Revenue Laws Amendment Draft Bill: hearings

FINANCE PORTFOLIO COMMITTEE
13 June 2001
REVENUE LAWS AMENDMENT BILL: HEARINGS

Chairperson: Ms B Hogan

Documents handed out:
South African Institute of Chartered Accountants submission (see Appendix 1)
Pricewaterhouse Coopers submission (see Appendix 2)

SUMMARY
The South African Institute of Chartered Accountants and Price Waterhouse Coopers were both concerned about Clause 16 of the Bill. This withdraws the exemption from PAYE granted for payments by private companies to its directors. Clause 18 makes provision for calculation of the PAYE to be deducted from the salaries of directors of companies but a specific concern was the way the deduction would be calculated.

The flaws in the consultation process were also pointed out by SAICA, particularly the short response time in which submissions on proposed legislation have to be made to the Committee. From the reaction of the Committee, it was evident that this is an issue that needs addressing.

MINUTES
South African Institute of Chartered Accountants (SAICA)
Mr B Croome, SAICA Taxation Committee chairperson, highlighted certain points from SAICA's written submission that were of major concern:
- The provision in Clause 16 of the Bill allows for deductions of Pay As You Earn (PAYE) from the earnings of directors of private companies. The problem is that the PAYE to be deducted would be calculated on the "deemed remuneration" of the director for the previous year. This was inconsistent with the manner in which the normal employee has to pay PAYE. There is a need for uniformity.
- Clause 64B allows SARS to subjectively decide on the qualifications of persons who wish to enter the customs industry, that is, their good character and sufficient knowledge. He felt that SARS would have too much discretionary power in this respect.
Mr Croome pointed out further minor concerns of SAICA (see submission).

In conclusion Mr Croome emphasised that he had a major problem with the consultation process as it is at present. The timeframe within which submissions had to be made to the Committee on proposed legislation was totally inadequate. He asked the committee to look into the matter. The Chairperson sympathised with Mr Croome's sentiments and stated that the committee would raise the issue with the National Treasury.

SARS response
Mr Kosie Louw (SARS) conceded that the issue of the applicability of PAYE to directors of private companies is highly complex. The discrepancy between the way PAYE applies to normal salaried people and directors should be resolved. He stated that at present directors definitely have a cash flow benefit over ordinary salaried people. Mr Louw pointed out that directors either receive a fixed salary or they are paid a percentage of the profits of the company. The focus of SARS on PAYE has been on those directors who receive fixed salaries. This means that those directors who fall in the latter category are exempt from paying PAYE. Mr Louw stated that SARS is trying to resolve the issue with a solution that would be acceptable to all.

On the second issue of SARS setting the criteria for persons who wish to engage in the customs business, Mr Louw stated that the decision had not been taken without considering the impact it would have on the industry. He pointed out that fraud in the industry is rampant and steps had to be taken in order to eradicate it. At times it would seem harsh but it was necessary.

Mr Louw also very briefly touched on some of the minor issues raised by SAICA. Most of them had been covered in the initial briefing to the Committee.

Mr Louw conceded that the consultation process could be better. He was well aware that timeframes for the handing in of submissions were inadequate.

Mr Martin Grote (National Treasury) stated that it is not only various stakeholders that are being pressurised. National Treasury and SARS have to meet deadlines as well even though they have to make do with whatever resources are available to them.

The Chair appreciated the efforts of both SARS and the National Treasury but stated that the issue is not about their performances but rather on the timeframes that are set.

Discussion
Prof B Turok (ANC) stated that self-regulation cannot be introduced until such time that fraud in the customs industry has been eradicated. He added that National Treasury should assist non-profit organizations in making their submissions, as they do not have the vast resources at their disposal that other organisations have.

Mr Croome stated that in all professions there are people who do not fully comply with legislative requirements. He added that SAICA could only take action against their members if SARS informs them about infringements.

Mr K Andrew (DP) made the following points:
- Reference was made in SAICA's submission to Clause 25B and he asked for clarity on the part that touches on retrospectivity.
- His suggestion for taxing the remuneration of directors was that directors should be given the option of either complying with the provision in the Bill or alternatively they should be automatically required to pay a percentage of any remuneration and bonuses that they receive.
- He endorsed Professor Turok's views on the way that non-governmet organizations (NGOs) have been treated.
- He agreed that the consultation process is an issue that the committee should deal with. SARS, the National Treasury and the Committee must agree to an appropriate timeframe within which public submissions should be submitted.
- Proper prioritising has to be done in order to alleviate the heavy workloads of SARS and the National Treasury.

Mr Croome replied that most of their concerns on Clause 25B have been addressed but felt that the possibility of it having retrospective effect is still present. Mr Louw confirmed that there is retrospectivity but also added that sections of the legislation have been transposed.

Mr Croome stated that taxing directors on a flat rate would be impractical and would create too much of an administrative burden.

The Chair felt it important that the issue around assistance by National Treasury to NGOs when making submissions should be addressed.

