure is upfronted, while income accrual is deferred. Thus a person declares his expenditure but the income which arose from the same transaction is not accurately declared. To counter this problem the Department proposes introducing general matching rules and a limitation on the deduction of expenditure incurred to things such as services rendered.
Another corporate loophole occurs in respect of conditions attached to sales of trading stock. The problem in this regard occurs where trading stock is sold but the seller does not receive payment at that time because of conditions attached to the transaction such as the sale of promissory notes. A proposal to counter this problem is that the owner/seller of the trading stock cannot deduct more from the transaction than what he acquired in terms of the sale of the trading stock.
Restraint of trade is also a problem which the Department intends to address. The problem here is that the recipient of a restraint payment does not declare the amount to be of a capital nature. A solution proposed by the Department is to include the amount in the income of the recipient and to tax it in this way.
(Q) Referring to the fact that the tax on fuel was going up more than diesel, Mr Luyt (FA) asked why a distinction was drawn between fuel and diesel.
The response was that the Department of Minerals & Energy regards diesel as more efficient, and they want to stimulate the sectors which use this kind of fuel by means of a lower tax.
(Q) Mr Andrew (DP) asked if imposing CGT on retirement funds would not create the problem of reducing savings. What would the position be if on the effective date, the value of shares was worth less than the base cost of the shares. Finally, would a valuation be in the form of a sworn appraisal?
Mr Louw replied that the effective rate of CGT on retirement funds was only 6.25%. They had tried to put together a mild package with low rates and so ''the impact on savings should not be significant''. He said that the owner did not have the option to apportion shares as would be possible with other assets. The valuation that they would use would be the stock exchange valuation. It may be that the original cost was higher than the current valuation. This was a ''valid point'' which ''might have to be considered''. He conceded that the process of valuation could be a ''costly exercise'' and that they were prepared to consider alternative cheaper ways to value property.
(Q) Mr Feinstein (ANC) asked for an explanation of the specific and practical effect that CGT would have on foreign investors.
The reply was that a foreigner investing in the market would not be subject to CGT. Thus there would be no effect on a foreigner. If, however, a foreigner was doing business here and utilising business assets, then CGT will arise on the disposal of those assets, subject to normal roll-overs and exemptions.
Mr Louw, commenting on the inclusion rates, said that if you have higher inclusion rates, then you must have either a form of indexing or tapering which complicates the system. Other countries have tried to move away from indexing. Tapering is only somewhat less complicated. An example of a tapering relief system would be: if losses exceed capital gains then the losses cannot be offset against normal income tax. Also, he said that the record keeping of such a system is immense, and the Department had tried to keep the system as simple as possible.
(Q) A committee member asked what SARS was planning to do about people who were cheating government. She made specific reference to the taxi industry, where many operators were not paying taxes and were unregistered.
Mr Gordhan said that when it came to the taxi industry, they had a mixed relationship. At a local level, they were interacting with the operators and the administrators of the industry who seemed to indicate an intention to register. The problem facing SARS now is how far back they would have to go in order to assess these people. Mr Gordhon said that they hoped to meet with national representatives from the industry. What the Department was aiming at was to get people to understand their obligations in respect of tax. Education and awareness are important aspects in addressing the question of tax compliance.
(Q) Dr Woods asked what was being done to counter the problem of money laundering.
The Minister noted the difficulty of picking up these transactions but that they were committed to ending money laundering by establishing a financial intelligence institution to deal specifically with this.
(Q) Dr Koornhof (UDM) suggested making assets acquired only after the effective date (1 April 2001) subject to CGT.
Mr Louw said that if this simpler approach was followed then the ''there would be less money in the system''. A consequence of this could be a huge lock-in effect in that all assets acquired before the effective date will be out of the system forever. He added that most countries who had introduced CGT had included assets acquired before the effective date. Further he did not think it would be ''equitable to leave out old assets''.
(Q) Mr Andrew asked if a manufactured asset is sold for less than its original price because of depreciation, would this capital loss be offset against capital gain. He also commented that he had been approached by various people who had complained that they were due to get a tax rebate from SARS but had not received the money yet. He asked Mr Louw what monitoring mechanisms they had in place to ensure that SARS pays taxpayers the money that they owe them.
Mr Louw used the following example: you have an asset worth R100 and after the requisite depreciation calculation, the asset has a tax value of R40. If the owner sells the asset below R40, then he sells at a loss, and CGT will not come into the picture. If he sells it for above R40, then there will be a capital gain which will be subject to CGT.
On the question of tax rebates, Mr Gordhan acknowledged that they have a problem with backlogs from the old system. The new income tax system is designed to take care of these problems. He emphasised that there was no conscious manipulation of refund processes by SARS.
(Q) Professor Turok (ANC) commented that tax awareness was an important issue. He suggested that the Department issue a periodical newsletter which addressed the tax issues that the media brought up. He thought departure tax was a very good idea. However payment of such a tax could be a nuisance if it had to be paid by means of a separate procedure. He hoped that the method of payment would not inconvenience traveller.
The Department replied that the departure tax will be included in the price of the ticket so that no inconvenience will be caused to the traveller.
