Revenue Laws Amendment Bill; Revenue Laws Second Amendment Bill; Adjustments Appropriation Bill: briefing & adoption

Meeting report

FINANCE SELECT COMMITTEE
16 November 2005
REVENUE LAWS AMENDMENT BILL; REVENUE LAWS SECOND AMENDMENT BILL; ADJUSTMENTS APPROPRIATION BILL: BRIEFING AND ADOPTION

Chairperson: Mr T Ralane (ANC)

Documents handed out
Revenue Laws Amendment Bill [B40-2005]
Diamonds Second Amendment Bill [B39-2005]
Presentation on Revenue Laws Amendment Bill + Revenue Laws Second Amendment Bill
Adjustments Appropriation Bill [B37-2005]
Presentation on Adjustment Appropriation Bill

SUMMARY
The Committee was briefed on the Revenue Laws Amendment Bill, Revenue Laws Second Amendment Bill and the Adjustments Appropriation Bill. It adopted all Bills without amendments.

In terms of the Public Finance Management Act, 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. It also included money that had to be appropriated for expenditure already announced by the Minister during the tabling of the annual budget. The total adjustments from national departments amounted to R2.9 billion. Adjustments were offset against the contingency reserve, unallocated amounts, declared savings and projected underspending. Adjustments resulted in a decrease in expenditure from R418 billion to R416 billion.

MINUTES
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 South African Revenue Services. The presenters focussed on the most important amendments (see document).

Mr Mordern said that employer contributions to medical schemes were tax-free in the hands of the employee up to a maximum of two-thirds of the total contribution. A number of problems had been identified and a new regime was being proposed to address them. The new regime entailed providing a tax-free contribution of R500 for each of the first two beneficiaries and R300 for each additional beneficiary / dependant (as defined in the Medical Schemes Act) with effect from 1 March 2006. Out of pocket medical expenses of a taxpayer (member), spouse and minor children in excess of 7,5% of taxable income would also be deductible. On-site and off-site (subject to certain limitations) employer provided medical treatment for employees and immediate dependants would also be tax-free.

He said that the Bill was also proposing a withholding tax on non-resident entertainers and sportspersons. At the moment many of these individuals leave SA without paying any taxes that were due to the fiscus. The Bill would impose a 15 per cent final withholding tax obligation on SA residents paying non-resident entertainers or sportspersons.

Mr Tomasek said that SARS was proposing some changes to assist with company formation and restructuring. Currently for a group of related entities to be regarded as a group for tax purposes, there had to more than 75% shareholding. This means that if there was a company that had 80 percent shareholding in another company would constitute a group with that company for tax purposes. The problem was that a number of Black Economic Empowerment charters required a 26% stake. The Bill proposed the reduction of the threshold from 75% to 70% or more. The Bill also proposed a reduction from 25% to 20% threshold for tax-free company formations, to enable more tax neutral corporate restructuring.

Mr Mordern said that a few years ago the government had introduced an incentive to encourage development in certain urban areas. The main aim was to rejuvenate urban centres. The Urban Development Zones (UDZ) incentive allowed taxpayers to receive accelerated depreciation allowances for the construction and/or refurbishment of buildings in urban development zones. This incentive was currently restricted to the owner who had undertaken or commissioned the construction or refurbishment of a building. It was proposed that the incentive should be extended to first time purchasers who buy from bona fide developers and to allow for the subdivision of buildings. A first time purchaser would qualify for the UDZ incentive as long as the person owned the building or part and used it or part solely for trade.

Mr Tomasek said that the accelerated film allowance would only be available on the full cost of the film where at least 75% of expenses were incurred for goods and services in South Africa and paid or payable in South Africa. In other cases, the allowance would be limited to the South African expenses. This was to encourage the production of South African films. Co-productions concluded in terms co-production treaties would also be eligible for the accelerated film allowance. The acquisition cost of a film acquired directly or indirectly from a connected person would be limited to the acquisition cost or production cost of the film incurred by the connected person. This would limit the potential abuse of the film allowance through an artificial increase in the claim.

He said that under the current law, public benefit organisations (PBOs) that traded outside defined areas and exceed the cumulative trading income limitation of R25 000 or 15% of total income, automatically lost their tax exempt status. This "all or nothing" approach was impractical as public benefit organisations needed to be self-sustaining in order to survive. The Bill introduced a system of partial taxation whereby the trading income would be taxable, subject to some relief. The effect of this provision is that an organisation might trade without the risk of losing its tax-exempt status. A 5% or R50 000 exemption of gross trading income was proposed.

