Small Business Tax Amnesty & Amendment of Taxation Laws: informal briefing

FINANCE PORTFOLIO COMMITTEE
31 MAY 2006
SMALL BUSINESS TAX AMNESTY & AMENDMENT OF TAXATION LAWS: INFORMAL BRIEFING

Chairperson: Mr N Nene (ANC)

Document handed out:
South African Revenue Service (SARS) and National Treasury Joint Presentation: Part 1 & 2
SARS Explanatory Memorandum: Part 1 & 2

SUMMARY
The South African Revenue Service and National Treasury said that that the continued economic growth and effective South African Revenue Service administration allowed for yet another year of broad-based tax relief. For small business relief, the definitional limit was increased to an annual turnover of 14 million and the exemption threshold topped out at R40 000. There was also a once-off exemption for small business sales of up to R750 000.

The rationale for small business amnesty was to broaden the tax base, to normalise tax affairs, to improve the tax compliance culture and to facilitate the Taxi Recapitalisation Programme (TRP). Individuals, trusts and estates and unlisted companies completely owned by individuals and/or estates could apply for the amnesty.

The Regional Services Council Levy would be repealed with effect from the 1^st of July 2006. The repeal provided R7 billion in tax relief and simplified taxpayer compliance (especially for small business). For housing, the municipal rental housing would remain exempt. The sale of housing my municipalities would remain subject to value added tax. With regard to Treasury’s access to the Provincial Finance Management Act, Treasury had limited access to SARS’ taxpayer data, that is, it was only retrievable at an aggregate level. Given its role in appropriating funds, Treasury had to be given full access to taxpayer data.

MINUTES
Prof K Engels, from Treasury’s Tax Department, said that the continued economic growth and effective South African Revenue Service (SARS) administration allowed for yet another year of broad-based tax relief. For example, the 40% maximum tax rate was reconfigured to only kick-in at R400 000 (compared to the former R300 000). Also, the rebate threshold for people below 65 years of age only kicked in at R40 000 (compared to the former R35 000). Other concessions were found in the interest (dividend) exemption, retirement fund taxation, donations/estate duty tax and in the Capital Gains Tax (see document).

The zero rate for Transfer Duty Relief on purchases now topped out at R500 000 and the 5% duty only kicked in at R500 001. For stamp duty, the exemption kicked in at R500 per agreement. For car allowances, deemed private miles would be 18 000km (compared to 16 000km in 2005) in terms of the overall 32 000km deemed amount. A new monetary cap was implemented for medical allowances. Employer-provided medical assistance on-site and off-site was now excluded from income in terms of uninsured employees. Employer assistance was now available for medically-insured employees as long as the medical scheme reimbursed the employer (to prevent double-dipping).

For small business relief, the definitional limit was increased to an annual turnover of 14 million and the exemption threshold topped out at R40 000. There was also a once-off exemption for small business sales of up to R750 000. Small items that were eligible for 100% depreciation now operated under an increased definitional limit of R5 000. The definitional limit for four-monthly filers was increased to R1.2 million, and that for six-monthly small farmers was increased to R1.2 million.

Mr F Tomasek, Assistant General Manger of Legislation for SARS, said that the rationale for small business amnesty was to broaden the tax base, to normalise tax affairs, to improve the tax compliance culture and to facilitate the Taxi Recapitalisation Programme (TRP). Individuals, trusts and estates and unlisted companies completely owned by individuals and/or estates could apply for the amnesty. The party had to carry on a business and have a maximum gross turnover limit of R5 million for the 2005 year of assessment (1 April 2005 – 31 March 2005). The amnesty covered both unregistered persons and registered taxpayers with undeclared income.

The time period to apply for the amnesty was from 1 August 2006 to the 31^st of May 2007. The dual amnesty process was dropped. Initially, the TRP was supposed to be a pilot programme, but splitting up the process added more administrative complications than benefits.

