Adjustments Appropriation Bill; Revenue Laws Amendment Bill and Revenue Laws Second Amendment Bill

Meeting report

FINANCE PORTFOLIO COMMITTEE
09 November 2005
ADJUSTMENTS APPROPRIATION BILL; REVENUE LAWS AMENDMENT BILL AND REVENUE LAWS SECOND AMENDMENT BILL

Chairperson:

Adjusted Estimates of National Expenditure
Adjustments Appropriation Bill
Department response to public submissions on Revenue Laws Amendment Bill
Revenue Laws Amendment Bill [B40-2005]
Diamonds Second Amendment Bill [B39-2005]

Members raised the following concerns and questions:
- why there were rollovers in programmes or projects that had already been completed.
- why a further allocation of R242 million had been made to Sports and Recreation South Africa.
- whether Departments submitted requests for money on the basis of their Strategic Plans.
- The possibilities of abusing virements.
- whether all additional allocations were due to unforeseeable and unavoidable expenditure.

A number of amendments were effected to the Revenue Laws Amendment Bill. They were aimed at incorporating submissions made on the draft Bill. They amendments made included the following:
- the Bill would give effect to the proposal that there should be a move to a threshold of 5% or R50 000 of the gross receipts, whichever would be greater, in relation to the tax rebate given to Public Benefit Organisations.
- an asset that belonged to a Public Benefit Organisation, part of which was being used for commercial purposes would be exempted for CGT purposes.

- with regard to costs of film production, in cases where less than 75% of the expenditure was incurred in South Africa, one would get an accelerated deduction only in respect of the South African expenditure. SARS would permit a ten-year write off in cases where one was below the threshold but had other foreign expenditure.


MINUTES
Mr N Cole (Chief Director: National Budgets) and Ms A Adendorf (Director: National Budgets) represented Treasury. Mr Cole gave the presentation. In terms of the Public Finance Management Act (PFMA), expenditure provided for in the Adjustments Appropriation Bill included:
- adjustments required due to significant unforeseeable economic and financial events that affected the fiscal targets set by the annual budget;

- money to be appropriated for expenditure already announced by the Minister during the tabling of the annual budget;

- the shifting of funds between and within votes, or to follow the transfer of functions, in terms of the PFMA and

- the roll-over of unspent funds from the preceding financial year.

Funds were appropriated per programme and indicated as current, transfers or capital payments. Unspent funds on payments for capital assets might only be rolled over to finalise projects or assets acquisitions that were still in progress. Savings on transfer payments and subsidies might not be rolled over for purposes other than what was originally voted for. Savings on compensation of employees might not be rolled over. A maximum of 5% of a Department's payments for goods and services (excluding compensation of employees) might be rolled over. Funds for specific purposes might not be rolled over for more than one financial year unless approved in advance by National Treasury.

Mr Cole said that the total adjustments from national Departments amounted to R2.9 billion. Adjustments were offset against contingency reserve, unallocated amounts, declared savings and projected underspending. Adjustments resulted in a decrease in expenditure from R418 billion to R416 billion.

Discussion
Ms S Asiya (ANC) said that the Committee would have to adopt the Bill since it had been referred to it. He suggested that in future the Bill should be referred to the Joint Budget Committee.

The Chairperson said that the issue of referring the Bill to the Joint Budget Committee was being considered by Parliament.

Mr T Vezi (IFP) asked if the leadership disputes and claims referred to under the Provincial and Local Government Vote involved traditional leaders and questions of chieftainship.

Mr Cole replied that the money that had been rolled over was intended for accommodation rental for the Commission on Traditional Leadership Disputes and Claims. This had been budgeted for in the 2004/05 financial year and the money had to be rolled over because of delays in construction.

Mr L Gabela (ANC) said that an amount under unforeseeable and unavoidable expenditure relating to disaster relief had been put under the Department of Social Development. He was of the view that disaster management was the competency of the Department of Provincial and Local Government (DPLG). He asked why the money was put under the Department of Social Development.

Mr Cole agreed that disaster relief was the responsibility of the DPLG. The DPLG was responsible for designing policies and co-ordinating responses to disaster. Other Departments provided services that were more closely aligned to their responsibilities. The Department of Social Development was responsible for the management of the Disaster Relief Fund and also assisted people affected by disasters. The South African National Defence Force was responsible for rescue operations. One could not put all responsibilities within the DPLG.

