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FINANCE PORTFOLIO COMMITTEE
24 October 2005
DRAFT REVENUE LAWS AMENDMENT BILL: HEARINGS
Chairperson: Mr N Nene (ANC)
Documents handed out
Aids Law Project submission on Draft Revenue Laws Amendment Bill, 2005 – Section dealing with medical contributions and expenses
Methodist Church of Southern Africa submission on Public Benefit Organisations
Independent Producers Organisation submission
Business Unity South Africa/SACOB submission
Draft Revenue Laws Amendment Bill
The Committee heard submissions by the Aids Law Project, the Methodist Church of Southern Africa, the Independent Producers Organisation and Business Unity South Africa. Both the Aids Law Project and the Methodist Church felt that, given the far-reaching effects and the complex nature of the proposed amendments, an extension in the submission deadline was justified. The Methodist Church of Southern Africa’s submission supported an earlier submission by the South African Council of Churches and focussed heavily on the implications for faith-based Public Benefit Organisations that were registered as groups. With regards to the Independent Producers Organisation’s submission, members showed particular interest in developing an understanding of how profit for films was estimated, realised and calculated.
Submission by the Aids Law Project
Ms Fatima Hassan (Aids Law Project Attorney) welcomed the objectives that underpinned the proposed amendments in clauses 27, 70 and 71 (referred to as "the Sections" in the written submissions) of the Bill, but expressed the Aids Law Project’s (ALP) dissatisfaction with the short deadlines for public comment. The ALP also believed that these proposed amendments had to be seen in the context of broader health reforms and considered jointly by the Portfolio Committees on Health and Finance.
The ALP felt that the rationale behind the choice of Option 1A (as detailed in the Discussion Document) by the National Treasury needed to be explained, as it seemed to further promote the use of private healthcare by middle- and high-income earners, rather than to provide access for the poor.
Clause 27: Amendment of Income Tax Act No. 58 of 1962, Section 18
The proposed amendments (e.g. the proposed section 18(2)(c)) would not achieve the objective of getting very low-income earners (less than R2971-00) or the elderly (those earning less than R5000-00) to join medical schemes as they fell outside of the tax system and therefore would derive no benefit. Compulsory membership of the Government Employee Medical Scheme (GEMS) by very low income earning government employees would also derive no tax benefit for them.
The amendment in clause 27(1)(a) provided no incentive to join schemes registered in terms of the Medical Schemes Act (MSA), as it provided for rebates to taxpayers who made contributions to foreign benefit funds that did not comply with the MSA. This did not encourage social solidarity and risk pooling among beneficiaries in South Africa.
The ALP suggested that all references to "step-child" or "step-children" be replaced with "child/ren of spouse" as it deemed the former two derogatory. It (the ALP) also felt that deductions provided for in the proposed section 18(1)(b) — and all other sections of the Bill — should not be limited to immediate beneficiaries, but extended to all the taxpayer’s dependants as defined in the MSA.
The ALP thought it unclear why the costs incurred in relation to the "mental disability" of a taxpayer or his or her beneficiaries was not included alongside "physical disability" in the tax deductions proposed in section 18(1)(d).
Finally, the ALP pointed out that the reference to "handicapped person" in section 18(2)(b) should be replaced with "person with disability".
Clause 71: Insertion of paragraph 12B in the Seventh Schedule to the Income Tax Act No. 58 of 1962
The ALP submitted that paragraph 12B(3)(a) needed to be redrafted to included the following provision: "In the event that a benefit that is provided off site is not doing (or is determined as not doing) the business of a medical scheme, no value will be attached to the benefit". This was to ensure the attraction of a tax benefit to the provision of HIV/AIDS treatment both on and off site. In addition, it would eliminate any discouragement to employers to provide treatment and services that fell outside of the narrow category of prescribed minimum benefits.
Similarly, the ALP also submitted that the fragment "listed in any category of the prescribed minimum benefits determined by the Minister of Health in terms of section 97(1)(g) of the Medical Schemes Act, 1998" be replaced by "public health services" in paragraph 12B(3)(a). This was to ensure the attraction of a tax benefit to the provision of primary healthcare benefits by employers.
Finally, the ALP proposed the revision of the proposed paragraph 12(3)(ii) to promote equity rather than equality in the access of medical services. In this manner, only employees who did not belong to a medical scheme would be able to gain access to employer-funded services.
Mr S Asiya (ANC) asked what period for public submissions would be deemed adequate by the ALP.
Ms Hassan stated that more time should have been allocated for civil society and public organisations to research the calculations that underpinned the four options identified in the Discussion Document. Three weeks were allowed for this. It also came at the same time that submissions on other healthcare issues were under way. Again, when the Bill was published, submissions had to be in within two weeks.
Mr I Davidson (DA) asked which of the remaining options, identified in the Discussion Document, would the ALP have preferred.
Mr B Mnguni (ANC) asked whether the ALP had done research to support their arguments with regards to the choice of options identified in the discussion document, and regarding their assertion that people earning below R2971-00 could not afford medical aid membership.
