Draft Taxation Laws Amendment Bill: Informal briefing
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Meeting report
FINANCE PORTFOLIO AND SELECT COMMITTEES: JOINT MEETING Dr R Davies (ANC)
27 May 2005
DRAFT TAXATION LAWS AMENDMENT BILL: INFORMAL BRIEFING
Chairperson:
Documents handed out:
PowerPoint presentation on Taxation Laws Amendment Bill Currently individuals were allowed to take into account any foreign taxes they had paid when making their provisional tax payments. This was not available to companies but was being extended by the Bill. This was credit that would have been allowed in any event. It would prevent unnecessary refunds from arising. The concept of a designated country list was repealed two years ago. If one had a sufficiently high shareholding in a company in a designated country and it had declared a dividend, the dividend was not subject to tax and one received a Secondary Tax on Companies (STC) credit for the dividend. This was done away with as SARS moved to the concept of participation exemption. In terms of this, a person who held more than 25% in an offshore entity and had received a dividend, was exempted from tax. Last year SARS had made an amendment to simplify the accounting for STC and so called "loop structures" wherein a dividend that was subject to STC in South Africa had flown offshore and then came back to South Africa. People were finding it difficult to track down the STC credit. SARS introduced a deeming provision and some people were concerned that the deeming provisions touched on the last few months of the phased out designated country regime. The amendment was aimed at saying that the deeming provisions did not have this effect. The original phase-out that was proposed and accepted remained in place.
Draft Taxation Laws Amendment Bill
SUMMARY
The Committee was briefed on the draft Taxation Laws Amendment Bill. The presenters gave a summary of the main tax proposals for 2005. These included the R10, 9 billion tax relief for individuals and companies and the exemption from skills development levy for small business with a payroll bill of less than R500 000. They also outlined the new transfer duty rate structure that came into effect as from 1 March 2005. The small business tax relief had been extended to personal services as long as the businesses maintained at least four full time employees who were employed in the core activities of the business.
There was an amendment to deal with the issue of exchange control amnesty. Some people had been advised not to submit their returns until they had received notification that the application for amnesty had been accepted. Implicit from this advice was that people should continue to lie in their returns if their applications had been unsuccessful. There was a number of people who had taken the advice and had not submitted their returns. Rather than out kicking them out of the amnesty process entirely, SARS was saying that they must furnish the returns within 30 days of their getting the amnesty approval. The penalty for late rendition of the returns had not been waived.
Members raised issues around cars that had been stored in bonded warehouses. Such cars were sold to people who were living in South Africa but had addresses outside South Africa, registered there but driven in South Africa. It was also suggested that Treasury should formulate a long term tax policy that would indicate the direction it intended to go. This would be beneficial to investors and give them confidence about investing in the country.
MINUTES
The Committee was briefed on the draft Taxation Laws Amendment Bill. The delegation consisted of Mr M Grote (National Treasury: Technical Tax Specialist), Ms M Botha (National Treasury: Consultant on Legislative Oversight and Policy Co-ordination), Mr F Tomasek (SARS Assistant General Manager: Law Administration) and Mr V Pillay (Manager: Law Administration).
Both Mr Tomasek and Mr Grote briefed the Committee on the Bill (see document). Mr Grote thanked the Committee for an opportunity to present on the taxation design process in South Africa. By way of background, he explained the main policy interventions that were announced earlier this year by the Minister of Finance. These included the total tax relief for individuals and companies, the compliance burdens for small businesses and the abolishment of stamp duties on all banking debit entries and installment credit agreements. The government was concerned about the cost of doing business in South Africa. There had been some adjustment of the deemed business cost against car allowance. Taxes on tobacco and alcoholic beverages had been increased.
Clause 1: Amendment of section 2 of Act 40 of 1949
This clause dealt with the new transfer duty rate structure with effect from 1 March 2005. Given the buoyancy in the property market, the government was concerned about first time homeowners who were getting into the market. Hence the substantial relief (zero rate) for property value up to R190 000.
