RevenueLaws Amendment Bill: Treasury, SA Revenue Services Department response

Meeting report

Professor K Engel (Director: Tax Policy), Mr C Mordern (Chief Director: Tax Policy) and Ms Y Mputa (Deputy Director: Legislative Oversight and Policy Co-ordination, Tax Policy Chief Directorate) represented Treasury. Mr F Tomasek (Assistant General Manager: Legislation) represented the South African Revenue Services.

Public Benefit Organisations (PBOs)
Mr Tomasek read through the responses (see document attached).

Discussion
Ms J Fubbs (ANC) said that these social service organisations currently received government grants. It had been proposed that such organisations should become self-sufficient. She referred to a hypothetical case of a PBO that had 50 homes, of which 40 were in use. The PBO could use the funds towards self-sufficiency. It had been submitted that a single rebate for all PBOs would not be appropriate and that it would be better to introduce a special tax rate for PBOs equal to the company rate. SARS and Treasury noted the proposal required further research.

It had also been submitted that "integral and directly-related to the sole object of the organisation" in clause 18(b) should be replaced by "incidental to the objectives of that public benefit organisation". The proposal had not been accepted. The departments were of the view that the proposed wording would exempt trading that was merely connected with or resulted from the objects of a PBO, and would expand the scope of exempted trading activities too far. This clause was related to a number of clauses that dealt with trading. She asked for more clarification on the response. She asked the impact of the proposed exemption on this clause. SARS had also rejected a proposal in respect of deductible donations to PBOs. It was not aware of any organisation that had been removed from the list. She wondered if the response could be interpreted to mean that SARS would the recommendation under certain circumstances.

Mr Tomasek replied that the question was whether it was a grant being used to fund, or whether it was a PBO running a service for government. This distinction could be difficult to draw. Generally speaking, a straight grant would be exempted. In cases where a PBO was acting like any other organisation in terms of a contract, then the trading rules would generally apply. The comment on a single rebate for PBOs opened: "we do not consider that a single rebate for all PBOs is appropriate". SARS was proposing 5% of the total receipts and accruals of the organisation. The thrust of the proposal was that there should a single tax rate for PBOs no matter what legal form they were in. This was a break from existing practice where each particular legal entity had a tax rate associated with it. SARS was being asked to ignore the form of the organisation and only be concerned that the organisation was a PBO. SARS was of the view that there was a need for further research on the possible implications because this would entail a significant break from current practice.

Mr Tomasek continued that SARS was proposing a three-stage process. Stage One would deal with whether the entity was applying the funds for its proper purposes. Donations would become taxable if the organisation was not spending the funds for the intended purposes. This would off-set the deductions originally granted in respect of the taxpayer who made the donation. SARS would then notify the organisation that their ability to issue receipts for tax-deductible donations would be withdrawn should they continue to use the funds for unintended purposes. Presuming that the organisation did not ‘mend its ways’, the ability to issue receipts would be withdrawn. It would be a criminal offence should the organisation ignore the withdrawal and continue to issue receipts. There was a potential third response. As their ability to issue receipts had been removed, they would be removed from list of people who were able to issue receipts. He was not aware of any PBO that had had its ability revoked.

Mr Davidson (DA) said that PBOs had presented examples of what an application of such laws could do to them. It was a kind of ‘sensitivity analysis’. It was difficult to grasp what would be the net effect of this in terms of examples given by the Methodist Church. Would they be heavily taxed and have to change the structure of their organisation? The SA Council of Churches had indicated that the present rule was 15% of gross annual receipts. SARS had made the point that that this had been reduced by certain factors. In 2004, SARS had made an administrative concession that effectively allowed the de minimus clause that was 5%. He asked if SARS was effectively going back or improving on that. What was the attitude towards the rule? It would be very useful if the Committee could get a sensitivity analysis of the net effect to organisations like religious bodies.

Mr Tomasek replied that SARS was essentially recognising the administrative concession that had existed before. The concession had been welcomed by the PBO sector when introduced because of difficulties with the 15% rule. The available numbers suggested that the 5% concession would resolve the difficulties brought to SARS.

Taxation of medical scheme contributions and other medical expenses
Mr C Mordern then read through the response to issues raised in respect of the taxation of medical schemes contributions and other medical expenses.

Discussion
Mr S Asiya (ANC) said that the concept of a "stepchild" was foreign to African culture. The issue of disability was problematic. Deaf people wanted their language to be recognised as the 12th official language. There was a need to look at the issue of disability because there could be litigation in this respect.

Mr Mordern replied that the wording would change. The issue of mental disability was included in concept of handicap. It would take time to have a uniform definition of disability.

Mr B Mnguni (ANC) said that the government's objective was to get as many people on medical schemes as possible. SARS had indicated that expanding the category of tax-deductible medical expenses other than medical scheme contributions would be contrary to government's overall health objective of expanding medical scheme coverage. He asked how this would disadvantage the government. Would it lead to too many administrative costs to the fiscus?

Mr Van Dyk (DA) said that it had been submitted that it was imperative that the limits referred to in section 18 and the Seventh Schedule be adjusted annually to ensure that increases in medical aid tariffs and cost to medical expenses were taken into account. SARS had only noted the proposal, and said that consideration of adjustments to the caps would be given annually after consultation with the medical schemes industry and the Council for Medical Schemes as indicated in the discussion paper. He asked what particular circumstances would be taken into account.

