Taxation Laws Amendment Bills [B18-2007]: briefing; Committee Report on Budget

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Finance Standing Committee

08 March 2007
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Meeting report

 

 

FINANCE PORTFOLIO COMMITTEE
09 March 2007
TAXATION LAWS AMENDMENT BILL: BRIEFING; COMMITTEE REPORT ON BUDGET


Chairperson: Mr N Nene (ANC)

Documents handed out:

Treasury Presentation on Taxation Laws Amendment Bills (Initial briefing)
Draft Taxation Laws Amendment Bill, 2007
Draft Taxation Laws Second Amendment Bill, 2007

SUMMARY
The Committee was briefed on amendments to taxation laws. The amendments would effectively put the budget proposals into law. The Tax on Retirement Funds would be repealed. The effective date of the repeal would be 1 March 2007 but the last payments were still due. Changes for lump sum withdrawals were pending. The trading threshold for public benefit organisations increased from the greater of 5% or R50 000 to 5% or R100 000. There would be increases in taxes for alcohol and cigarettes. Changes to the tax on dividend would be implemented in two phases.

Members asked questions that included the following:
- How the control and supervision test worked in determining if a person was an employee.
- Whether there were other options that the government had looked at whereby it would be mandatory for institutions to make contributions to consumer financial education.
- If the government had been successful in reaching those who did not have even the Mzantsi account.
- What was meant by effective management in relation to the determination of the residence of a company? The residence was determined with reference to the location of its effective management.
- What were the reasons for the different increases for different categories of cigarettes? How did the government arrive at those percentage increases?

MINUTES

Presentation by National Treasury
Prof. Keith Engel (Treasury Chief Director: Tax Policy), Mr Franz Tomasek (Assistant General Manager: Legislation- SARS) Mr Mark Pruis (Director: Legal Tax Design) attended the meeting. Prof. Engel and Mr Tomasek made the presentation. (See document attached). Prof. Engel said that the presentation was about goods news that the Committee had already heard before in the Budget Speech. These taxation bills would put Budget 2007/08 into law.

Discussion
Mr A Moloto (ANC) focussed on three tests for small businesses. He noted that the control and supervision test would only be an issue for work mainly performed at the client's premises. He asked the presenters to clarify the test.

Prof. Engel replied that the three tests had changed. A person who was under another person's control and supervision was automatically deemed to be an employee. Regular payment was also an indicator that a person was an employee. The four-employee safe harbour was being reduced to three employees. The test had been changed and one would be deemed to be an employee based on the factual circumstances. One automatic indicator would be if the person was under supervision and control and regularly worked at the client's premises. One would also be deemed to be an employee if 80% of the salary came from one client.

Mr L Johnson (ANC) referred to the financial consumer education foundation and amendments to the Income Tax. The intention was to direct contributions to a foundation that would help people to become more financially literate. There was the Financial Services Board (FSB) and contributions that voluntarily came from the private sector. He asked if there were other options that the government had looked at whereby it would be mandatory for institutions to contribute. It had in the past been mentioned that some people did not have banking accounts. A number of them had since opened the Mzantsi account. He asked if the government had been successful in reaching those who did not have even the Mzantsi account.

Prof. Engel replied that the question posed was a little bit beyond Treasury's jurisdiction. There was a financial service consumer fund that was being set up. The banking and insurance industries working together with the FSB had set up a fund wherein money would be put to help people with financial literacy. Financial literacy was a major issue in South Africa and internationally. One should just look at how people run up their credit cards debts in the United States of America. The agreement was that contributions would be voluntary. The issue whether this should be mandatory was within Mr Jonathan Dixon's (Treasury Chief Director: Financial Sector Policy) jurisdiction. This issue would have to be clarified because it presented some complexities. The contributions were semi-voluntary because they were an industry practice. It should be made clear that companies that made such transfers would get tax deductions.

Mr Tomasek replied that SARS had done an assessment on how many of the numerous refunds it had made went to people who had no bank accounts. The amount was less than 2000 people. Interesting enough was that the Unemployment Fund would only make payment to a bank account. It made a lot of sense that repayments went straight to bank accounts to eliminate the risk of cheques getting lost in the mail. People who did not have a banking account could nominate somebody else's bank account. The two people involved would have to make an arrangement for the refund to be paid into the account and inform SARS accordingly. It was preferable for people to open their own accounts.