Clauses 2 and 3: Fixing of rates of normal tax in terms of Act 58 of 1962 and Amendment of section 6 of Act 58 of 1962
These dealt with the normal personal income tax rate and bracket adjustments and amendments to rebates of normal tax. They translated into an attractive tax threshold of R35 000 for people below the age of 65 and R60 for people over 65. 44% of the tax relief went to people earning below R150 000. This was in line with the government’s commitment to improving the conditions of poor people. 33, 4% went to people earning R250 000 and above and this should be read together with clause 4 wherein the government had tried to move aggressively in relation of the treatment of motor vehicle allowance. There were also various measures of relief for taxpayers over the age of 65. Retired couples with income only from interest bearing deposits could invest almost R2 million tax free.
Clause 4: Amendment of section 8 of Act 58 of 1962
This clause addressed the issue of the deemed method for calculating fixed business travel cost. A number of new elements had been introduced. This included the introduction of the 30% residual value element and the increase of the taxable value of company car from 1, 8 to 2, 5 per cent. The depreciation of economic use value of a car would be determined over seven years. Tax benefits would be capped at car value of R360 000.
Mr Tomasek added that the actual kilometre method was still available for people who were travelling for business. The Bill was only changing the deemed kilometre method. The changes did not affect someone who had traveled extended distances on business. Such a person would only be affected by the capping of the vehicle. A question could be asked why the Bill was allowing wear and tear over seven years. He reminded members that the Bill would introduce the principle of the residual of 30%. Trying to work this into a piece of legislation that would have to be applied by ordinary people on the streets could be complex. The seven-year write off period would approximate this in a simpler fashion. If one did calculations after five years using the seven-year write off period, one would have a residual of 28, 5%.
Clause 5: Amendment of section 10 of Act 58 of 1962
This dealt with the increase in interest and dividend exemption. In 2004/05 interest and dividend exemption was fixed at R11 000 for taxpayers under the age of 65. This had been increased to R15 000 with effect from 1 March 2005. The exemption for foreign source interest and dividend had been raised from R1 000 to R2 000.
Various tax relief measures for small businesses had been introduced. The compliance burden would be reduced and cash flow improved by allowing certain vendors to file VAT returns every four months. Small business tax relief had been extended to personal services as long as the businesses maintained at least four full-time employees. The employees should be employed in the core activity or business of the firm. Some people still felt that this might still be overly restrictive. They would also be eligible for a depreciation write-off for all depreciable assets at a 50:30:20 per cent over a three-year period. Businesses with a payroll of up to R500 000 would no longer be required to account for Skills Development Levy. There were still negotiations with the Department of Labour on the distributions of the proceeds of the Skills Development Levy. The requirement that at least one employee should have been registered for Pay As You Earn (PAYE) had been dropped.
The Regional Services Council levies and Joint Services Council levies would be abolished with effect from 30 June 2006 and replaced with an alternative tax instrument or revenue sharing arrangement.
Mr Tomasek focused on anti-avoidance and tax administration.
Clause 6: Amendment of section 11 of Act 58 of 1962
Mr Tomasek said that some people had carefully looked at the section and concluded that it did not mean what people thought it had meant for the last 40 years. Some people had said that there was no specific requirement that one should have been the owner of the asset in order to claim for wear and tear. This was a ridiculous argument from a common sense perspective. The amendment was to clarify the position and the words "acquired by the taxpayer" had been added to clarify the section. The clause also referred to section 12E in order to ensure that there was no double deduction between this wear and tear allowance and the general wear and tear allowance allowed to small businesses.
The amendments in clauses 7 and 8 were similar to the amendment in clause 6.
Mr Davidson (DA) asked the presenter to clarify the meaning of clause 6.
Mr Tomasek replied that the Income Tax Act had various provisions that permitted people to claim various wear and tear allowances on assets. If one had taken out the words "acquired by the taxpayer" the clause would say "used by the taxpayer". An argument could be made that people who were renting properties had assets that they were using and could therefore claim wear and tear allowance.
Clause 10: Amendment of section 24J of Act 58 of 1962
Some people had indicated that the definition of "yield to maturity" was not clear as it should have been. The amendment sought to clarify the section. There had been a move to the use of technical jargon to ensure that people did not read it in the wrong manner.