Mr Mordern replied that it was difficult to provide for a specific percentage. There were no inflationary adjustments to any threshold in SARS's legislation. The adjustments were made annually after consultation with the Minister and various stakeholders. There was a reluctance to include particular percentage adjustments of the threshold because this could have ripple effects throughout the tax legislation and severe implications to the fiscus.

Ms Fubbs (ANC) said that SARS had acknowledged dependants and proposed rewording the definition. There were reasons why it might not be possible to expand the tax relief. Medical schemes did not cater for every full form of disability. She used an example of eyesight. There would be a dependant who needed glasses and this contributed to disability. The dependant might not for example, be able to do his or her schoolwork. It would be better to have some rationalisation of the situation.

Mr Mordern replied that SARS had aligned the definition of dependants with the Medical Schemes Act. He conceded that some of the beneficiaries on the list would be disqualified if they went beyond the available medical benefits. SARS would have to see how to accommodate this. The problem was that there would be monitoring problems. Beneficiaries might start claiming expenses that SARS would not be able to monitor.

Dr P Rabie (DA) noted that consideration would also be given to defining the monetary cap based on the age of the beneficiary. There would be a higher cap for an adult dependant and a lower cap for a child dependant to avoid family splitting. He asked if it was possible to distinguish adolescent and mature person. The medical expenditure of a young person might be higher than those of an adult.

Mr Mordern replied that the proposal did not draw the distinction. SARS might consider the distinction because a concern had been raised that the current proposal might result in family splitting. The Medical Schemes Council had indicated that medical expenses were high at birth. The expenses would drop thereafter and start to increase roundabout the age of 35. In principle, there was a case for a lower threshold for children.

Mr L Johnson (ANC) said that teachers and domestic workers earned poorly. The government should begin to look at some of these categories in relation to access to medical aid.

Mr Mordern replied that said one was dealing deductions from a taxable income. There should be some assistance for people below the income threshold and this was an initiative driven by the Department of Health. SARS' public finance team was working with the Department on some of these issues.

Transfer and estate duty
Mr Tomasek responded to issues relating to transfer duty. SARS was aligning the Transfer Duty Act with other tax legislation. There was a cut-off period for a refund. It was good for SARS and the taxpayer that there should be finality as to an individual's tax affairs. He did not accept the argument that there should be no cut-off period in relation to refunds. He accepted that there should be a cut-off on the raising of assessments.

Mr Tomasek did not agree with the submission that the reduction of the market value by 30% would not take into account the prevailing market conditions, the location of the property, availability of water and the nature of farming conducted. SARS had consulted with organised agriculture and it was agreed that it was reasonable.

Discussion
Ms Fubbs asked what was meant by "absent fraud".

Mr Tomasek replied that tax legislation normally contained a provision that a Commissioner was not able to re-open a matter after a particular time. This was commonly referred to as ‘prescription’. However, there was an exception in cases where the Commissioner had failed to pick something up due to fraudulent misrepresentation or material non-disclosure of information. The prescription period would not run and the Commissioner would be allowed to go back as far necessary to raise the additional assessment. SARS was essentially saying the prescription period would not apply if there were fraud involved.

Further income tax amendments
Mr Tomasek said that these amendments were technical. SARS had proposed an amendment to the definition of a 'beneficiary' as a result of a tax court case judgment that gave it a narrow scope. The amendment was aimed at ensuring that the broader definition originally in place remained. He continued to read through the responses.

Ms Fubbs said that the government had some proposals around the creation of Black Economic Empowerment schemes to ‘broaden and open’ companies. Employees would be encouraged to buy shares. There were too many tax agreements or treaties at different levels, for instance with the Organisation for Economic Co-operation and Development (OECD) and individual member. She wondered if SARS and Treasury were aware of latest implications regarding the withholding of tax. She was of the view that one did not have to be an owner of a land in order to have mining rights.

Mr Tomasek thought that Ms Fubbs was referring to the Broad-Based Equity Scheme.In this context, a relatively small percentage of the shares would be held in terms of the type of scheme. It was a useful contributor but would probably not give one 25 or 30% of the ownership in the company. The theory was that in respect of a scheme available to a broad range of employees, they could be given the shares at no price at all or charged at the lowest rate possible. There was a situation wherein a company would be able to get its shares out into a broad spectrum of its employees. In most cases, the lower-paid employees would be in the majority. There were certain concessions available in such cases. If the shares were held by an individual for at least five years, the disposal of such shares would not be treated as being on a revenue account. The five-year problem was necessary to ensure that broad-based empowerment was achieved. The people should get the benefits of owning shares. The company would be allowed a deduction for shares that had been issued for free or substantial discount.

With regards to foreign tax, he assumed that Ms Fubbs was referring to the European Union (EU) directive which essentially provided that member countries of the EU should exchange information with respect to interest or withhold tax on the interest. The idea was to make it less attractive to put money in tax havens. It was an attempt by the EU to deal with what could be considered harmful tax competition within the EU. The OECD had its own initiative in respect of harmful tax competition.

Mr Tomasek explained that mining rights were immovable property and did not have to be transferred with the ownership of the land.

Mr Tomasek, Mr Mordern and Professor Engel then read through the rest of the responses.

The meeting was adjourned.