Price Waterhouse Coopers
Mr Enslin van Riet, Director of Tax and Legal Services, dealt with the provisions in Clauses 16 to 19 of the Bill relating to the applicability of PAYE to directors of private companies. Mr Enslin reiterated Mr Croome's concerns on the provision. He added that the basis of the taxation is on 'deemed remuneration', which represents amounts not yet paid by the employer or which may never be paid. The director is in fact being taxed on an amount that is not yet payable to him and not yet tax-deductible by the employer. The legislation does not take into account the fluctuating fortunes of a company or that a director may receive bonuses for one year and not the next. In light of the aforesaid there seems to be no alternative than the application of PAYE as and when the amounts are paid or become payable to the director. This is consistent with the position for all other employees.

Mr van Riet noted that Mr Paul Ferreira was supposed to present the rest of Price Waterhouse Coopers' concerns on the Bill but unfortunately was unable to attend the meeting. However their submission was made available to the Committee.

The committee did not engage in a discussion as most of the issues had been raised in the discussion above. The meeting was adjourned.

Appendix:
South African Institute of Chartered Accountants (SAICA)
7 June 2001

REVENUE LAWS AMENDMENT BILL, 2001

INTRODUCTION
The South African Institute of Chartered Accountants (SAICA) wishes to express sincere thanks to this honourable Committee for being afforded the opportunity to present this submission to the Committee. The comments on the Bill itself have been forwarded to the Commissioner: South African Revenue Service in various submissions forwarded by SAICA to SARS on the legislation as and when received. This submission also refers to certain general policy matters relating to fiscal legislation in South Africa which we deal with at the end of this submission.

ESTATE DUTY ACT
1. Amendment of Section 5

1.1 We specifically comment on the proposed amendment of paragraph (f) substituting the first proviso to subsection (2) with a new proviso.

1.2 We would like to obtain clarity as to whether the words "the Commissioner may fix such sum, taking into account the average annual yield of the property for the three years immediately preceding the date of death of the deceased" in the new proviso still gives the Commissioner a discretion to fix the sum by looking at the three previous years, and whether he would be able to only look at two years or further back to 5 years in fixing the sum.

1.3 We anticipate that an unfair state of affairs could result if the Commissioner would only be able to look at the three preceding years.

For example: a farmer dies and had a fire two years before his death which destroyed his crops. The ground had to recover from the fire and the year thereafter there was no yield from the farm. If the Commissioner may only take into account the three preceding years, his yield will be much lower than normal and the deduction on death of the farmer for the usufruct on the farm left to his wife, would be very low.

1.4 The same situation would apply where the deceased had shares and no dividends were declared in two of the preceding years, but after death the company again declares dividends.

1.5 We would suggest that an alternative be available in the case where the preceding three years delivered no or a very low yield.

1.6 Although not specifically addressed in the proposed legislation, we would suggest amendments to existing legislation as follows:

A trust is seen as a person in the Income Tax Act but not in the Estate Duty Act. This poses a problem where the trust (not being a person for Estate Duty purposes) cannot deduct a premium under a policy of insurance (section 3(3)(a)).

It is not always clear what the term "reasonable market value" means -additional guidance should be issued.

INCOME TAX ACT OF 1962, AS AMENDED
2. Section 1: Pension fund definition
The decision to amend the definition of "pension fund" to take account of the Municipal Systems Act to deal with those members of pension funds etc previously employed by local authorities who are now employed by municipal entities wholly owned by local authorities must be supported. Whether employees are employed by the local authority directly or entities controlled by them, the tax rules on lump sums should be the same.

3. Section 11(bA)
It is submitted that this section should also be amended to allow that the interest incurred on the acquisition of land on which a building will be erected for the purposes of trade be allowed for tax purposes. Invariably the financial institution receiving the interest on a loan relating to the purchase of land will be fully subject to tax thereon whereas the owner of the land will not be entitled to a deduction until the asset is brought into use. The amendment of the section such that land is specifically included will ensure symmetry in regard to the treatment of interest paid on land.

4. Section 12E
Section 12E(4) contains definitions of "small business corporation", "employment company" and "personal service".

In view of the fact that the above terms are relevant to other parts of the Act and particularly the rates of tax contained in Schedule One of the Amending Act, it is recommended that the above definitions be inserted in section 1 of the Act as opposed to section 12E.

5. Section 12F
5.1 Subsection 1 defines an "affected asset" as including "any apron, runway or taxiway on any international airport" and it must be questioned why the section only refers to international airports and not also to airports used for domestic purposes. The section should in our view rather refer to an airport that has been licensed by the Civil Aviation Authority regardless of whether the airport is international or domestic.

5.2 The definition of "affected asset" refers to "contracted for on or after the effective date". Is the intention that the contract must be concluded and signed by all parties on or after the effective date or will it suffice if the contract, regardless of date of signature by all parties, merely defines effective date as a date after 1 April 2001.

We suggest that clarity be given in the legislation or in the Explanatory Memorandum on this issue.

6. Section 25B
6.1 As many trust structures are already in existence, it is problematic that the legislation contained in the amending clause, paragraph (b) will have a retrospective effect.

6.2 There is still confusion with regards to section 25B(3) and the impact that this has on discretionary trusts. Clarity is sought in this regard.

6.3 If it is the intention of Revenue to fundamentally change the taxation of discretionary trusts surely this should have been announced in the Budget Speech.
7. Section 66

7.1 With regard to the legislation for comment (2), the proposal to treat a return that is materially incomplete or defective as not having been submitted until all the deficiencies have been rectified is understood and agreed to.