(Q) Dr Woods commented that it must be ''an administrative nightmare'' to change from the one tax system to another. He pointed out that the Katz Commisssion had looked at the issue of residence-based tax two years ago and both SARS and the Commission had concluded that it was not a good idea. The reason given was that the tax differences between South Africa and its major trading partners would disadvantage South African businesses. He asked if the tax margin had narrowed sufficiently to introduce this tax now.
The Department said that evidence shows that business people are sourcing money through other countries to avoid being taxed in South Africa. The effect of this is that South Africa is losing out and that they ''must do something''. Phasing in residence-based tax was aimed at countering this problem. The Department said that the switch was an ''administrative burden'' but that the new tax regime had to be implemented.
Presentation by Professor Lynette Olivier
Professor Olivier stated that this Budget had gone a long way in "addressing the inequalities of the past without unnecessarily hampering economic growth." On tax administration, she called for compulsory community service for law students at SARS, stating that it would give much needed experience to the students, while attracting sufficiently skilled persons for SARS. She criticized SARS for being unapproachable and over-zealous, and argued that incentive bonuses paid to SARS employees based on the amount of tax collected raised constitutional issues. Professor Olivier also called for advance notice of tax rulings. She argued that failure to do so was driving foreign investors away.
Professor Olivier supported the CGT, but felt that a study should be undertaken as to the compliance cost for taxpayers and SARS. She stated that it would make little sense to introduce a tax which would collect little revenue but greatly burden both SARS and the taxpayer.
On tax rate changes, Professor Olivier said they were to be welcomed, but that the Government still needed to address the taxation of the retirement industry. She also noted that the twelve categories and six different rates for taxpayers is too complex for what is needed in South Africa.
Professor Olivier argued that there were numerous problems facing small business corporations (SBCs) including low levels of education and tax laws that were designed to cater for first world economies. She criticized the Budget's requirement for SBC's annual gross income not to exceed R1 million, arguing that the figure should be raised since those businesses did not create employment.
Submission by Ernest Mazansky
Mr Mazansky commended the Government on the decreased tax rates, but stated that consideration must be given to further reductions in corporate taxes and the STC. He said that assets held by companies prior to the initiation of CGT on 1 April 2001 should be exempt from the tax as had been done in the Australian model. He also found the CGT problematic in that South Africans emigrating to other countries were made to pay the tax on their assets but were prohibited from taking those assets to their new country of residence. Mr Mazansky also stated that immigrants should be exempted from the tax in order to attract more foreign investment to South Africa.
Mr Mazansky also gave a detailed analysis and recommendations on the taxation of foreign dividends, on the worldwide basis of taxation and on small business corporations (see submission).
Presentation of Themba Tshokovhi
In his assessment of the budget proposals, Mr Tshokovhi felt that the government's macro-economic assumptions were realistic, and welcomed the apparent shift of spending away from personnel and towards infrastructural spending. He did, however raise criticisms including:
- the increase in interest exemption from R2000 to R3000 for personal income tax was not significant enough.
- there may not be adequate personnel or structures in place to implement the Capital Gains Tax within a year.
- there should be a tax deduction for taxpayers who own buildings that are not "used in the process of manufacture" but are used for trade.
Mr Tshokovhi called on the Government and the South African Revenue Services to ensure that the tax system is understandable and accessible to the majority of South Africans. He also called for equal and fair taxing of all income levels, stating that the CGT was an unfair tax on the rich. He believed the tax system should be foreign investor friendly and that there should be a move towards higher indirect taxes and lower direct taxes.
(Q) Dr Davies (ANC) asked Professor Olivier to provide an alternative to the twelve categories for taxpayers which she called cumbersome.
(A) Professor Olivier stated that the more categories that exist, the more options there were for tax planning, which can be both problematic and complicated. International experts suggest no more than three categories for tax rates.
(Q) Dr Davies (ANC) asked about alternative corporate taxes to allow South African businesses to become more competitive?
(A) Mr Mazansky replied that it was first necessary to reduce the corporate tax rate from 30% to a level of about 28%. This would make it equal to the corporate tax of both Sweden and the United Kingdom. He argued that this reduction would make South Africa more attractive to outside investors. He also stated that a reduction in the STC would make South African businesses more competitive.
(Q) Mr Andrew (DP) stated that the presenters had raised concern over SARS capacity to implement the CGT, and wanted to know SARS reaction to that claim?
(A) Mr Louw (SARS) replied that with respect to the valuing of assets, only a small percentage of assets would pose problems. He stated that SARS would follow the Denmark model, whereby if the documentation showing the original cost of the asset was not available, that the original cost would be 20% of the disposal price. Mr Louw stated this was the measure that they had implemented but noted that it would be problematic.
Mr Gordhan (SARS) stated, in its defence, that SARS had become a more efficient and dignified institution and he felt that the taxpayers' view of SARS was that it was providing a much better service than it previously had. He agreed that SARS was experiencing problems but welcomed public debate to help in finding a better solution. More interaction with the private sector was needed to reach a higher level of conduct. With respect to the CGT, Mr Gordhan admitted that they did not have ready-made capacity, but was confident that if given the resources, they would be able to meet the challenge.