Clause 11: Amendment of paragraph 23 of Fourth Schedule to Act of 1962
Clause 12: Amendment of section 21 of Act 91 of 1964
This was intended to clarify the requirements of section 21. The main provision in the Customs and Excise Act was a concession that was introduced last year. People who imported goods for the purposes of re-exporting them might store them in bonded warehouses without the payment of duty or value added tax. They had a timeframe within which they had to re-export the goods. They would be guilty of an offence should they fail to re-export the goods. It was unclear as to what should be done with the goods. In terms of the Bill such goods would be caused to be abandoned or destroyed. The importer could also enter all goods into the country and pay duties unless they were prohibited goods.
Ms J Fubbs (ANC) asked why SARS did not have the right to auction or sell the goods.
Mr Tomasek replied that the word ‘abandon’ in the Act meant abandoned to the State. There were sets of procedures in terms of how to deal with the goods once they had been abandoned. Sometimes it was very difficult to auction or sell the goods in the country due to the impact this might have on the local market.
Mr B Mnguni (ANC) asked why the goods were not simply given to the poor people.
The Chairperson replied that this had been subject to debate for sometime. The same answer given to the question by Ms Fubbs could apply to this question. There had been lots of pressure to allow second hand clothing. The concern from the Department of Trade and Industry was that such clothes would end up in the trading system and undermine the local clothing industry.
Mr Tomasek agreed with the Chairperson. Some countries had had huge influxes of goods that were supposedly donated to charities but found their way into the local trading system. This had serious impacts on the local markets.
Clause 13: Amendment of section 21A of Act 91 of 1964
This clause was intended to correct some cross references in the Act. The most substantive amendment was found in clause 13(d). Parliament should on an annual basis ratify amendments made in respect of the Schedules to the Customs and Excise Act. The Schedules set out the various tariffs.
Clause 14: Amendment of section 44 of Act 91 of 1964
This was a clarification and provided that if SARS had gone to investigate somebody’s affairs and had picked up some discrepancy, it could go back two years prior to the start of the investigation. A question would arise if, for instance, the investigating officer had taken some documents to go through them in his office and had picked out some discrepancies. The question was whether such discrepancies were picked up during the inspection. The amendment referred to "as a result of" and during "the course of or following upon" so as to eliminate arguments on the boundaries. The substance of the section did not change.
Clause 15: Amendment of section 47 of Act 91 of 1962
Mr Tomasek said that this clause had fallen out of the Bill in 2001 during the editing process. The World Customs Organisation normally issued books that broke down goods into various classifications for tariff purposes so as to ensure that they were consistent throughout the world. South Africa adhered to this and had a copy of the guide. The version kept by the Commissioner would be the authoritative version.
Clause 18: Continuation of certain amendments of Schedules Nos. 1 to 6 and 10 to Act 91 of 1964
This clause provided confirmation of two tariff amendments that were made in 2004. The amendments would soon be tabled in Parliament so that Members could look at them.
Clause 28: Amendment of section 1 of Act 89 of 1991
This was another unfortunate omission during the editing process. The clause would be deemed to have come into operation on 24 January 2005 which was the date at which the last Revenue Law Amendment Act was promulgated.
Clause 29: Amendment of section 11 of Act 89 of 1991
In the last few years there had been a whole restructuring of the way government and public entities were treated for Value Added Tax (VAT) purposes. One of the side effects of this was that certain designated public entities had to pay value added tax if they were engaged in certain activities that made them to compete with normal business. One would not want them to pay VAT on grants that they had received from the Sector Educational and Training Authorities (SETAs). The amendment would ensure that those grants were zero rated and not subjected to VAT.
Clause 30: Amendment of section 23 of Act 89 of 1991
The clause provided that one could not register as a VAT vendor for any supplies made on or before 31 March 2005. The reason was that if one was to enter into debates on whether public entities owed SARS any VAT or whether SARS owed them any refund, there might be entities coming forward to ask for more money. Treasury could also say that an entity had received too much refund which it did not need and this should be forfeited to Treasury.
Clause 31 Amendment of section 25 of Act 58 of 1991
This clause was necessitated by the introduction of the filing of VAT return for certain small businesses every four months. It required small business to notify SARS of any change in circumstances that would make them no longer qualify.
Clause 33: Amendment of section 39 of Act 89 of 1991
Mr Tomasek reminded Members that the government had introduced an environmental levy in respect of plastic bags. People who did not pay the levy would be subject to some penalty.