7.2 However, the penalty of additional tax seems quite harsh, especially in respect of taxpayers not experienced in the submission of tax returns. What if the taxpayer is unaware that his tax return is incomplete or defective? What is meant by "materially"?

8. Paragraph 1 of the Fourth Schedule
The Minister of Finance announced in his annual budget speech that it was intended to impose PAYE on amounts of remuneration paid to directors of companies. It is for this reason that the definition of employee is expanded upon to specifically include directors of private companies and also to amend the definition of "remuneration" by removing item (vii) thereof. Our concerns on this amendment are set out in paragraph 9 below.

9. Paragraph 11C of the Fourth Schedule
9.1 The Commissioner: South African Revenue Service issued practice note no.11 on 11 February 1991 in order to subject advances paid or payable to directors of companies (including members of close corporations) to PAYE. That practice note was withdrawn by GN2899 on 6 December 1991 as a result of the practical difficulties encountered in subjecting advances paid to directors of companies to PAYE. Practice note no.14 was issued by the office of the Commissioner on 6 December 1991 to clarify the position insofar as directors of companies are concerned.

9.2 It is therefor not surprising that the Minister made the decision to subject earnings derived by directors of private companies to PAYE. The concerns that must be raised though relate to the systems changes that will be required by companies in order to administer the payment of PAYE on amounts paid to directors.

9.3 We believe that many private companies do not in fact currently pay PAYE in that they do not have any persons rendering services other than the directors of the company and for this reason such companies will be required to register for PAYE for the first time. This administrative aspect must not be overlooked in introducing the legislation contained in paragraph 11C of the Fourth Schedule.

9.4 Companies will also have to be fully aware of the requirements contained in paragraph 11C as well as the calculations required in order to determine the "deemed remuneration" that is to be subjected to PAYE on a monthly basis.

9.5 It must be noted that many directors of private companies are in fact in receipt of a monthly salary which is currently not required to be subjected to PAYE in accordance with paragraph (vii) of the definition of "remuneration" contained in paragraph 1 of the Fourth Schedule. In these cases it is easy to determine the amount of PAYE to be deducted on a monthly basis and the concern that arises in this regard is the fact that the "salaried director" may in the previous year have been in receipt of a profit share or incentive bonus which will result in amounts of deemed remuneration being subjected to PAYE on a monthly basis. Our concerns insofar as these persons are concerned are set out in example A set out below.

EXAMPLE A
2002 Year of assessment

Assume salaried director of a private company, who participates in profits earned the following amounts over the 12 month period:

Salary (paid monthly) R350 000
Bonus (paid upon finalization of audit) R150 000
Total taxable income R500 000

No PAYE would have been deducted in accordance with paragraph (vii) of the definition of "remuneration".

2003 Year of assessment

Assume salary is increased to R400 000, payable monthly and that the incentive bonus depends on company's results and director's performance.

Calculation for PAYE purposes :-

Salary paid per month

^{R400 000} ₌ R33 333
¹²

(Now treated as "remuneration" under the definition).

Deemed remuneration (paragraph 11C)

Y ₌ ^T - P
^N

= ^{R500 000} - R33 333 = R8 333
¹²

Total amount subject to PAYE per month
(say months 1 to 11) R41 666
If director performs and receives a bonus of R180 000 in month 12 of the above monthly calculation is reasonable.

In month 12 PAYE will be required to be deducted from an amount of :-

Salary - actual remuneration R 33 333
Bonus - actual remuneration R180 000

Deemed remuneration under paragraph 11C

Y ₌ ^T - P
^N

= ^{R500 000} - R213 333 = 0
12

Total subject to PAYE in month 12 R213 333

In the above example PAYE would have been required to be deducted from the following amount :-

Months 1 to 11 (R41 666 x 11) R458 326
Month 12 R213 333

Total subject to PAYE R671 659

Actual earnings

Salary R400 000
Bonus R180 000

Total taxable income R580 000

Excess amount taxed R 91 659

It is our view that the definition of "remuneration" needs to be amended to take amount of those amounts deemed to be remuneration under paragraph 11C in order to prevent the above from happening.

If one assumes that the company does not meet its targets, PAYE will be overpaid.

Actual annual earnings R400 000
PAYE deducted from salary and deemed remuneration in an amount of R500 000 (i.e. R41 662 x 12)

This once again confirms that the definition of remuneration needs to be amended.

9.6 Having regard to the calculations reflected above, we believe that it is necessary that the definition of "remuneration" specifically refers to those amounts that are deemed to be remuneration in terms of paragraph 11C. Failing to do this will, in our view, result in the same amounts being subjected PAYE twice such that the total amount of PAYE actually paid is inflated and overstated by virtue of the fact that there is no interlinking between the definition of "remuneration" contained in paragraph 1 of the Fourth Schedule and the definition of "deemed remuneration" contained in paragraph 11C of the Fourth Schedule.

9.7 The second category of persons are those directors of companies and members of close corporations that are owner managers of the business such that they do not in fact earn a monthly salary but whose income will only be determined once the financial statements of the legal entity are finalised. In such a case the formula contained paragraph 11C does make sense in that no amounts of remuneration would in fact be paid to such persons on a monthly basis.