Ms Hassan indicated that full and proper research had not been possible due to the tight deadlines for submissions. Preliminary indications from industry experts fingered Option 1A as the most expensive and Option 1B as the least expensive. The problem was compounded by the fact that no calculations existed for the current healthcare subsidies to middle and high-income earners, so no comparisons could be made. The ALP did not necessarily prefer one of the other options to Option 1A, but any option that would not shore-up middle and high-income earners at the expense of creating benefit for low income earners would be preferable.
Ms Hassan stated that analogous research done by Cosatu’s Naledi arm indicated that very low-income earners did not want to join medical aid schemes.
A representative from National Treasury pointed out that the option chosen by National Treasury was, in fact, Option 1B and its cost was lower than the R3.7 billion mentioned in the ALP submission. In addition, given its own constraints, the National Treasury thought the submission deadlines had been reasonable.
Submission by the Methodist Church of Southern Africa (MCSA)
The MCSA was represented by Reverend I Abrahams (Methodist Church Presiding Bishop) and Mr G Trimble (Methodist Church Chief Financial Officer).
The MCSA declared its support for the submission from the South African Council of Churches (SACC) and requested that submission deadlines for the Bill be extended. The MCSA accepted that the Income Tax Act needed to ensure that Public Benefit Organisations (PBOs) did not unfairly benefit the founders or office bearers; did not have a competitive trading advantage over other tax paying entities; and reflected good governance in their management.
Under the proposed amendments, PBOs had to pay income tax on net taxable income from unrelated trading or business which felt outside the permissible trading rules. It therefore would become necessary for each Circuit and / or Society that engaged in such trading or business to maintain separate accounting records for each type of trading activity, and be individually responsible for any tax liability. The MCSA would be adversely affected by this, since many of its 330 circuits and 1000 societies did not have the necessary capacity to take on this administrative burden. Certain of its circuits and societies covered both South Africa and another southern African country, thus adding to the complexity.
The MCSA felt that the Income Tax Act should provide a generic exemption for rental income from manses registered in the name of a PBO, in a manner similar to the Property Rates Act. Failing this, the MCSA would apply for Ministerial approval for such rental received from letting manses to be regarded as exempt in terms of section 30(3)(b)(vi)(dd).
The MCSA voiced its disapproval of the discrimination against PBOs with group registration when it came to tax rebates, as per the proposed amendments to section 6. It had the implication that circuits and / or societies had to sell their manses in order to avoid tax, and this could seriously impede the mission of the MCSA.
Any building would also be subjected to Capital Gains Tax (CGT) had it become subject to partial taxation due to unrelated trading. This implied that such buildings had to be valued in terms of complex legislation and CGT had to be paid when they were sold.
Mr B Mnguni asked what the cost implications would be for the MCSA to comply with the law if the proposed amendments were accepted
Mr I Davidson noted that the MCSA had opted for group registration with the South African Revenue Services (SARS) because of its connexional structure. He asked for further clarity on the MCSA’s resistance to unbundling its registration with the SARS.
Reverend Abrahams stated that unbundling for tax registration purposes would turn the MCSA into "another animal". It would change the theological and historical make-up of entities such as the Anglican Church and the MCSA in that they would have to become congregational churches.
Mr Nene ventured that the MCSA sought that the legislation be adapted to its composition, rather than the Church adapting its composition to the requirements of the legislation.
Mr Davids pronounced such a comment unfair and simplistic. He expressed concern that the difficulties identified by the MCSA extended to most other faith-based organisations, and that it should be attended to.
A representative from the National Treasury asked whether each of the societies currently constituted a legal person, or whether the MCSA consisted of one legal person with the societies forming the branches.
Mr Trimble stated that the MCSA was a single legal entity.
Mr M Johnson (ANC) asked what the operational implications of unbundling would be for the MCSA’s circuits and societies outside of South Africa.
Reverend Abrahams stated that the laws of other countries impacted on the way that their circuits and / or societies were run in the five neighbouring states in which they were active. For instance, Ministers of religion had to pay income tax locally, because they were working in a foreign country. Insurance was another area of disparity. Thus far there had not been any difficulty in this regard.
Mr S Asiya stated that the Committee needed to be informed on the double taxation implications of these amendments insofar as the countries where the MCSA had circuits and / or societies were concerned.
Submission by the Independent Producers’ Organisation (IPO)
Mr D Wicht told the Committee that the IPO supported amendments to section 24F of the Income Tax Act that created greater certainty, eradicated abuses and encouraged legitimate and realistic financing arrangements commensurate with the high risk associated with film investment. It was the experience of the IPO that legitimate local financiers avoided investing in the film industry for fear of engaging the SARS in a long protracted dispute on the interpretation and application of the Income Tax Act. To this end, the IPO urged the SARS to set out positive and clear guidelines that encouraged local film investment.