Mr L Johnson (ANC) said that unspent funds on payments for capital assets might only be rolled over to finalise projects or assets acquisitions that were still in progress. There were instances wherein there would be fiscal dumping on projected projects. This was a big problem. He asked for more information in relation to the R10 million rollover in the Apex Fund. There was also an amount rolled over in relation to the Ten-Year Celebrations. Since, the Celebrations were over, it would be interesting to know what would happen to the money. He also asked for more information relating to the R1, 104 million unspent money in relation to the Khoisan project. The Department of Minerals and Energy also had some unspent money in the National Electrification Programme. He referred to a housing development project in his constituency that had no electricity. It had been said that electricity would be available in the area in the next financial year. This was disturbing given that it had been said that the Department had no money and yet there were rollovers.

Mr Cole replied that requests for rollovers on capital assets were looked at very carefully. Treasury looked at things like the credibility of plans and the Department's ability to spend. This was helpful in determining whether the projects would be completed in the next financial year. It was also important to look into whether there were no sufficient funds within the current financial year that could cover the requests made. The issue was whether it was necessary to have the roll over of funds. The issue of dumping and whether rollovers would not exacerbate dumping was also considered. Treasury was aware that putting more money in a Department that had problems in relation to planning contributed to further under-spending.

He agreed that the Ten-Year Celebrations had come and gone but the rollovers were meant to cover outstanding invoices. Some invoices had not been processed on time. Treasury was on a cash based accounting system and payments could only be processed once invoices had been submitted. Payments were reflected when the cheques had been cashed. Many invoices were submitted late or had been delayed and payments had to be made in the next financial year. The Khoisan project was part of the Heritage project. It might be better to refer the question to relevant Department.

With regard to the electrification programme, he said that the rollovers in capital projects could only be used for the completion of a specific projects and could not be used for another project. It might be that part of the planning and budgeting process did not make funds available for that particular area. The Funds were being rolled over in cases where municipalities had not been able to implement the electrification project before March 2005.

Mr Y Bhamjee (ANC) asked for more information on virements and how they impacted on the analysis to justify the allocations of additional money to Departments. He noted that there were high profile cases that had led to unforeseeable and unavoidable expenditure by the Department of Justice. He asked who was involved in those cases. He also asked why there was a further allocation for the Disaster Relief Fund. He wondered if Treasury was making the additional allocation because the funds in the Fund had been exhausted or because it just wanted to reserve the money. An amount of R242 million would be allocated for the planning and upgrading of stadiums for the 2010 World Cup. He asked what the initial allocation had been and why Treasury had decided to allocate a further R242 million. Unforeseeable and unavoidable expenditures were understandable in cases of national disasters. The same could not be said about expenditure in specific votes. The issue was whether Departments had presented their requests for money in terms of Strategic Plans or had just made vague requests. He asked if Treasury was condoning the practise of making vague requests for funding if such requests were being made.

Mr Cole replied that there were virements that were within the competency of the accounting officer of each Department. It was possible to have funds being shifted from one sub-programme to another. The programme manager was responsible for giving approval for the shifting of funds. There was a percentage that could be transferred. The accounting officer was allowed to approve a transfer of funds provided that not more than 8% of the funds would be transferred. Transfers that were more than 8% had to be referred to the national Treasury for approval. All transfer amounts were reflected in the Adjusted Estimates of National Expenditure (ENE). There were also cases wherein money could be shifted out of programme where government priorities were being undertaken and one had to examine such cases more carefully. It was important for the Committee to engage Departments on the shifting of funds away from critical programmes into programmes like administration.

He said that there were two high profile cases and one was them was the Shabir Shaik case. With respect to the amount of R242 million, he said that the amount had been announced in the main budget but had not been appropriated to a specific Vote. The legislature was not required to appropriate the amount to a specific Vote when it was announced. The Adjustment budget was now allocating the amount to a specific Vote. The amount would go to planning and to the refurbishment of Soccer City/ FNB Stadium. The amount should not be seen as a rollover because it was being allocated for first time.

Mr I Davidson (DA) said that the figures contained in the presentation and those contained in the Adjusted ENE book sometimes differed quite considerably. For instance, the presentation document had an additional appropriation of R216 126 million for the Education Vote. The Adjusted ENE book referred to R200 926 million. He asked why there were differences.

Mr Cole could not see discrepancies referred to. The amount of R200 926 million only referred to transfers and subsidies. It did not include virements.

Dr M van Dyk (DA) said that there were huge amounts of additional allocations to the Department and not all of them could be called unforeseeable and unavoidable expenditures. He asked what were the reasons for the high amounts of additional allocations. The figures gave an impression that Department was not following proper budget processes and that the budgets were not being properly scrutinised by Treasury.