Mr K Marais (DA) noted that for the purposes of the country-of-residence test, residence was based on the location of effective management of the company. He asked what 'effective management' meant.

Mr Tomasek replied that people played games around the issue of effective management. The issue was not about looking at the highest tier of management which was the board of directors. The approach was to look at the place where the effective operation decisions where made and implemented. A legal opinion from a Senior Counsel had indicated that this was a tougher test to bite.

Mr Moloto said that there was certain information needed in relation to amalgamations. Some of the things listed in the presentation were mentioned during debates on the General Anti Avoidance Rules (GAAR). Some of the information required was a description of the businesses involved and whether the acquiring company in the amalgamation was newly formed. He asked what was the government's concern around this. He was not sure if this was mentioned during discussions on GAAR.

Mr Tomasek replied that there were similarities between the matters referred to in this presentation and those mentioned during discussion on the GAAR. The amalgamation rules were directed at instances where two businesses had decided to come together to form one company. One could find a company amalgamating with itself by creating a new company out of a holding company structure. It was important to know if the acquiring company was truly a new company. The problem was that some of the "amalgamations" were structures simply designed to gain tax advantages.

Mr M Mbili (ANC) noted that there would be a withholding of payment of a refund where there were outstanding returns for any taxes administered by the Commissioner and not just Value Added Tax (VAT) returns. This could negatively impact on small business owners who relied on bookkeepers and accountants to fill in their tax claims. It might affect their cash flows. Issues on outstanding taxes could take some time to resolve. Was there no other way to accommodate small business people?

Mr Tomasek replied that members should bear in mind that there were already concessions built into the tax system. For example, a small business that had a turnover of R1, 2 million only had to submit VAT returns every fourth months and this gave it a cash flow benefit. It was two months for those with an up to R30 million turnover. Small businesses could hang onto their cash for a longer period as the accountant looked at the returns less frequently. The concern was with accountants filing in returns for refunds and not those that showed that the business was owing some tax. He appreciated the concern about the cash flow problem but added that small businesses should comply with their obligations. SARS was trying to help them.

Dr M van Dyk (DA) asked for the rationale on the increases on alcohol and cigarettes. What were the reasons for the different increases for different categories of cigarettes? How did the government arrive at those percentage increases? There was an over-supply of wine in South Africa. One should expect the price to go down but the budget proposed an increase in the price.

Prof. Engel replied that the intention was to try and maintain a certain percentage tax burden overall. The tax burden was fixed to a certain percentage in order to dissuade people from smoking and to stop smuggling. There was a dual view on alcohol. The tax burden for wine was lower compared to beer. SARS and Treasury did not want people to drink or smoke.

Mr Tomasek replied that the percentages that people kept on mentioning were for retail prices. Some of the fluctuations would be different because the market prices for the products had not moved as much as others. One could find that the price of some tobacco products had gone up more than others. There would have to be a higher increase to keep the tax up. The presentation could be indicating that cigarette prices had gone up faster than that of tobacco.

Mr Y Bhamjee (ANC) said that there had always been talks about the dual economy in South Africa. He asked if SARS had made an analysis of the colonialism of a special type that the government had inherited. How were previously disadvantaged people becoming entrepreneurs and enjoying the benefits of the new dispensation? What kind of impact had SARS had on such people?

Prof. Engel replied that the small business tax amnesty was taking place and some technical corrections were being made in relation to the amnesty.
FinMark had conducted a useful study and the World Bank and the International Monetary Fund were conducting a study. The government was increasingly concerned about the informal economy. The issue was about formalizing small business and not just about the raising of revenue. The bulk of money received through the company tax came from the big and not small players.

Mr Tomasek replied that the government had done some work but was not sure if it was up to the level requested by the member. The number of registered taxpayers had grown at a faster rate than the economic growth.

Dr van Dyk said that he was not aware that SARS acted as a consultant for the Department of Health. The Department of Health should be responsible for stopping people from smoking and drinking.

Committee Budget Report
The Committee considered and adopted its budget report.

The meeting was adjourned.

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