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FINANCE PORTFOLIO AND SELECT COMMITTEES Dr R Davies (ANC)
31 May 2005
DRAFT TAXATION LAWS AMENDMENT BILL: HEARINGS
Documents handed out:
FINANCE PORTFOLIO AND SELECT COMMITTEES
Dr R Davies (ANC)
Draft Taxation Laws Amendment Bill
Banking Association of South Africa submission
Business Unity South Africa (BUSA) submission
KPMG Services (Proprietary) Limited submission
Chambers of Commerce and Industry South Africa, (CHAMSA) submission
Institute of Certified Public Accountants (ICPA) submission
SARS Draft responses to submissions on draft Taxation Laws Amendment Bill
The Committee was presented with the Banking Association of South Africa’s (BASA) submission concerning the Draft Taxation Laws Amendment Bill. This challenged Section 2 of the Estate Duty Act, the rates of normal tax for companies and persons other than companies, the amendment of section 11 of the Income Tax Act, the amendment to section 24J, the textual amendment to section 76A of the Income Tax Act, the Limitation and Prescription on Assessment of RSC Levies and Stamp Duties.
Banking Association of SA submission
Mr C Coovadia (Managing Director of BASA) said that BASA wanted to address the Committee as there were a few issues outstanding after its written submission to the National Treasury had been considered.
Section 2 of the Transfer Duty Act
Mr C Coovadia suggested that given the upward mobility of residential prices, the R330 000 cap no longer represented the higher range of property prices, so the ceiling should be raised on the lower rate.
This point was made in the context of the substantial effort the banks were putting into the housing initiative with the government, including new low-income housing stock and the regeneration of the secondary housing market.
Rates of Normal Tax (Persons other than companies)
Mr C Coovadia said that BASA welcomed the increase in both primary and secondary rebates, especially as the tax burden on low-income earners would be reduced. BASA requested that the taxation of income derived from individual policyholder funds of long-term insurers be reviewed. The rate of 30% was now higher than the company tax rate and substantially higher than the average rate applicable to individual taxpayers.
The harmonisation of tax rates between institutions and individuals in the current environment was believed to be a prerequisite in the deliberations of National Treasury’s discussion paper on Retirement Fund Reform. BASA had submitted recommendations to the National Treasury concerning a National Savings Fund, and the role BASA could play in facilitating this fund given the experience of the Mzansi account.
Rates of Normal Tax (Companies)
BASA again welcomed the downward trend in company tax rates, and the support given to small businesses. BASA believes that many small businesses and start-up operations were intended to benefit, but these
benefits were lost if the beneficiaries were unable to make use of the allowances, because they had no taxable income at the time that the allowance was available. Experience had shown that it took a few years before small businesses and start-up operations were in a tax paying position.
Amendment of section 11 of Act 58 of 1962
BASA welcomed the proposal to enhance capital allowances for small businesses, but had two concerns. Firstly, many small businesses, especially in their start-up phase, made use of leasing facilities from banks. Enhancing allowances in this area would stimulate growth, but access to leasing finance was limited through the effects of section 23A and the wording of section 12E.
The essence of section 23A was that income tax allowances were limited to the rental income from leasing. This ring-fencing of leases had the effect of limiting banks’ capacity to expand leasing business to the income from existing leases. BASA believed that much of the desired stimulus of enhanced capital allowances would be lost through the limitations of section 23A, particularly where small businesses finance productive plant and equipment through leasing. These restrictions would have the effect of negating the benefits sought by the proposed amendments.
Secondly, BASA appreciated that allowances should only be claimed by the owner of the assets, and banks, as lessors of productive assets had always been granted such allowances. The bank, as owner and lessor of such assets, would earn leasing or rental income and would claim depreciation allowances in respect of these assets.
In most cases, the bank was the owner, but not the operator of the asset. If an interpretation was made that the bank, as owner, but not the operator, may not claim allowances, the consequences would be very severe. BASA suggested in its submission to the National Treasury and SARS, that the words "acquired by the taxpayer" be followed by "or a lessor, as envisaged under sections 12B and 12C."
Amendment to section 24J (Interest Accruals)
Mr C Coovadia said that section 24J was proposed to be amended to recognise, in the determination of "yield to maturity," and payments made to connected parties as part of the yield inherent in the transaction or scheme. The use of the wording that such amounts must be taken into account as amounts "receivable by that issuer" was cumbersome. The issuer was normally the payer of interest, and not the receiver. For clarification, and consistency, BASA suggested that any payments to connected parties be taken into accounts as amounts in "reduction of amounts payable" by that issuer. That would have the desired effect, but would be clearer to the reader.
Textual Amendment to section 76A of Act 58 of 1962
Mr C Coovadia said that the introduction of reporting requirements under the new section 76A, brought with it the consequence that wilful or reckless failure to report under the requirements of section 76A, would subject the company or trust to penalties, which the Commissioner could remit if s/he was satisfied there were extenuating circumstances. However, where a company or trust inadvertently failed to report, there would be an automatic process by which the arrangement would be deemed to have been entered into by means contemplated in sections 103(1)(b)(i) and (ii), with the Commissioner having no authority to consider extenuating circumstances.
BASA proposed that the current Draft Taxation Laws Amendment Bill be enhanced to include, under section 76A(4)(a), a proviso that the Commissioner’s discretion be extended to recognise extenuating circumstances in unintentional failures to report. This would create greater balance in the sanction options for failure to report, and more certainty in the reporting process.
Reportable arrangements came into effect on 1 March 2005 as provided for in section 76A. BASA noted that while it would take some time to assess the impact and effects of such reporting, it suggested that section 76A be reviewed and amended as soon as possible.
Limitation and Prescription on Assessment of RSC Levies
Mr C Coovadia welcomed the introduction of a two-year prescription period for the assessment of levies.
Mr C Coovadia said that BASA welcomed the abolition of duties in respect of debit entries and Instalment Credit Agreements, and shared the Minister’s view that these changes had a disproportionately large impact on low-income individuals and small businesses.
In conclusion Mr C Coovadia thanked SARS and the National treasury for considering favourably many of the proposals and recommendations BASA made.
The Chair asked if a situation could arise in leasing where ‘double-dipping’ could occur, where the bank and the lessor could both claim the allowances or deductions.
Mr C Coovadia replied that the lessor alone could claim the allowance. There had been misunderstandings in the past which may have led to ‘double-dipping’. Thus, there should be clarity in the Bill regarding this issue to entrench the status quo.
The Chairperson gave SARS until the following day to consider the rest of the public submissions from Business Unity SA (BUSA), the Chambers of Commerce and Industry SA (CHAMSA), the Institute of Certified Public Accountants (ICPA), and KPMG Ltd., after which they would provide their responses.
The meeting was adjourned.