Mr Cole replied that in some cases adjustments were due to inadequate planning and budgeting, especially when looking at infrastructure projects. Many of the reasons given for delays were related to slower that expected procurement and appointment of contractors. The Committee and other Committees might have to engage Departments on this issue. The Freedom Park project was taking longer than expected. The Department of Arts was building a library in Pretoria but not a single trench had been dug. He suspected that the funds that had been made available for the national library would be requested as rollovers. Treasury was of the view that some of the delays were unacceptable. Good expenditure was key to the government's economic growth strategy. The cash based accounting system was also not helping especially in cases where funds were being rolled over because service providers' invoices could not be processed on time.

He said that rollover in the Apex Fund had been earmarked for transfer to the Development Bank of South Africa. There had been some delays in the approval of Business Plans. The initial request was R40 million and R10 million had been approved.

Mr Bhamjee said that there was a possibility that virements could be abused. He asked what kind of oversight role Treasury played in relation to virements. He also asked if the Adjustment Appropriation Bill could make an allocation for the first time.

Mr Nene said that the presenter had said that the R242 million for Sport and Recreation South Africa had already been announced in the main budget.

Mr Cole replied that the adjustment budget contained several cases of first time allocations. All cases of unforeseeable and unavoidable expenditure were first time allocations. Some funds had been announced in the main budget but were being allocated for the first time in the Adjustment Appropriation Bill.

Mr Asiya asked if it was possible to transfer funds from one Vote to another.

Mr Cole replied that the 8% rule applied when there was a virement from one programme to another within the same Vote. The shifting of funds from one Vote to another would be referred to as transfers and normally happened when a function had shifted from one Department to another. The 8% rule did not apply in this case.

The Committee reported that it had concluded its deliberations on the Bill.

Revenue Laws Amendment Bill
Professor K Engel (Director: Tax Policy), Ms Y Mputa (Deputy Director: Legislative Oversight and Policy Co-ordination) and Ms M Botha (Consultant: Tax Policy) represented Treasury. Mr F Tomasek (Assistant General Manager: Legislation) represented the South African Revenue Services.

Mr Tomasek said that the Revenue Laws Amendment Bill had suddenly become two Bills: Revenue Laws Amendment Bill and Revenue Laws Second Amendment Bill. The tax legislation administered by SARS dealt with administrative issues and the actual imposition of tax. From a constitutional perspective, one had to split money Bills from Bills that dealt with administrative issues. The draft Revenue Laws Amendment Bill that had been presented to the Committee had been split into two Bills: one dealing with administrative issues and the other with the imposition of the tax. There were new clauses that were not in the draft Bill. Most of them were technical amendments and others were made following the responses given to the submissions on the Bill.

Revenue Laws Amendment Bill
Clause 3 Amendment of section 13 of Act 40 of 1949
Mr Tomasek said that this amendment was made following submission on the Bill. The Draft Bill had proposed a five-year cut off for refunds in the Transfer Duty Act. SARS had undertaken to introduce a five-year cut off for collections on the other side so that the matter would be symmetrical. This clause was intended to give effect to that undertaking.

Clause 46 Amendment of section 58 of Act 58 of 1962, as amended by section 39 of Act 32 of 2004
Mr Tomasek said that this clause was also new and contained a technical change to clarify matters in relation to donations tax.

Clause 50 Amendment of paragraph 2 of Fourth Schedule to Act 58 of 1962
Mr Tomasek said that this was a consequential amendment. Because employees could belong to their own medical schemes and make their own contributions in terms of the new dispensation with the capped amount, the clause was introducing a tax deduction for those contributions. The employee would be able to show the employer that payments had been made into a medical scheme and the employer could take the payments into account when working out the employee's tax. This would mean that the taxpayer would not have to wait for an assessment for refunds. The deductible tax would be reduced on a monthly basis.

Clause 58 Amendment of paragraph 10 of the Seventh Schedule to Act 58 of 1962
Mr Tomasek said that this clause would bring into effect the fringe benefits tax exemption for family visits to a person who was working far from home for extended periods of time.

Clause 62 Amendment of paragraph 16 of Seventh Schedule to Act 58 of 1962
Mr Tomasek said that this was a consequential amendment. The fringe benefits tax system provided that a fringe benefit given to an employee's family member was a benefit in the employee's hands.

Clause 69 Amendment of paragraph 24 of Eight Schedule to Act 58 of 1962
Mr Tomasek said that this was a provision in the capital gains tax (CGT) system that provided base cost for people who were immigrating to South Africa. There was a view that a strict interpretation of the law would not give them a base cost of zero and this had meant that anything that they received on a sale of assets would be taxable. This was not desirable and the amendment was to ensure that this did not occur.