9.8 If anything amounts would be paid to the director on a monthly basis such that the amounts would be credited to the director's loan account and these amounts cannot be said to be remuneration as and when paid to them. The formula contained in paragraph 11C will result in tax being paid on a monthly basis which is understood and accepted. Once again though the difficulty results in the month in which the final earnings are in fact paid to the director or credited to their loan account which constitutes an accrual for tax purposes and will then in our view constitute remuneration in terms of the general definition contained in paragraph 1 of the Fourth Schedule. This is also best illustrated by way of an example.

EXAMPLE B

2002 Year of assessment

Assume for full 12 months taxpayer is owner manager of business and earnings are only determined once audit of company is completed.

Director is allocated earnings of R300 000 for this year which would not have been subject to PAYE because of paragraph (vii) of the definition of "remuneration".

2003 Year of assessment

Once again earnings are determined by company's profitability. Director is allocated earnings of R450 000 upon completion of company's audit.

Calculation for PAYE purposes:
Actual remuneration R nil
Deemed remuneration (paragraph 11C)


Y ₌ ^T - P
^N

= ^{300 000} - _P = R25 000
¹²

PAYE would be required to be deducted on above amount for months 1 to 11.
Assume profit is finalised and credited to director's loan account in month 12.

Actual remuneration R450 000

Deemed remuneration

Y ₌ ^T - P
^N

= ^{300 000} - R450 000 = R NIL
¹²

Total subject to PAYE in month 12 R450 000

Earnings subject to PAYE over the year
Months1 to 11 R275 000
Month 12 R450 000

Total subject to PAYE R725 000

Excess taxed R275 000

This once again confirms that the definition of remuneration must be amended to allow as a reduction therefrom those amounts that were deemed to be remuneration under paragraph 11C of the Fourth Schedule of the Act.

If one assumes the company makes a loss and no amounts are finally paid to the director the result will be as follows:-

Tax payable month 1 to 12

Y ₌ ^T - P
^N

= ^{300 000} - P = R25 000
¹²

Total amount subject to PAYE R300 000
Actual earnings R Nil
Amount overpaid on R300 000

9.9 We believe that the clause inserting paragraph 11C must recognise the amounts already subjected to PAYE. It is vital that there is some interlinking between the definition of "remuneration" contained in paragraph 1 of the Fourth Schedule and the provisions of paragraph 11C of the Fourth Schedule.

9.10 Another practical difficulty is the fact that where a company incurs a loss and PAYE has been paid in accordance with paragraph 11C the company clearly would have overpaid PAYE in that the director in question would in such a case not receive any salary in that particular year. It is unclear how this matter will be addressed practically. Will the company be obliged to issue the director with a tax certificate reflecting the PAYE deducted and paid over to the SARS such that the director will then reflect no salary but tax would have been deducted. The director will then be subjected to a comprehensive audit as a result thereof. We accept that this example is an extreme one but use it deliberately to illustrate the point that cash flow difficulties will arise where the final amount actually paid to the director in the form of remuneration is well below that of the previous year of assessment.


10. Paragraph 86 of the Eighth Schedule

Sub-paragraph 3(b)(ii): the word "asset" should be inserted after the words "at a base cost equal to the base cost of that asset at the time of that disposal"


VALUE-ADDED TAX ACT 89 OF 1991, AS AMENDED

11. Section 1

We noted earlier that the definition of "pension fund" was being amended to take account of those persons employed by local authorities who will in future be employed by a municipal entity created in accordance with the provisions of the Municipal Systems Act 2000 (Act No.32 of 2000). We believe that an amendment should be made to the VAT Act to specifically provide that a local authority includes a municipal entity created in accordance with the Municipal Systems Act. The reason for this is the fact that the current provisions of the VAT Act state that only natural persons and local authorities can pay VAT on the payments basis. On a strict reading of the law it does not appear that corporate entities wholly owned by local authorities in accordance with the Municipal Systems Act are entitled to be registered under the cash payments basis. This may in fact result in an increase in costs to end consumers and SARS is urged to consider amendments to cater for the statutory position whereby local authority functions are being performed via municipal entities in accordance with the Municipal Systems Act.


12. Explanatory Memorandum

12.1 The Explanatory Memorandum on the first batch of legislation should, in our view, be amended where it deals with Value-Added Tax: amendment of Section 8 of the VAT Act, 1991. It would appear that words are missing from the paragraph and should, in our view, read along the following lines:

"and provides that the transfer of all assets and liabilities from a disestablished local authority to a new local authority will have not VAT consequences."

12.2 It would appear that the words "local authority" needs to be inserted into the Explanatory Memorandum.

12.3 The comments on the amendments to section 9E should in our view be amended along the following lines:

"The definition of "foreign dividend" in section 9E includes any amount which is a deemed distribution as contemplated in section 64C whereas (instead of where is)."

12.4 Amendment of section 11 of the Income Tax Act

The word "hangar" is misspelt in the part - subclauses (b) to (f).

12.5 Paragraph 1 of the Fourth Schedule, in our view be amended as follows:

"A director of a private company will, therefor, be an employee for the purposes of the Fourth Schedule in respect of any amount of remuneration paid to such director or accrued in their favour. In addition certain amounts of remuneration will be deemed to be remuneration from which PAYE is required to be deducted in terms of paragraph 11C."

12.6 The explanatory memorandum should also specifically refer to the fact that directors of companies includes members of close corporations in accordance with the definitions contained in the Income Tax Act.

