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FINANCE PORTFOLIO COMMITTEE
7 June 2006
DRAFT SMALL BUSINESS TAX AMNESTY AND AMENDMENT OF TAXATION LAWS BILL: TREASURY / SARS RESPONSE TO SUBMISSIONS
Chairperson: Mr N Nene (ANC)
Documents handed out:
Explanatory Draft Small Business Tax Amnesty and Amendment of Taxation Laws Bill
Draft Small Business Tax Amnesty and Amendment of Taxation Laws Bill
Response to submissions on Draft Small Business Tax Amnesty and Amendment of Taxation Laws Bill
Submission by South African Institute of Professional Accountants
The National Treasury and the South African Revenue Service responded to submissions made on the draft Bill. Some of the issues raised in the submissions still had to be discussed with the Minister of Finance and response to them would be given at a later stage.
The South African Revenue Service rejected the proposal for the scrapping of the 10% levy on the 2005 gross taxable income of small businesses that would apply for the small business tax amnesty. It pointed out that the levy was a nominal amount considering the waiver of the much larger tax amount plus no prosecution for tax contravention. SARS would consider a proposal to raise the gross income ceiling for small businesses from R5 million to about R14 million. More than 100 000 small businesses with turnover of less than R5 million were expected to take advantage of the amnesty process. The amnesty was intended to give small businesses the opportunity to regularise their tax affairs with little penalty and so bring them into the tax net.
The issue of whether tax advisors who picked up a suspicious transaction, should report them to the Financial Intelligence Centre, had been sent to the Financial Intelligence Centre for consideration.
The Committee met to give National Treasury and the South African Revenue Service (SARS) an opportunity to respond to submissions made on the draft Bill. Mr F Tomasek (Assistant General Manager: Legislation- SARS), Mr C Morden (Chief Director: Tax Policy) and Prof K Engel (Treasury-Director: Legislative Oversight and Policy Co-ordination) attended the meeting. Both Mr Tomasek and Prof Engel made the presentation (see document attached).
Prof Engel said that the submissions were mainly about the amnesty. There were few issues around municipalities and minor technical corrections. Some of the issues raised were related to policies and the team still had to discuss them with the Minister.
Mr Tomasek accepted the proposal that the amnesty should apply to partnerships as well as to partners in a partnership in part. A definition of person would be introduced in the Bill, which would be similar to the definition of person in the Income Tax Act. This would have the effect that the partners of a business partnership might individually apply for amnesty if their share of the gross income of the partnership for the 2005 tax year attributable to that partner was not more than R5 million. Applying the R5 million ceiling per partnership as suggested by the South African Institute of Chartered Accountants (SAICA) would be more restrictive than the current approach because all partners would be stuck with that one cap. Looking at each partner individually would mean that each partner would get the cap of R5 million. The government was being more generous than requested.
An important question was whether the R5 million cap should be increased to R14 million for the small business corporation rules. He said that it seemed that people were comparing apples and oranges because the amnesty referred to the 2005 year of assessment whereas the small business corporation rules increase to R14 million would only be effective for the 2007 year of assessment. In essence people wanted to use the cap for the 2007 year of assessment for the 2005 year. He understood the request for a higher cap and said that the government was looking at the proposal.
He noted that it had been suggested that the amnesty should be available to a group of companies if the aggregate gross income of all companies in the group did not exceed R5 million, and each company in the group was eligible for amnesty. This proposal was not accepted because a group of companies did not fall within the target market for which the tax amnesty had been designed. The amnesty process could get a little bit difficult should groups of companies be included. It had been submitted that it was somewhat illogical and limiting, that a company whose shares were all held by a trust, was precluded from the amnesty. He reiterated the point that the process was not intended to assist group structures. However, the point that trusts and companies should be treated on a similar basis was acknowledged. Trusts should only qualify as applicants where only individuals were vested or contingent beneficiaries.
The draft legislation provided that a person who had declared but not paid tax to SARS could still come forward for amnesty. It also provided that any amount that had been declared would not be eligible for amnesty. There was a contradiction in the Bill. The idea was to give amnesty to people who declared things for the first time. The Bill would be drafted to exclude amounts declared but not paid over. The normal rules would apply to people who had declared but not paid their taxes.
SARS was urged to temporarily halt carrying out any new investigation of categories of taxpayers who would qualify for amnesty during the duration of the amnesty so as not to prejudice these taxpayers from qualifying for the amnesty. This proposal was not accepted but SARS was prepared to consider withdrawing notices of audit and investigation issued since 15 February 2006 until the amnesty window opened.
It had also been suggested that the exclusion from amnesty should apply only to the specific tax or levy being queried or audited by SARS. This meant that taxpayers should be able to take advantage of the amnesty process to regularise their tax affairs in relation to non-compliance. Mr Tomasek rejected this proposal because an amnesty was a package deal. An investigation might by its nature be extended past its initial focus.
Mr Tomasek said that certain submissions had proposed that the incentive to induce small business to regularise their tax affairs should not have a penalty attached it. This proposal was not acceptable. In comparison to the tax waived under the amnesty, the amnesty levy was a nominal amount compared to the much larger tax amount that had been waived plus possible future prosecution for tax contravention. It was not a penalty but a recognition of the fact that the person had broken the law and that a contribution had to be made for that tax year before one could move forward on a clean slate.