The IPO submitted that in calculating the total production and post-production costs for purposes of section 24F(2), the film owner should be entitled to exclude the compensation of up to four designated persons. It also submitted that production and post-production costs incurred by film owners in the Southern African Development Community (SADC) should form part of the section 24F film allowance calculations.
Finally, the IPO suggested that the ten-year loan period limitation proposed in section 24F(8) be changed to 15 years, as it was done in the UK.
Mr B Mnguni asked for further explanation of the reasons behind the submission that the compensation of up to four designated persons should be excluded from the calculations of the production or post-production costs for the purposes of section 24F(2).
Mr Wicht explained that there were two ways in which a film could qualify as South African for tax purposes. The first of these was if a film was produced under any of the official co-production treaties with other film-producing countries. Currently, there were three of these in place. The second way was if the film was considered to be largely South African by virtue of its expenditure and its ownership. The test that the SARS was proposing was that with respect to the latter option that 75% of the total expenditure had to be made in South Africa in payment for South African goods and services. The IPO believed that, initially, it would be necessary to obtain the services of foreign film stars for international marketing purposes. As a result of the high cost involved in contracting such services, it would make the 75% threshold unobtainable in most instances.
Mr Y Bhamjee asked how and over what time period the profit of films was calculated.
Mr Wicht explained that once a film had been completed it was put on the international market to generate income. Profit was realised once the proceeds of sales surpassed the costs related to the production and marketing of the film. The period over which the income realised by the film was taken into account was for as long as the copyright period. Films had different earning cycles. The initial earnings of a film happened mainly over the first five years via licences (lasting from seven to fifteen years) to the various markets which purchased it. When the licences expired, the rights to the film reverted back to the owner, who could then re-licence it to new media that had developed.
Mr K Moloto asked why it was necessary to extend the loan period for film financing to 15 years if films tended to realise their initial income within the first five years.
Mr Wicht explained that the fact that a film realised its initial income over the first five years did not mean that it made a profit within that period. Should this be the case a film owner would have to wait for a second sales cycle to try and recoup the outstanding costs. The bulk of South African films did not make their costs back within the first five years.
Ms J Fubbs (ANC) interpreted the IPO’s submission to infer that the SARS had created a negative impact on foreign investment in South African films and asked for further clarity on this. She expressed her continued confusion at how profits on films were estimated, and asked whether it was not as a result of weak business models that were being employed. She also asked whether it was the function of the SARS to determine the financing route a film owner should take. Finally, Ms Fubbs questioned the wisdom of requesting the exclusion of up to four foreign persons for income tax purposes when the aim was to produce local films.
Mr Wicht did not believe that the SARS intended to impact negatively on foreign investment in South African films. He believed that improvements could be made to the Income Tax Act to mitigate the high risk involved in investing in films so that it could compete better with other investment options. Investors felt that if they invested in films they would attack the wrath of the SARS due to past events. He continued to say that profit estimation in the film industry was not as much an object of weak business models as it was depended on highly unpredictable audience responses. Also, the first five-year profit cycle was a feature of the film industry, as was its financing needs. The inclusion of foreign film stars in South African films was purely to ensure their relative success in foreign markets, as it provided foreign audiences with something to identify with.
Mr Bhamjee pointed to the historical and structural constraints in growing cinema audiences in South Africa.
Mr Wicht concurred and declared it to be very high on the agenda of the IPO.
Mr Davidson asked how many South African films of the last five years were profitable.
Mr Wicht stated that he did not have the exact numbers. He stated that during this year, Ster Kinekor had released, on average, one South African film per month. While many of these films attracted critical acclaim, the vast majority of them would not make their money back in the short term. They would need to find secondary markets. Foreign sales were highly depended upon whether the foreign market could recognise something in the movie, such as either the story, or the actors.
Submission by Business Unity South Africa (BUSA)
Clause 10: Amendment of section 6quat of the Income Tax Act 58 of 1962
Mr D Kruger (BUSA Taxation Committee Member) submitted that the reference to the "source" of income in section 6quat was inappropriate for a truly residence-based tax system and that it should be amended to provide relief to South African residents for all taxes payable on their worldwide income.
Clause 14: Amendment of Section 8C of the Income Tax Act 58 of 1962
BUSA ventured that it could be beneficial to insert a provision in section 8C(3)(b)(i) whereby it would not trigger a vesting on termination of an equity instrument which was an option.
Mr B Mnguni asked whether there were any countries in the SADC with which South Africa had not yet concluded double taxation agreements.
Mr Kruger responded that there were still a few treaties with African countries outstanding, while treaties with certain SADC countries needed updating. Botswana and Swaziland were two examples of the latter.
Ms J Fubbs asked whether the SARS provision in respect of income tax paid by South Africans on their income in foreign countries had to be changed, or whether the outdated tax treaties with those territories needed to be revised instead.
Mr Kruger stated that to change or draft treaties were time consuming, and that relief via SARS provisos was a good interim alternative
The meeting was adjourned.
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