Clause 34: Amendment of section 40 of Act 89 of 1991
This was one of the cut-off provisions in respect of public entities. It provided that the Commissioner could not go and ask for more money from the entities and at the same time the entities could not claim refund from the Commissioner.
Clause 35: Amendment of section 54A of Act 89 of 1991
The clause would ensure that all the ruling provisions in the Value-Added Tax Act were in the same place.
Clause 37: Amendment of section of 20 of Act 12 of 2003
This clause dealt with the exchange control amnesty. It followed from information that SARS had received from the Amnesty Unit. What had happened was that in the early days of the amnesty, there was an amnesty cut-off date of 30 November for amnesty application and the returns had to be submitted by the 29 February. People were saying that one should not submit the returns until they had received notification that the application for amnesty had been accepted. Implicit from this advice was that people should continue to lie in their returns if their applications had been unsuccessful. Because of the sheer volume and interest in the amnesty process, there were very few applications that had been accepted before the cut-off date. The cut-off date was then extended to the 29 February. There were a number of people who had taken the advice and had not submitted their returns. Rather than out kicking them out of the amnesty process entirely, SARS was saying that they must furnish the returns within 30 days of their getting the amnesty approval. The penalty for late rendition of the returns had not been waived.
Clause 38: Substitution of paragraph 3 of Schedule 3 to Act 16 of 2004
Mr Tomasek reminded members that last year SARS had proposed an amendment in respect of the continuation of existing mining royalties until such time a new regime had kicked in and had been accepted. Subsequent to this there had been discussions about SARS taking over the collection of the royalties. The clause would provide SARS with the usual powers that it exercised in the collection of taxes.
Clause 39: Amendment of section 40 of Act 32 of 2004
Clause 41: Taxation proposals on customs and excise duties
There had been a slight error in the calculation of the duty for cigarettes. The amendment was aimed at correcting the document that had been tabled.
The Chairperson referred to the Revenue Laws Amendment Bill last year and the tax administration provisions there and the tagging. He was not sure if what happened to goods in bonded warehouses kept for more than six months, would pass muster in terms of the interpretation clause of the Constitution. He urged the presenters to get in touch with the people who had advised the Joint Tagging Mechanism.
Discussion
Mr Davidson focused on the question of tax and tax policy. He asked what consideration government was giving to coming up with a tax policy. Members of Parliament often found themselves, during the budget debate, with surprises like the recent decrease of corporate tax from 30% to 29%. If government was to come up with a tax policy for five years, for instance, there would be indications to corporate investors of exactly where the government was going. If government was to come up with policy to say that over the next five years it intended to decrease the corporate tax by 1% per annum, this would be as good as saying that tax had been reduced by 5%. This would be a huge encouragement for investment. He agreed that
Mr Grote replied that in 1994 Treasury had appointed the Katz Commission that had released eight reports. The first report dealt with a stock take of the tax system of South Africa. Substantial time had been spent on inefficiency in the revenue administration. Out of this came the SARS concept of having a semi-autonomous agency taken out of the salary structure of government. The second report had dealt with the review of exchange control given the opening up of South Africa. As one relaxed exchange controls, one should institute a tax system that would create the right incentives to retain resources within the country. The third report dealt with tax incentives and minimal use of tax incentives, how to incentivise savings and retirement fund tax. The fourth report dealt with capital transfer taxes and reconfirmed South Africa’s position of retaining the estate duty in lieu of inheritance tax. The fifth report was an interim report on the land tax. The seventh report dealt with intergovernmental relations and fiscal decentralisation. The eight report dealt with land tax. There had been various attempts of explaining tax policy choices. This route was followed because at that time Treasury had very limited capacity on the policy side. A decision was taken in 1999 to create a tax policy unit. When the unit came into being, it released an internal discussion document on tax policy choices. It dealt with all aspects of tax. It was an internal process run by Treasury but had full stakeholder participation. This fed into the next wave of tax reforms since 1999. It was correct that Treasury should signal its direction more often. It had done this in respect of the Minerals Royalties Bill. It would soon release a discussion paper on the retirement funds tax.
With regard to the RSC levy, he agreed that the tax was on the way out for constitutional reasons. There were many options that Treasury was considering and this would be debated with stakeholders. He could not preempt what it would be. They were looking at a combination of resources.