A question had been raised in some submissions as to the position of an applicant that had had a taxable loss for the 2005 year of assessment. Could amnesty still be applied for? What if the applicant had not traded in the 2005 year of assessment but traded in prior years? It had been proposed that the levy should be based on the last year of trading. Mr Tomasek commented that one was dealing with people who in many cases had not kept robust records. The proposal was suggesting that one should go to into the past and try and find a year in which they had made a profit. The question was how far should one go. What would happen if the business had never made a profit or had made a profit many years ago? The idea was to keep things simple by looking at a recent year. A business that had made a loss in the 2005 assessment year would still be able to get amnesty but would not have to pay the levy because there was no taxable income.
Another proposal was that the amnesty should be extended to include estate duty, donation tax and customs and excise contravention. This proposal was not acceptable because wealth taxes were not taxes on business operations. This was appropriate in the context of foreign exchange control amnesty. Customs and excise contravention was usually excluded because it involved cross-border trade and smuggling.
It had been submitted that no mention had been made about granting advisors exemption under the Financial Intelligence Centre Act (FICA) in cases where they had advised applicants on their rights and obligations and on compilation of the amnesty applications. Since tax offences were reportable in terms of section 29(1)(b)(iv) of FICA, any client coming forward and disclosing any irregularities in the course of applying for amnesty would have to be reported. It was proposed that a specific exemption from the FICA should be granted. Mr Tomasek said that the issue had been referred to FICA and that it could best be dealt with in the regulations.
Prof Engel said that there were submissions in relation to allowance and the deemed business miles. People had a choice between claiming the actual or deemed business miles. The 'deemed business miles' was supposed to be an approximate substitute for actual miles. It was felt that the deemed system was far more generous than the actual state of affairs. Many people were taking the car allowance based on 'deemed business miles', knowing that it was factually incorrect. The government had been trying to cut back on the allowance and simplify individual returns. The increase in the deemed private kilometres from 16 000 to 18 000 was announced in the 2005 and 2006 Budgets. The increase from 50 to 60 per cent of the monthly travelling allowance had been proposed to ensure that the correct amount of income tax was collected through the PAYE system during the tax year.
He said the Treasury had proposed zero rating municipality property taxes. Municipalities would be able to claim value added tax credit for all expenses related to collecting the taxes. The potential loss aspect identified by PricewaterhouseCoopers (PWC) was minor compared to the substantial benefits to municipalities. PWC also had a problem with the definition of a municipality because they felt that it would include only a few district municipalities. He pointed out that the wording of the definition was carefully chosen to include all district municipalities. PWC had also submitted that the annual turnover limit in relation to small farmers should be increased to at least R2 million in order to reflect the effect of inflation. He said that the amount had moved from R1 million to R1, 2 million. The proposal had been noted for consideration during the 2007 budget process.
The Chairperson noted that no response had been given to some of the submissions. Certain issues had to be sent to the Minister for his consideration because they dealt with policy issues. He asked when the Committee could expect answers to them.
Mr Morden replied that SARS and Treasury would probably get a response from the Minister by tomorrow. The Committee would be given written feedback on the matter.
In reply to the Chair asking what were Interpretation Notes, Prof Engel replied that a tax system had the law, regulations and interpretation notes. The Interpretation Notes used to be called practice notes and were SARS's view on how the law had to be interpreted. They were not legally binding on taxpayers.
The Chairperson said that the issue of the reporting of tax offences had been sent to FICA for consideration. He asked when the Committee could expect a response from FICA.
Mr A Moloto (ANC) commented that the responses given to most of the submissions were clear. What were the real concerns in relation to issues that dealt with FICA? He also asked if a person who had stopped trading by 2004 did not have to apply for amnesty.
Mr Morden replied that during the foreign exchange control amnesty process there had been a provision that tax practitioners who had provided advice to applicants would be absolved from the duty to report suspicious transactions. The question was whether to include such a feature in this amnesty process. There was a need to discuss this issue with FICA.
Mr Tomasek replied that FICA provided for a reporting duty when dealing with suspicious transactions. SARS might have access to the information from the Financial Intelligence Centre. The question was whether this would not discourage people from seeing tax advisors or consultants. He said that one might ask why would a person who had ceased trading want to come forward for amnesty. Persons who had ceased trading still ran the risk that SARS might pick them up at a later point. People might want to legitimise the past and eliminate the risk of being caught at a later stage. People might want to trade in the future and it would be in their interest to have a clean slate going forward.
Dr M van Dyk (DA) asked what percentage of the small businesses was expected to participate in the amnesty process.
Mr Tomasek replied that it was exceptionally difficult to answer this question because there was general disagreement on how many small businesses existed. It was expected that around 100 000 people or small businesses would come forward. This was the number that government was using for planning purposes and it would evaluate the number as the process unfolded.
The Chairperson noted that the revoking of an amnesty would require approval of Head Office. He asked how this issue was worded in the Bill. Was it proper to simply say "Head Office"? Was it not the Commissioner who should revoke the amnesty?
Mr Tomasek replied that this issue was not in the legislation and it would be delegated other officials at SARS. Conceptually the Commissioner did everything but this was not possible given the work load. The issue of who should give the approval, still had to be settled. The Amnesty Unit could be tasked with granting the approval but the problem was the Unit would be dissolved once the process was complete. It might make sense to give the authority to somebody outside the Unit.
The Chairperson said that the Bill would be formally tabled in Parliament on Tuesday, 13 June 2006 and the Committee would meet to consider it on 14 June 2006.
The meeting was adjourned.
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