Revenue Laws Second Amendment Bill
Clause 24 Insertion of section 77HA in Act 91 of 1964
Mr Tomasek said that the amendment gave an effective date for the introduction of the alternative dispute resolution provisions which were being introduced or modified.

Clause 46 Repeal of section 6B of Act 9 of 1999
Mr Tomasek said that this clause provided for the deletion of section 6B of the Skills Development Levies Act, 1999. The section was being deleted because it was a duplication of a provision that already existed in the Act.

Responses to written submissions on the Draft Revenue Laws Amendment Bill
Mr Tomasek said that there were certain issues that SARS and Treasury had said they were still going to finalise following the submissions. There was a fair amount of discussion on the rebate that was being granted to Public Benefit Organisations (PBOs). It was proposed that there should be a move to a threshold of 5% or R50 000 of the gross receipts, which ever would be greater. This had been implemented in clause 16 of the Revenue Laws Amendment Bill.

Another issue from PBOs was the capital gains implications of moving into a taxable situation. There was a request that SARS should not look at the exclusive use of an asset to exempt the asset. It was submitted that SARS should be generous in this regard and the request had been accepted as reflected in Clause 78 of the Revenue Laws Amendment Bill. SARS had moved from exclusive use to 'substantially the whole of the use of the asset'. This would mean that an asset part of which was being used for commercial purposes would be exempted for CGT purposes.

Mr Tomasek said that there was also a submission on the term 'dependant'. The submission had been accepted and was reflected in Clause 25 of the Revenue Laws Amendment Bill. Clause 25(1)(a) referred to a ‘dependant’ as defined in Section 1 of the Medical Schemes Act, 1998. There was also a submission of the concept of a 'step-child'. SARS had undertaken to delete this concept and had done this throughout the clause.

He said that there was a question as to what should be done in respect of off-site treatment services provided by employers. Where the employer's scheme was considered to be doing the business of a medical scheme and was approved by the registrar of medical schemes as being exempted from the provisions of the Medical Schemes Act, SARS was comfortable with not taxing the treatment provided by the employer. The treatment was exempted in the recipients' hands and there were deductions in the employer's hands. The question was what would be done in cases wherein the scheme was not considered to be doing the business of a medical scheme. The answer to this was contained in Clause 60 of the Revenue Laws Amendment Bill.

Mr Tomasek said that there were also issues around film production. There was a situation where one could get an accelerated deduction off the cost of the film if at least 75% of the expenditure was incurred in South Africa. This also applied to films that qualified in terms of co-production agreements. In cases where less than 75% of the expenditure was incurred in South Africa, one would get an accelerated deduction only in respect of the South African expenditure. The question was what should be done in cases where one was below the threshold but had other foreign expenditure. SARS would permit a ten-year write off. This was reflected in Clause 32 of the Revenue Laws Amendment Bill.

Mr Tomasek handed over to Professor Engel to continue with the presentation. Professor Engel said that the question was when would the legislation come into effect. There were a number of complaints in relation to the effective date. The key issues were around the special legislation that dealt with controlled foreign companies and international restructuring. The effective date was critical because there were many deals taking place. Some people would prefer doing their transaction before the effective date should they see something they did not like in the legislation. On the other had, they would want the legislation to become effective immediately should they see something they liked. The proposed legislation was trying to be generous and provisions that would help the taxpayer would become effective immediately and retroactively in some cases. They key date was 8 November 2005. Everybody had been warned that the legislation was coming. Clause 14 of the Revenue Laws Amendment Bill provided for the effective dates.

The Chairperson noted that SARS had chosen 8 November 2005 as the effective date. That date had already passed. He asked what had informed the choice.

Professor Engel replied that the 8^th of November had been the tabling date. The normal practice was to use the date of promulgation. It had been realised that some of the transactions were a bit sensitive and it was important to protect them. There would have been a gap had the Bill referred to some date in December or January and companies were going to take advantage of it.

Prof. Engel said that the bigger issue that had large policy implications dealt with international restructuring. There was an intention to allow people to restructure but they were attempting to use this to artificially move offshore. Clause 67 of the Revenue Laws Amendment Bill addressed the issue. People who would leave the South African tax jurisdiction would be taxed one last time on the untaxed gains. The typical case whereby one would leave the taxing jurisdiction would be one of a South African who had decided to leave the country. The issue that came up was in relation to foreign owned companies because South Africa had a partial taxing jurisdiction. Companies would be partially taxed as the completely move from the taxing jurisdiction. There was a rule that said that a person would be taxed on the passive assets should the move from a controlled foreign company status to foreign status. However, there was a participation exemption that provided that a person would not be taxed in cases where he or she had a 20% interest. A person who had received a dividend from a large interest would not be taxed on the dividend being repatriated. The same would apply should a person sell the shares because this was another way of bringing money back home. This was consistent with the practise in other jurisdictions.