On the issue of the word "acquired" not solving the problem, Mr Tomasek said that SARS’s analysis in the tax context was that the word should solve the problem. He would take the view back to his team.
Mr Mnguni asked what would be the impact on car sales, job creation and revenue if people started buying cars that were less than R360 000 so as to save on tax.
Mr Grote replied that there was a very low percentage effect that had no employment fall out effects.
Ms Fubbs was concerned that for Clauses 9 and 36, the clauses might bring about negative compliance. In order to remain within the ambit of the clauses small businesses might employ four people at any level and at a very low cost to the business. She asked if SARS had looked at this.
Mr Tomasek replied that the people should be employed in the core activities of the business. There might be problems in deciding whether a person in the margin, a receptionist for instance, was in the core activities of the business.
Ms R Joemat (ANC) said that capacity was always a problem and the over working of staff was quite high. She was concerned with the monitoring of clause 9. She also asked if there was sufficient capacity to monitor large numbers of containers in the ports.
Mr Tomasek replied that the payment of people was very important. SARS had an advantage on this front. The monitoring of containers was a minor issue in the context of clause 9. SARS was working towards expanding its x-ray and scanning capacity to containers.
The Chairperson linked his input to the question raised by Mr Mnguni. He wondered if someone should do an impact study because intuitively, one would think that there would be some advantage to locally produced motor vehicles over imported vehicles. In terms of the bonded warehouses, recent television broadcasts had shown cars that had been imported going through the warehouses and being bought by people in South Africa who had addresses in neighboring countries. The cars would be registered in other countries but driven in South Africa. He wondered if there was any thought about dealing with this issue. He was concerned by the fact that the provisions in clause 6 had been interpreted and acted upon for decades and some smart lawyers had found another interpretation. He asked if there was no interpretation clause that could be put in place to prevent anybody from interpreting the provision contrary to what it had been held to provide.
Mr Tomasek replied that he did not have sufficient insight on what was happening around the sale, registration and use of vehicles. Steps had been taken to address this and to make it more difficult. There had been complaints about border crossing between South Africa and a neighboring state because SARS had stepped up controls on vehicles that had gone out of the country and come back.
With regard to the interpretation of legislation, he replied that there was a judicial rule that provided that if there was a provision that had been interpreted in a certain way, one should be hesitant in disturbing it. He was not sure how the courts would react to the codification of the rule. Courts normally looked at the interpretation as it arose shortly after the promulgation of the Act and the consistent application of the provision over many years.
Ms B Hogan (ANC) asked how the amount of R330 000 on transfer duties was arrived at. Was it just arithmetic or did it take into consideration what was happening in the property market.
Mr Grote replied that the cut off was R330 000 for the 8%. There was a model for this given what was happening in the property market. Treasury had been thinking about this given the high prices in the market. By increasing VAT cut-off to R400 000 one would have jumped to a tax loss of over R1 billion and this could not be afforded. The decision was to give incentive to first-time homeowners and Treasury also did not want to add more incentives in the higher market.
Mr T Vezi (IFP) said that he collected mail for some people who lived in remote areas of Kwazulu-Natal. He had seen a number of letters from regional councils that had been addressed to people who were supposed to pay levies. The problem was that people did not collect the mail. He asked if the presenter shared the observation that the letters did not serve any good purpose since people did not collect the mail. He wondered if the regional councils had derived any benefit from sending the letters.
Mr Grote replied that the RSC was not necessarily a bad tax instrument. It was a voluntary tax and not enough resources were put into its proper administration and keeping people compliant. There was no accurate database.
Mr M Johnson (ANC) asked if SARS worked with other departments and other institutions such as the Post Office with regard to the filing of tax returns. There were people who imported vehicles at cheaper prices from East Asia via Swaziland. The person would take the car from Swaziland and use it in South Africa. He would renew the licence in Swaziland from time to time but use it in South Africa.
Mr Tomasek replied that the problem was that one needed to have a certain level of quality control over the people who were assisting taxpayers in filing their returns. It was difficult to work with other departments on this level. One would essentially be expecting a person working at a post office to have advanced knowledge of the tax system. SARS was placing its people in different places in order to assist people with their returns.
The meeting was adjourned.
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