The first core requirement that had to exist before amnesty was granted was that there had to be full disclosure of all improperly undeclared or unpaid amounts in income tax; secondary tax on companies (STC); pay as you earn (PAYE); value added tax (VAT); unemployment insurance; the skills development levy and any withheld taxes on intellectual property royalties for the 2005 year of assessment. The applicant had to submit all the relevant returns per tax type for that year and produce an asset/liability balance sheet for the close of the 2005 year of assessment.

Many small businesses lacked viable internal reporting mechanisms. The amnesty accordingly accepted ‘reasonable estimates’ in lieu of actual expenditure. However, the amnesty could be revoked if these reasonable estimates were not materially correct.

The second core requirement was that the applicant had to pay a levy of 10% of the undeclared taxable income for 2005. For this purpose unused pre-2005 losses could not be carried against 2005 taxable income. The levy had to be paid 12 months after SARS issued a notice of the approval amnesty. However, the Commissioner could extend this 12 month period subject to certain conditions.

The third core requirement was that amnesty would be denied if SARS issued a notice to the applicant before the amnesty submission of an audit, investigation of other enforcement action that related to a period otherwise covered by the amnesty. The amnesty also did not cover amounts already paid and payable amounts already disclosed to SARS by way of a tax return. The amnesty covered improperly undeclared or unpaid amounts that arose before 1 April 2004 and it provided relief from additional tax, penalties and interest and criminal prosecution for failure to disclose information.

Taxpayers may not carry-over tax benefits from a pre-2005 year. Hence, loss carry-overs, STC credits and VAT input credits could not be utilised if they stemmed from a pre-2005 year receiving amnesty relief. The approval of amnesty was non-discretionary and applications would be reviewed by a separate SARS unit with regional presence. All applicants were entitled to a SARS notice of approval or denial, and all decisions were subject to objection or appeal.

Despite initial SARS approval of amnesty, it could become void if the applicant subsequently failed to pay the full 10% levy, if the applicant failed to make full disclosure, if the estimates were materially incorrect and if the applicant failed to provide all the information needed for SARS to properly evaluate the application. The success of the amnesty process would be reported to Parliament. The contents of this report would include the number of applications received; the number of applications approved and denied; the number of new taxpayer registrations; details of non-disclosure granted amnesty (per tax type) and details of all taxes payable for the 2006 year of assessment (per tax type).

Prof Engels then spoke about the Regional Services Council Levy (RSCL) repeal and VAT simplification. The RSCL would be repealed with effect from the 1^st of July 2006. The repeal provided R7 billion in tax relief and simplified taxpayer compliance (especially for small business). Technically, the repeal required repeal of section 93(6) of the Local Government Municipal Structures Act and the enactment of the Municipal Fiscal Powers and Functions Bill which would be presented to Parliament shortly.

The zero-rating of property rates was designed to shift revenue from the Government to municipalities due to RSCL repeal (the rest was financed via national grants). The proposal also simplified VAT administration by eliminating allocation issues for input credits. As of July, property rates would go from ‘out of scope’ to zero rating status. As a result, all VAT cost inputs that related to property rates would be unlocked. The proportion of municipal exempt/’out of scope’ revenue would decrease which would reduce input allocation issues.

Zero-rating for property rates would apply even if those rates acted as hidden subsidies for standard rated services such as sewage and refuse. The opportunity for misuse was limited because of municipal rate guidelines and external pressures. However, the ‘flat-fee’ rate funding that covered all services would be viewed as a standard rated service.

Other changes included modernising the definition of ‘Local Authority’ in Clause 56 and removing the special ‘enterprise’ definition in Clause 49. By mainstreaming the enterprise definition, municipal supplies would be generally be standard rated (not rated items). Areas to be clarified by SARS were licenses and fees would be standard rated and if penalties and fines would be exempt.

For housing, the municipal rental housing would remain exempt. The sale of housing by municipalities would remain subject to VAT. The national grants for subsidised rentals remained exempt and national grants for subsidised sales remained zero rated while public transport remained outside the VAT net.