He said that the law allowed people who had sold a large interest in a foreign company to bring the money back tax-free. The same would apply in cases of the restructuring of subsidiaries. The problem was that people had attempted to use the law to strip the country of the subsidiaries. There was no problem with a South African company selling its foreign subsidiaries for cash. It had been argued that money should be allowed to go offshore because it would eventually bring dividends back home. The problem arose when subsidiaries were sent offshore for them not to be seen again. There were two levels of tax when money was distributed offshore: capital gains tax and the secondary tax on companies (STC) regime. People had managed to avoid both the CGT and STC. The industry had argued that the distribution of dividends in cases where the company was willing to pay STC was not done to avoid tax because the STC would be too high given the size of the companies. SARS would only impose the CGT charge when companies moved offshore only if they had managed to beat the STC.

Discussion
Mr Mnguni asked why a person who had a 50% interest in a foreign company received only 20% of the dividends tax-free. The situation was different when dealing with a subsidiary because it would receive the full rebate.

Professor Engel replied that originally all foreign dividends that were coming back into the country were tax-free because all foreign assets were tax-free. However, there were certain exceptions. It was realised that there were a number of round tripping transactions in terms of which people put money offshore, got deductions for moving offshore and brought it back tax-free. People had managed to manipulate the tax system in this way. Consequently, there was a shift to taxing all dividends in order to stop tax avoidance. The problem was that the taxation of foreign dividends coming back into the country was a bad economic policy because it discouraged people from bringing back the dividends.

With regard to the 20% tax-free dividends, the argument was that a person who had a meaningful say in a company distributing the dividends would decide to bring the dividend back into the country. The person had the power to decide whether or not to declare the dividends. At a 20% level, in accounting terms, a person had a significant influence in the company. People who were below the 20% line typically got dividends without exercising any real influence in deciding whether or not to declare dividends. Such people got the dividends because they had invested in the company. The company made the decision in respect of whether to declare dividends. The intention was not to give such people an advantage for investing in portfolio shares offshore. For instance, if a person had invested in the Johannesburg Stock Exchange and there was a dividend, there would be a 12,5% STC. However, if one had invested in the London Stocks Exchange and there was no tax, people would decide to go to London. There was a need to strike a balance. It was important not to give incentives to go abroad. On the other hand, it was important to encourage people to bring money back home. The 20% line was designed to strike the required balance.

Ms Fubbs said that the Committee had been occupied with the issue of the taxation of dividends. There was a tendency to postpone the dividends once people had become aware of the tax that they would have to pay. They would postpone declaring the dividends until some favourable regime was in place. She asked if the amendments would address the issue or if this was one of those issues that would only be addressed when everyone complied with one international tax regime.

Prof. Engel replied that the important question was when did a dividend accrue. The greatest power that a taxpayer could have was the power to decide when to declare a dividend. SARS could only impose tax once a declaration had been made. There were avoidance laws. One could find a company that had lots of profits but not declaring dividends. Some regimes provided that they would deem the company to have declared the dividends. Such regimes were very complicated and had not been very successful.

Mr Tomasek replied that South Africa did have a tax system along the lines outlined by Prof. Engel. It was called the undistributed profit tax. The idea was to push people in the direction of distributing profits so that they could be taxed in the hands of shareholders. This was in the days when shareholders paid tax on dividends received. Shareholders would clearly not want dividends declared and would keep the profits in the company. There had been a policy shift in the form of the move to STC. The idea was to encourage the company to keep the profits so that it could reinvest and build its business. Foreign companies were outside the country's taxing jurisdiction and one could not talk of undistributed tax because the company was not taxed in the country. However, there were controlled foreign company rules which were directed at diversionary and abusive transactions. Because one had to balance avoidance with not harming the business' ability to compete internationally, the controlled foreign company rules did not apply if one had an active and valid business offshore.

The Chairperson took the Committee through the Revenue Laws Second Amendment Bill clause by clause. The Bill was adopted with amendments.

Report on MTBPS
The Committee considered its report on the Medium Term Budget Policy statement. The report was adopted.

The meeting was adjourned.