12.7 SARS is urged to supply examples in the explanatory memorandum so as to illustrate exactly how the calculations are to be performed in respect of those persons who are regarded as salaried directors who participate in incentive schemes on the one hand and those directors who are regarded as owner managers whose earnings are determined only upon the finalisation of the profits of the entity concerned. The examples supplied in this submission may be of some assistance to SARS in drafting examples for the purposes of the explanatory memorandum.

CUSTOMS AND EXCISE ACT
13. Section 1
13.1 We support the change of the definition of duty to include VAT as this will now allow goods that are free of customs duty to be stored in a customs and excise warehouse. Further, this amendment means that non-dutiable goods can be rebated in terms of rebate items the third and fourth schedules to the Customs and Excise Act. For the third schedule rebates and certain fourth schedule rebates not covered by schedule 1 to the VAT Act the inclusion of VAT as a duty may pose the problem of non recovery of import VAT on goods that will be used for home consumption. This is the result of the schedule merely stating that the extent of the rebate is full duty, which would include VAT after the amendment comes into effect. The specific schedules would have to be amended to specifically exclude VAT.

13.2 Currently VAT is not levied on excise when such duty is paid across to SARS on a periodic basis, and we can not see the merits in SARS wanting to levy VAT on the underpayments of excise duties when they become due. We assume that there will be a consequential amendment to the VAT Act to include the imposition of VAT within Section 13 of the VAT Act.

14. Section 18
We support the amendment to sections 18(1), which will in our view improve the control of removals in bond. We further support the insertion of the wording in section 18(1)(a) which will effectively give the Commission discretionary powers regarding the removal of goods in transit through South Africa.

15. Section 19

15.1 Subsection 9(a): Internal instructions will have to be drafted as to what is deemed to be a good cause and reasonable as certain industries such as the motor industry are bound by statute to hold inventories for a minimum period of 10 years subsequent to the discontinuation of a model. We therefor agree that the Commissioner/controller has the discretionary powers to allow for such industry requirements. In a country where the cost of money is high, the transit distance from suppliers is long and costly, and there is a need to hold sizeable stock for replacement purposes, demands such trade facilitation mechanisms.

15.2 Based on our experience, a number of industries hold inventories for periods exceeding 2 years and this could result in an undue and unintended administrative burden to SARS and users of bonded warehouses.

15.3 We believe that the insertion of subsection 9(b) will create problems for both bonded warehouse registrants and SARS alike, as the administrative burden required to identify inventory over 2 years old will be onerous and SARS is not in a position to effectively police such an operation. Those companies that are identified by SARS will be prejudiced over those that SARS cannot get to.

16. Section 19A
16.1 We agree with the intention of duty at source as this results in a lesser admin burden to SARS and to the manufacturer. The proposed amendment will also impose restrictions on the licensing of storage warehouses.
16.2 This is to be supported, however, drawback facilities in terms of the Fifth and Sixth Schedules should be made available to traders wishing to export product where duty has already been paid.

16.3 Subsection 2(a) We are of the view that the Commissioner must give a manufacturer prior notice, of the impending closure of his warehouse as this action may have dire financial consequences and the Commissioner is effectively not allowing the manufacturer to remedy the situation.

Subsection 2(b) This section is now prescribing a penalty, which in certain circumstances may be excessive or in other cases insufficient.

Does this section comply with the proposed new penalty guidelines issued by SARS?

17. Section 59A
17.1 There is a lack of skills in the clearing and forwarding industry in general. Is this provision going to be excluding persons from earning an income. Further, it is important that the criteria for qualification are clear, unambiguous and transparent. Will there be a window period to enable current players that don't meet the criteria to skill up?

17.2 Subsection 2 has been amended, however we still believe that the review by the High Court is an onerous one and not accessible by the majority of people who would have their licenses refused.

18. Section 64B
18.1 This section is highly subjective as how can a person prove his good character and sufficient knowledge. Further, are the administrators at SARS qualified to identify a person's good character and knowledge.

18.2 This cannot be supported at this time. Both the private sector and the providers of tertiary education should, with government, agree on the criteria for specific educational material and programmes, before the Commissioner is given legislation to set rules. The expertise required of Government officials differs greatly from that in the private sector. Joint training programmes, where appropriate, and recognized tertiary programmes should be encouraged before legislation. This may also have a detrimental impact on the smaller SMME establisments (one man band) who, although having a working knowledge of customs to fulfil requirements, does not have the time to have additional training.

19. Section 64E

19.1 In principle we support SARS' initiative to be focussing their efforts in areas of higher risk and not on clients who are in compliance with the legislation.

19.2 Probably the two most important guidelines in reviewing the Siyaka programme is that careful consideration should be made to the tendency to marginalise small to medium size businesses in terms of the accreditation process, and the failure to recognise that any accreditation management team, caucus or committee that excludes the private sector will not have the desired result of partnership and commitment. It is a concern that it appears that SARS would be acting as Judge and Jury in the accreditation process, and that the private sector was merely asked to endorse the process. It is fully recognised and accepted that the Commissioner has the full weight of the legislation in terms of the Customs and Excise Act, to rely on to manage imports and exports, and the accreditation process should be where the private sector can assist government with self-regulation. It is imperative to include the players responsible for self-regulation and compliance in the accreditation process.

20. Section 69(d)
We do not believe that this definition of invoice price is extensive enough to be able to account for all discounts, rebates etc., that are passed after the initial invoice is raised.