With regard to tax deductible donations to PBOs, he said that under the current law, if the PBO had utilised the qualifying tax deductible donations for purposes other than the objects of the PBO, the donation would be disallowed as a deduction in the hands of the donor. The Bill made provision for an application of graduated levels of penalty measures for continued failure to take corrective steps by PBOs. Separate remedies were proposed for government institutions that were permitted to receive tax deductible donations. The net effect of the proposal was that the PBO would be liable to pay tax in full on the donation received. If the PBO continued with the breach of the provisions, the donation would not be allowed as a tax deduction in the hands of the donor.

Mr D Botha (ANC) [Limpopo] asked who would monitor that money donated to PBOs was used for the intended purposes.

Mr Tomasek replied that SARS had a PBO unit that dealt with this.

Mr Mordern said that generally input Value Added Tax (VAT) could not be claimed on motor vehicles and entertainment expenses. The Bill proposed that vendors might claim input VAT on motor vehicles that were awarded as prizes provided that the vendor continuously or regularly supplied motor vehicles as prizes to clients or customers. Input tax might be claimed on entertainment that had been supplied as a prize provided that the provisions of a betting transaction as envisaged in section 8(13) of the VAT Act were met. It was also proposed that goods supplied to a foreign company but delivered to a registered vendor in South Africa be zero-rated where the supply of those goods formed part of the supply by the foreign company to the registered vendor in South Africa. This amendment would ensure that VAT was not a cost to the South African vendor where it contracted with a foreign company.

The Bill also provided for the zero-rating of the supply of services under a warranty agreement where the warrantor was a non-resident. This amendment would ensure that VAT was not a cost to the South African vendor where it contracts with a foreign warrantor. International donor funded agreements to which the Government was a party often contain clauses that the funds might only be used for the agreed purpose and not be spent on tax. Amendments proposed created a mechanism to give practical effect to the agreements. As a result funds so received would be zero-rated and all VAT paid on expenses would be claimable as input tax.

He said that the Road Accident Fund Levy was currently imposed in terms of the Central Energy Fund (CEF) Act and collected by the Central Energy Fund. The CEF Act and the Customs & Excise Act would be amended to provide for the imposition of a Road Accident Fund Levy in terms of the Customs and Excise Act and for it to be collected by SARS.

Mr Mordern said that the Public Finance Management Act did not provide for the writing-off, final waiver, or compromise of tax debts due to SARS. There was a need for a mechanism to deal with bad debts where it was evident that the full amount of tax was not collectible. The Minister of Finance would be granted the right to prescribe by regulation the circumstances for write off, waiver, or compromise of undisputed tax debts.

Mr Botha said that SARS must have a unit to monitor foreign entertainers and sportspersons. They charged a lot of money for entertaining people in the country.

Mr B Mkhaliphi (ANC) [Mpumalanga] asked how entertainers and sportspersons from the Southern African Customs Union were treated. Were they treated just like any other person from abroad?

Mr Tomasek replied that SARS had a specialist unit to deal with such people. Such people were already taxed in South Africa. They were covered by Double Tax Agreements that gave SARS the right to tax them in relation to performance in the country. The problem was that it was sometimes very difficult to bring them into the tax net. The tax paid would be creditable in the entertainers' jurisdiction against the tax that they would be expected to pay if there was a taxation agreement in place. There was a proposal that there would be a lower rate for entertainers from Africa. It was discovered that having a lower rate for African entertainers could contravene certain World Trade Organisation agreements and the proposal was dropped.

The Chairperson took the Committee through the Revenue Laws Amendment Bill and the Revenue Laws Second Amendment Bill clause by clause. The Committee adopted both Bills without amendments.

Adjustments Appropriation Bill
Ms A Adendorf (National Director: Budgets) briefed the Committee on the Adjustments Appropriation Bill. (See document attached). 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. It also included money that had to be appropriated for expenditure already announced by the Minister during the tabling of the annual budget. 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 to R416 billion.

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.

The Committee adopted the Bill without amendments. The Chairperson said that the DA would make a declaration on Vote 8 and that Mr Botha would contest the declaration.

The meeting was adjourned.