Mutual Banks / Revenue Laws Amendment Bills

Meeting report

FINANCE SELECT COMMITTEE
1 November 1999
MUTUAL BANKS AMENDMENT BILL and REVENUE LAWS AMENDMENT BILL: BRIEFING

Documents handed out:
1.Mutual Banks Amendment Bill [B47-99]
2.Revenue Laws Amendment Bill [B59-99] (not yet available; only draft version)
3.Draft version of the Explanatory Memorandum on the Revenue Laws Amendment Bill (the final version is not yet available electronically)

SUMMARY
The primary objective of the Mutual Banks Amendment Bill is to bring the Mutual Banks Act in line with the Banks Act in respect of various matters, the most significant being:
1.The provisional registration of mutual banks will be done away with and only one final registration is proposed.
2.The implementation of new supervisory powers extended to the Chief
Executive Officer (CEO) as well as employees and executive officers
designated by such CEO of the mutual bank or of its associates.
3.The introduction of audit committees to ensure that there are at least a
certain number of non-executive members with supervisory powers.

Revenue Laws Amendment Bill proposes amendments to the Income Tax Act, Marketable Securities Tax Act, Customs and Excise Act, Vat Act and several other Acts. The presentation went through the explanatory memorandum of the Bill. The proposed amendments were clearly aimed at tightening up all legislation regarding the payment of revenue and tax and the enforcement of this.

MINUTES
Mutual Banks Amendment Bill
Mr Henry Cronje from the South African Reserve Bank briefed the Committee on this Bill.

Background
Before 1993 all banking institutions in South Africa were deposit - taking institutions based on corporate membership only. However, the Registrar of Banks identified a need for banks not based on corporate membership. This gave rise to the principle of Mutual Banks in South Africa.

Cronje explained that the primary difference between a Mutual Bank and an ordinary public company bank lies in its ownership. An ordinary public company bank is owned by the persons who have invested in its share capital, represented by freely transferable equity shares. Mutual banks can be said to be owned by its members. Shareholders in ordinary banks share in the profits through dividends while members of mutual banks receive returns on their investments in the form of interest payable on the specific type of share in which they have invested.

There are different types of shares issued by mutual banks, however, only the permanent interest bearing shares (PIBS) are freely transferable and have been transferred between persons. Nevertheless, PIBS are not listed or traded on the JSE.

At present there are only three mutual banks in South Africa: these include GBS Mutual Bank in Grahamstown, TNBS Mutual Bank in Umtata and a third bank situated in Louis Trichardt, namely Cash Bank. There was a fourth one, namely Credit and Savings Help Bank in Roggebaai, which was the largest of the four, but it is currently in the process of being converted into an ordinary bank. The three mutual banks together have capital totalling 1.1 billion rand.

The purpose of the amendment bill was to bring the Mutual Banks Act on par with the Banks Act.

He commenced with an analysis of various sections of the Mutual Banks Amendment Bill by comparing some sections to the Banks Act.

Section 2
This related to powers of supervision. It was proposed that a new kind of supervision be implemented by extending supervisory powers to the CEO as well as persons designated by the CEO. According to Cronje, this type of supervision was an amplification of section 4(3) of the Mutual Banks Act and was there to provide powers for the registrar of banks for purposes of consolidating supervision. He said that this was successfully accomplished by the amendments to the Bank Act and he expected the same success with a similar amendment to the Mutual Banks Act.

Section 3 - 21
He said that sections 3 - 21 all related to the issue of provisional registration.
According to the Mutual Banks Act of 1993 registration of mutual banks had two stages. Firstly, they had to be provisionally registered. Thereafter, they had to qualify for final registration within a maximum period of five years. Any such bank failing to get final registration within that period faced de-registration.

The problem in this regard is that the public is more hesitant to do business with a provisionally registered bank than with a finally registered one. This is simply because of the scepticism and stigma attached to the term "provisionally registered bank". Its management is considered to be of an inferior quality even though this may not be so. According to Cronje, there are provisionally registered banks more capable of risk management than finally registered banks.

He explained that section 21 provided that provisionally registered banks would be finally registered when the Act was adopted.

Section 22
In terms of section 22, licence fees payable to government would now be payable to the Reserve Bank because he said that the South African Reserve Bank funded itself and they had therefore asked the government for the licence money.

Section 25
The type of supervision as discussed under 'Section 2' also applies to associates of corporate governance. The Mutual Bank Bill defines 'associates of banks' broadly. In terms of section 25 he explained that only 49% of a Mutual Bank's Board was allowed to consist of executive directors. He said that this conformed with the Kings report that there should be more non-executive directors. Non - executive directors could also not be employees of the Mutual Bank or employees of its associates. It was thus clear that directors of Mutual Banks had to be people who were independent. He said that the definition of associate was in section 1 of the Mutual Banks Act. Also when it came to auditors, the mutual bank had to have external auditors who could not be employees of the bank or employees of associates of the Bank. Thus, Section 25 which is an amendment of Section 45 (relating to auditors) states that an auditor must be an accountant and auditor registered in terms of the Public Accountants' and Auditors' Act 1991 who is not an officer of a mutual bank or of any of its associates.

Section 26
With regard to what duties these auditors would have, it was decided after consultation with the auditors' profession and the auditors' board, that the original proposed amendment in section 26 was too vague. It provided that the auditor must report anything that will endanger or impair the funds of the mutual bank. They agreed to change the wording slightly to read: "The auditor must report anything that will endanger the Mutual Bank's ability to continue as a going concern or may impair the protection of the funds of the Mutual Bank's depositors…."