21. Section 75
The rebate, refund and drawback items mentioned must be inserted into the said schedules on tabling of the proposed amendments to this section.

22. Section 101A
22.1 We agree in principle with the enactment of the protocol governing the electronic data interface with SARS. We have however not had sufficient time to analyse the proposed legislation and can therefore not comment on the intended text.

22.2 The definition of "electronic record" should, in our view, be amended along the following lines:

"Means data recorded or generated, image or sound stored, received or sent in an electronic form or microfilm or computer generated microfiche;"

GENERAL
23. Monetary limits

23.1 We attach hereto a schedule of the monetary limits contained in the Income Tax Act of 1962, as amended as well as the VAT Act, Act 89 of 1991, as amended.

23.2 The schedule attached hereto has been updated to take account of the various statutory amendments introduced recently as well as the provisions contained in the Taxation Laws Amendment Bill whereby capital gains tax is introduced into South Africa.

23.3 SAICA notes that the National Treasury indicated during the hearings before this honourable Committee on the introduction of capital gains tax that the question of the monetary limits in fiscal legislation would be reviewed and a policy decision would be made thereon. SAICA urges the Treasury to review the various monetary limits contained in fiscal legislation and to introduce legislation amending monetary limits contained on the schedule attached hereto.

24. Non-profit organisations
24.1 SAICA notes with concern that the schedule of those activities that will be recognised as public benefit activities in accordance with section 10(1)(cN) read together with sections 30 and 18A of the Income Tax Act of 1962, as amended, as introduced by the Taxation Laws Amendment Act, Act No.30 of 2000 have still not been finalised. The non-governmental organisation sector has been placed in an invidious position in that the current provisions contained in section 10(1)(f) and (fA) of the Act have been effectively suspended in that the effective date of the new provisions regulating NGO's has not yet been promulgated.

24.2 The Commissioner: SARS issued Media Release No.3 of 2001 on 17 January 2001 and called for comments on the draft schedule of public benefit activities for the purposes of section 18A and section 10 (cN) of the principal Act. Unfortunately the schedules have not yet been finalised. The National Treasury is urged to publish the schedules of those activities that will be recognised as public benefit activities so as to restore certainty in the non-governmental organisation sector. Act 30 of 2000 was promulgated on 19 July 2000 and it is most unfortunate that the schedule of public benefit activities as required by sections 30 and 18A of the principal Act have not yet been released. The NGO sector is in desperate need of finality in this regard and it is hoped that the schedules will be published shortly.

25. Incentives for strategic investment projects and the wage incentive
25.1 It is noted that the legislation regulating the abovementioned incentives has not yet been finalised. SAICA looks forward to receiving the legislation so that it can comment thereon. We believe that it is extremely difficult to design fiscal legislation that will meet the economic objectives intended by the two incentives mentioned above.

25.2 It is essential that the legislation finally drafted will result in targeted investments such that the incentives are not abused and that South Africa does not end up with more white elephants than is the case from the legacy of incentives that were made available in the past.

25.3 We also foresee difficulties in ensuring that the incentives do not exceed the amount specified by the Minister of the National Treasury in his annual budget speech introduced to the National Assembly on 21 February 2001. It is critical that legislation to be introduced catering for these incentives prevents abuse and ensures that the economic objectives are in fact realised.

26. Consultation process
26.1 SAICA is privileged to be involved in the commenting of the draft fiscal legislation but must raise a concern in regard to the extremely tight time frames that are placed upon it and its members in order to comment properly on the legislation made available to it.

26.2 We set out below the details pertaining to the various batches of legislation which now appears in the Revenue Laws Amendment Bill before this honourable Committee. Details of the legislation received by SAICA and the dates thereof and the date on which comments were due are set out below.

Legislation: Received: Time: Comments due:

* RLAB (1) 08/05/2001 13:22 Before 17/05/2001
* RLAB (2) 22/05/2001 16:35 Before 30/05/2001
Explan. Memo. (1+2) 23/05/2001 14:37 N/A
* RLAB (3) 29/05/2001 16:15 12h00, 04/06/2001
Customs & Excise 29/05/2001 16:32 12h00, 04/06/2001

* Revenue Laws Amendment Bill (RLAB)

26.3 The initial batches of legislation received by SAICA granted SAICA time to consult with the members of its tax committee whereas the third batch of legislation was only received on the afternoon of the 29 May with the request that comments be forwarded no later than 12 noon on 4 June 2001. We sought to meet the tight deadline imposed on us and unfortunately our submission on the third batch of the Revenue Laws Amendment Bill legislation was only forwarded to the office of the Commissioner: SARS on the afternoon of 4 June 2001. By virtue of the extreme deadline imposed on us we were unable to obtain substantial comments from our members on the legislation.

26.4 It is submitted that the time granted on the third batch was unreasonable and more time should in our view be granted so as to ensure proper consultation with the various stakeholders on the draft legislation under consideration. We understand that SARS is under extreme pressure to finalise the legislation but in order that the legislation can be properly considered it is essential that a reasonable amount of time be granted to the various stakeholders to consider such legislation and to properly comment thereon. It must also be noted that SAICA receives the legislation in different batches which is accepted and understood but that the draft Bill as tabled before this honourable Committee was only made available to SAICA by this committee on 5 June 2001. This was the first time that SAICA was able to look at the draft Bill on a comprehensive basis as opposed to considering bits and pieces thereof. Furthermore the Explanatory Memorandum forwarded to SAICA on 5 June 2001 by this honourable Committee is slightly different to the various batches made available to SAICA over the last few weeks.