The VAT treatment of grants to municipalities would remain dependent on the ultimate use of the funds. Grants were zero rated if the municipality used the funds to offer standard rated or zero rated supplies. The grants were out of scope if the municipality used the funds to offer exempt/’out of scope’ supplies. However, the grants were not to be confused with services (the latter of which was subject to VAT).

Payments from municipalities to municipal entities would generally be standard rated unless the Minister of Finance viewed the entities as being regulated. The standard rated treatment would not have any adverse impact because the municipalities could claim VAT input credits. National and provincial payments to municipal entities would remain subject to the grant/service distinction.

Municipalities may have difficulty shifting their systems before the 1^st of July 2006 so a six month penalty/interest waiver would be added as a transitional measure. Input credits for pre-1 July 2006 municipal purchases would be blocked even if the purchase subsequently related to a VAT-able output due to the opposed change. Under the old law, confusion existed as to whether a grant to a municipality was subject to VAT. This confusion was cleared up by a legislative intervention in 2005.

However, the same confusion existed for the pre-2005 years. Therefore a retroactive amendment was needed that foreclosed SARS from prosecuting underpaid amounts that related to this issue (even if a SARS notice had already been issued) and foreclosed municipalities from claiming refunds on overpaid amounts that related to the same issue.

Mr Tomasek said that there were adjustments to the yearly “sin tax” amounts. For example, sparkling wine tax was up by 20%, spirits by 9.5% and cigarettes by 10.2%. Certain de minimis items needed to be removed from the ad valorem excise duty list because the cost of administration largely outweighed the revenue raised. These de minimis items currently included aqueous distillates and aqueous solutions of essential oils, automatic goods vending machines, fax machines and road tractors.

A general fuel levy concession of 30% was announced in the 2002 Budget Review and the enabling legislation was enacted in the same year. Industry and standard setters were subsequently engaged and the 2006 Budget review announced an increase to 40% which was implemented on the 1^st of April 2006.

There were also some miscellaneous amendments and technical corrections to be made. Transfer duty currently did not apply to transfers between spouses upon death regardless of whether the marriage was in or out of community of property and transfers between spouses upon divorce only if the marriage was in community of property. The proposal here was to impose transfer duty on all transfers regardless of community of property.

Collective Investment Schemes (CISs) were currently exempt from Stamp Duty if they were in the form of an Unlisted Unit Trust. In order to provide equal exemption for CISs, all schemes would be exempt from Stamp Duty regardless of whether the scheme was in the form of a trust or company and the scheme invested in shares, bonds or land.

With regards to Treasury’s access to the Provincial Finance Management Act, Treasury had limited access to SARS’ taxpayer data, that is, it was only retrievable at an aggregate level. Given its role in appropriating funds, Treasury had to be given full access to the taxpayer data.

Discussion
Mr K Moloto (ANC) asked what problems SARS had in the past with the Transfer Duty in respect of trusts.

Mr Engels replied that by law, if an individual or company bought property they had to pay transfer duty. However, this law was being abused by people transferring the property to trusts and then selling the trust which incurred no transfer duty. The law had to be changed.

Ms J Fubbs (ANC) asked how determined if the submissions made for amnesty were ‘reasonable’ without access to accurate records.

Mr Engels admitted it was not easy but SARS made sure they examined the circumstances of each case thoroughly. They went as far as assessing things such as the value of the assets held by the applicant to get as full a picture as they could.

Mr Y Bhamjee (ANC) asked if there was evidence of the municipalities’ satisfaction with the replacement of the RSCLs.

The Chairperson wanted an indication of the level at which the consultations with the municipalities took place.

Mr Engels replied that the Treasury had a Local Government unit that handled most of the interaction with the municipalities. They had contacted as many municipalities as possible and managed to get a representative sample with an even mix of well-off and poorer municipalities. In all about 25 municipalities were represented as well as the four big accounting firms that did work for them.

The meeting was adjourned.