Section 28
In terms of section 28, there were certain qualifying factors in respect of large exposures: If the Mutual Bank lent an amount equal to at least 10% of its qualifying capital to a single person, this had to be reported to the registrar of Banks. Before a Mutual Bank could lend 25% of its qualifying capital to someone,
that person had to be looked at by a committee called the large exposure committee consisting of non-executive directors.

Questions and comments
A member was of the view that the amendments should be looked at together with the principal act.

There was a question as to would happen if an application for registration was turned down. She wanted to know the process from there.
Mr Cronje stated that previously the Act did not allow for appeals but now it would, therefore, if the registrar did not grant an application, one could appeal against the decision. He said that it was also possible for a person to reapply as well.

In relation to risk management, was thought given to the situation where a Mutual Bank lent 10% of its qualifying capital to three various persons or institutions, for example banks, who have pledged part of their qualifying capital to someone else?
Mr Cronje said that when the Mutual Bank lent the money to the persons or banks, it would be prudent banking business to subtract the pledged amount from their qualifying capital.

The chairperson, Ms D Mahlangu, (ANC, Gauteng) wanted to know what the relationship was between Mutual Banks and normal banks.
Mr Cronje said that firstly a Mutual Bank did not have a corporate identity like a Bank. He said that the Mutual Bank belonged to its depositors who thus have a say in its management. Secondly he said that Mutual Banks did not trade their shares as they were not listed on the JSE - there were no PIBS listed on the JSE. Finally he said that Mutual Banks were more commercially related institutions which dealt more with the public.

The chairperson reiterated the fact that the Amendments had to be read together with the principal Act and could not be read in isolation.

Revenue Laws Amendment Bill
Mr J.J Louw, General Manager: Law Administration for the South African Revenue Service (SARS) discussing selected clauses of the proposed Amendment Bill between clause 1 and clause 80 which dealt with all the proposed amendments to the Income Tax Act, Marketable Securities Tax Act, Customs and Excise Act and a few other less important Acts. Mr Peter Franck, Director of Policy and Legislation for VAT at SARS, dealt with the proposed Vat Act amendments in clauses 81 - 106. Their presentation was largely based on the explanatory memorandom of the Bill.

Mr Louw explained the new provisions of the Companies Act which allowed companies to buy back shares and raised various tax implications related to this. He spoke about new provisions relating to pension interest, financing schemes, the extension of credit provisions in clause 12, deeming provisions in clause 9 of the Income Tax Act and various other provisions relating to the prevention of tax fraud, the enforcement of loan agreements and generally how to curb tax evasion. The proposed amendments were clearly aimed at tightening up all legislation regarding the payment of revenue and tax and the enforcement of this.
Mr Franck said that the annual turnover required to register as a vendor would double to R300 000 (clause 92). Another proposed amendment was, due to fraud and abuse with regard to companies and close corporations, they must have an annual turnover of more than R20 000 to exist lawfully.

Questions and comments
Referring to the implications of the proposed amendments to the Income Tax Act which sought to override a court ruling which decided that in respect of a spouse's share of the other spouses pension interest, that share awarded in the divorce order could not be taxed, the member wanted to know whether the share could be taxed in the hands of the spouse receiving the benefit.
Mr Louw said that in fact that portion received was tax-free. He said that this was an inequitable situation since the member of the pension fund (the other spouse)
had, when contributing to the pension fund, received a tax deduction. He therefore argued that if he received a deduction for tax on all his contributions then he should be taxed on the full amount of his payout before his former wife received her portion. (See Clause 10 of the memorandum.)

With regard to clause 11, Mr Louw explained that SARS could be requested to assist the board of the Student Financial Aid Scheme in tracking down students who owe money on loans and whose whereabouts were not known. The chairperson wanted to know what the position was with graduates who owed money on loans but who did not have jobs.
Mr Louw supposed that because they did not have money they could not pay. He said however that he did not know since he had nothing to do with running the scheme and therefore did not know what the board would do.

A member wanted to know if a foreigner worked in South Africa, which country would be entitled to tax him.
Mr Louw explained that taxation was based either on source or residency. On both accounts in this situation South Africa would have the sole right to tax him.

Another member wanted to know whether this issue had any relevance to the prevention of money laundering.
Mr Louw said that it did not.

With regard to the attempt to eliminate the duplication of tax payments to two countries, a member wanted to know how the payments and the amounts thereof were influenced by factors like foreign exchange.
Mr Louw explained that there were two things affecting the payment of tax, namely the rate applied and the tax base. He said that these differ in both countries and therefore both calculations are first made separately. If the tax owed in the other country was more than the tax owed in South Africa, then South Africa would have no claim for any tax. If it was less, South Africa would have a claim for the difference between the two amounts.

She also wanted to know how long a foreigner had to be in South Africa to be considered a resident for the purposes of taxation.
Mr Louw stated that there were various double taxation agreements dealing with these and other issues. He said that South Africa had already ratified 32 such agreements with various countries and another 30 were in the pipeline at various stages of negotiation.

A member wanted to know how much money Mr Louw expected would be generated by the proposed amendments.
Mr Louw said that at the present the SARS was only collecting about R280 million whilst he expected the amendments to boost this from between 1.5 and 2 billion rand.

A member wanted to know how SARS would deal with the demutualisation of insurance companies.
Mr Louw said that this would not affect the situation at all since both limited insurers (companies) and mutual insurers were taxed on the same basis.

He also raised the capacity of SARS. He wanted to know what was needed to meet the challenge of enforcing the revenue legislation from a capacity point of view. Mr Louw said that SARS needed the services of an actuary since at the moment they were making use of the services of the Financial Services Board's actuary.

The Chairperson pointed out that there was no quorum to adopt the Bill. She also thought, as was suggested by a member, that the committee should receive a short synopsis in relation to the main principles of the proposed amendments. The presenters agreed to this. The meeting was adjourned.