27. Capital gains tax
27.1 SARS must be complimented for the extent of the Explanatory Memorandum published on the Taxation Laws Amendment Bill which introduces capital gains tax into South Africa. It is hoped that the Commissioner: SARS will shortly be issuing a comprehensive capital gains tax guide for the use by taxpayers such that it will address further aspects of the legislation that are not covered in the Explanatory Memorandum.

27.2 It is unfortunate that the current Bill before this Honourable Committee does not address the rules relating to capital gains tax and foreign exchange nor the capital gains tax relief measures insofar as corporate restructures are concerned. SARS is urged to finalise such draft legislation urgently so as to bring finality to this matter in the interests of corporate South Africa. In our submission presented to this honourable Committee last year on the introduction of capital gains tax in South Africa we urged SARS to undertake a comprehensive training programme of taxpayers and its own staff. We wish to place on record that SARS has confirmed that they will be presenting workshops for the benefit of taxpayers as to introduction of capital gains tax in South Africa. This measure must be supported and will go some way in educating taxpayers of South Africa as to their obligations under the capital gains tax legislation.

CONCLUSION
SAICA would like to thank this honourable Committee for the time afforded to it in making this presentation. SAICA looks forward to being involved in the deliberations in the further fiscal legislation that will be introduced this year dealing with the possible amendments of section 24C of the principal Act, capital gains tax insofar as corporate restructuring, unbundling and moratorium/rationalisations are concerned and related matters.

B J Croome
CHAIRMAN: TAXATION COMMITTEE
The South African Institute of Chartered Accountants

Appendix 2:
PricewaterhouseCoopers
SUBMISSIONS: REVENUE LAWS AMENDMENT BILL, 2001

Paragraph 7(g)
- The words ", in its capacity as such," should be inserted after the word "shareholder". This, for example, will preclude a sale of a company asset to a shareholder as a member of the public or in the normal course of business.
- Further, should the amendment not also cover the transfer of an asset to a connected person in relation to a shareholder?
- Incidentally, section 8(4)(k) has always been incorrect. The market value of the asset is not the amount of the recoupment, but rather the deemed amount of the disposal proceeds of the asset for the purposes of calculating the amount of the recoupment under section 8(4)(a).

Paragraph 8
- If an intra-group loan from a CFE is a taxable foreign dividend what is the position when the loan is repaid? Is it to be treated as a deduction by the taxpayer that repays the loan? It seems that, if the proposal is to be implemented, further provisions will be required to deal with the loan repayment: cf section 64C(5).

Paragraphs 10(1)(e) and 11
- Is an "affected asset", as contemplated in section 12D, regarded as plant and machinery ("P&M")? If not, then section 11(bA) should be amended to include these affected assets. If yes, then affected assets should be excluded from section 12C(1)(a).

Paragraph 12 - small business allowance
- Why is the new section 12E confined to new and unused P&M? Section 12C, which also provides for P&M write-offs, also applies for used or second-hand P&M. One would have thought that there is more likelihood that a small business would acquire used or second-hand than would a big business.
- Why does section 12E not also allow the allowance where the P&M is leased, as does section 12C(1)(b)?
- Why is the section 12E allowance confined to taxpayers that are companies or close corporations? The Finance Minister's February 2001 budget speech referred to "tax privileges for small businesses", not only small business companies and close corporations. The allowances under section 12C and the proposed new section 12F are available for all taxpayers, not only companies and close corporations. It does not seem unlikely that many small businesses are and will be unincorporated, eg sole traders, partnerships, and family or community undertakings.

Paragraph 12 - allowances for aircraft hangars, etc
- Here again why is the allowance confined to new and unused hangars, etc, and leasing precluded: see 6 and 7 above?
- The use of the word "his" in the last line of the proposed section 12F(2) is unacceptable in this age of gender equality and sensitivity. Why not simply use the word "its"?
- With respect, the drafting seems a bit haphazard:
why does not the equivalent of section 12F(5) and (6) appear in section 12E and the equivalent of section 12E(3) appear in section 12F?
section 12F(5) refers to any previous year of assessment while section 12C(4)(a) refers to any year of assessment;
should the words ", or any connected person in relation to the taxpayer," not appear after "taxpayer" in section 12F(5)?

Paragraph 13
- The words "in his capacity as the trustee of" in section 25B, besides being sexist are unnecessary if not confusing, as a "trust" is the person not its trustees: definition of "person" in section 1 of the Act.
- While the purpose of the proposed amendments to section 25B(2A) is understood, there appears to be two problems:
the receipts or accrual may be exempt from income tax, in which case they should not be included in the "income" of the resident beneficiary. Would it not be better to merely insert the words ", whether or not derived from a source or deemed source within the Republic," after the word "income" in section 25B(2A)(a)?; and
by virtue of what provision will the resident beneficiary be entitled to deduct the attributable deductible expenditure incurred by the non-resident trust?

Paragraphs 16 - 19
- In many cases, particularly with small business companies and close corporations, the corporate form is really a limited liability partnership: see, for example, In re Yenide Tobacco Co Limited, [1916] 2 Ch 426. The drawings of partners from a partnership are not subject to employees' tax. It is submitted that this be recognised and that there should be some threshold (eg assets, turnover) below which the proposed provisions do not apply.
- It seems a little ironic that in the same legislation it is proposed to provide relief or "privileges" for small business companies and close corporations and to then deprive them and their directors of an age-old tax "privilege".
- It is appreciated that the formula is well-intended but it does not make sense and is open to manipulation:
- if "P" is greater than T/N, surely "Y" should be equal to "P", not nil;
assume T/N is R10 000, the effect of the formula could largely be avoided by paying the director R9 999 a month, with perhaps a final top up payment at the end of the tax year;
if the person was not a director in the previous tax year but becomes one in the following tax year, it seems that there would be no employees' tax payable in the latter year, as Y/N - P would be nil;
it seems that loans to directors would be encouraged, even taking possible fringe benefits tax into account.
- With respect, these proposals require more thought.

Paragraph 23
- In relation to para 32 of Schedule 8 a practical problem has arisen for long-term insurers, retirement funds, portfolio managers and others which adopt weighted average to determine base cost of gilts and equities and adopt market value on valuation date in terms of para 26.
- Where market value is be used to determine the weighted average of pre-valuation date counters (identical assets), as opposed to the actual weighted average, two "baskets" will have to be maintained: one for pre-valuation date counters for which market value has been adopted and the other for the same counters for which market value is not adopted and counters acquired on or after valuation date, to determine if, and to the extent that para 26(3) applies for disposals out of the first basket. This, we are informed, will entail major system changes.
- Accordingly, we request that consideration be given to excluding the operation of para 26(3) to assets covered by para 32(3)(c).

Paragraph 29
- Should not para 66(1)(a) of Schedule 8 also include references to sections 12D and 12F?

Paul Ferreira
PricewaterhouseCoopers
8 June

SUBMISSIONS:REVENUE LAWS AMENDMENTS BILL 2001
These replace the representations made previously in paragraph 18.1 to 18.4 inclusive.

Paragraphs 16 - 19
These paragraphs withdraw the exemption from PAYE granted for payments by a private company to a director of that company. As a result, all amounts paid or payable to a director falling within the definition of remuneration will be subject to employees tax

In addition to the above, Paragraph 18 deems a further amount to be remuneration and subject to PAYE, payable by the company. This amount is based on the amounts received in the previous year of assessment.

The amount deemed is calculated in terms of a formula. The deemed remuneration thus represents the excess of the average remuneration in the last year of assessment over the balance of remuneration in the current month. This is calculated on a month by month basis

This raises the following issues.

The deemed remuneration represents amounts not yet paid by the employer and which may never be paid. The employee is in fact taxed on a notional amount not yet paid or payable to him, and not yet tax deductible by the employer.

The formula results in the deemed remuneration which is being subject to PAYE in the current year effectively being subject to PAYE again when the new bonuses are paid.

This is because the deemed remuneration represents an estimate of the bonuses to be paid in respect of the current tax year and PAYE will be paid over by the employer in respect thereof.

However, when the performance bonus is actually received, PAYE will again be deducted as such bonuses will fall into the normal definition of remuneration. If no bonuses (or significantly lower bonuses than the previous year) are paid, there appears to be no mechanism for recovery of this amount other than by way of assessment (see comments below on IRP 5). This formula therefore assumes that all directors will receive substantial bonus/additional payments for the current year after the end of the year, and at least equal to the equivalent bonuses received in the previous tax years. It should be emphasised that this is not always the case, and most directors need cash flow through out the year to meet obligations which will be for the most part be subject to PAYE as remuneration.

P in the formula looks at the position on a month on month basis, and does not take account of the bonus payments in the year. Where an amount is paid which has already been subject to PAYE in terms of the deeming provisions, the notional calculation be must adjusted for subsequent months, and when calculating the actual PAYE on that amount, the PAYE already paid over in respect of the deemed amount must be set off, otherwise there is the double taxation.

There appears to no method to reclaim any overpaid PAYE until assessment. It also appears that in order for such amount to be included on the employees tax certificate, it must be re-imbursed to the employer by the employee. Therefore, in the example, the employer must pay over PAYE twice (once on the deemed amount and once when actually paid) and the employee must recompense the employer before he can reclaim the excess PAYE deducted. It is important to note that this position is more onerous than if the director was an employee, or a director of a public company which are already subject to PAYE, which is surely not the intention.

The legislation does not take account of exceptional bonuses or the fluctuating fortunes of the company. If a director received an exceptional performance bonus which is not to be repeated the next year, is there a way of reducing the PAYE on the notional income ?

If the company is having a bad year after a good one, which does happen, the extra burden of cash flowing the PAYE on the non-existent future bonus will have a significant adverse impact on the company.

In light of the above, we can see no real alternative than the application of PAYE as and when the amounts are paid or become payable to the director. This is consistent with the position for all other employees.

It is not clear whether the deemed remuneration should be included on the employee's IRP 5. If not, the additional employee's tax deducted will be repayable on assessment, making the whole exercise of deeming and taxing futile. If it is included, there will be double counting as explained above. Guidance on this matter would be gratefully appreciated.

PricewaterhouseCoopers
12 June 2001