Taxation Laws Amendment Bill [B18-2007]: hearing

FINANCE PORTFOLIO COMMITTEE
13 March 2007
TAXATION LAWS AMENDMENT BILL: HEARING

Chairperson: Mr N Nene (ANC)

Documents handed out:
Joint submission by Institute of Retirement Funds, Life Offices’ Association and South Africa Financial Services Intermediaries Association
Treasury Presentation: Retirement Lump sum payouts

SUMMARY
Only one joint submission was made before the Committee. Budget 2007 would abolish the tax on retirement funds with effect from March 2007. It would streamline tax and regulatory aspects of retirement funds. The submission welcomed the changes but asked if they would close the book on retirement fund tax. SARS and the industry had insufficient systems and resources to administer the tax which had been introduced as a temporary tax. Systems had struggled to handle increased volumes and complexities over time. There were shortcomings in legislation on retirement fund tax which did not keep up with industry developments. There was inconsistent interpretation and implementation of the legislation by SARS.

The submission proposed:
- Closing the book on retirement fund tax which had collected more than R50 billion over the past ten years.
- The introduction of a cut-off date for new assessments.
- The introduction of settlement procedures into the retirement fund tax legislation in order to settle current disputes effectively.

Treasury indicated that under current law all retirement funds were subject to the tax on retirement funds. The tax impacted only on retirement fund interest, rental and foreign dividends. It would be removed from 1 March 2007 and one final payment was still due.

The current law in relation to lump sums was that pension and individual retirement annuity
funds could be withdrawn as follows: the greater of 1/3rd of the total value or an amount bearing a per annum annuity up to R1 800. Provident Funds could be fully withdrawn. The proposal was that the monetary R1 800 threshold be abandoned. The new monetary threshold would be R50 000. In terms of the new regime one could have a tax free lump sum on up to R300 000. The effective date of the proposal was 1 October 2007.

Members asked questions which included:
- How the abolishment of the tax would impact on the contributors/beneficiaries?
- What had been the impact of the reduction of the tax over the years?
- What measures were in place to ensure that benefits would be allocated to the beneficiaries following the abolition of the tax?

MINUTES
The Chairperson welcomed everybody to the meeting.

Dr M van Dyk (DA) informed the Committee that this was his last meeting as a member of the Committee. His party had deployed him to be its spokesperson on Public Enterprises. He thanked his colleagues for the wonderful relationship they have had over the years.

Mr B Mnguni (ANC), on behalf of the Committee, thanked Dr van Dyk for his contribution to the work of the Committee and wished him well in his new Committee.

The Chairperson said that Mr Kobus Marais (DA) would replace Dr van Dyk as a member of the Committee. He welcomed Mr Marais to the Committee. He assumed that most people were happy with the 2007 budget judging by the low number of submissions the Committee had received. There was only one joint submission to be made before the Committee.

Joint submission by Institute of Retirement Funds (IRF), Life Offices’ Association (LOA) and South Africa Financial Services Intermediaries Association (SAFSIA)
Mr Francois van Arde (SAFSIA), Ms Shantha Padayachee (IRF) and Ms Thobeka Sishuba-Mashego (LOA) attended the meeting. Ms Padayachee said that the associations appearing before the Committee represented the majority in the retirement fund industry. Ms Sishuba-Mashego made the presentation (see document attached). Budget 2007 would abolish the tax on retirement funds with effect from 1 March 2007. It would streamline tax and regulatory aspects of retirement funds. She welcomed the changes but asked if they would close the book on retirement fund tax. SARS and the industry had insufficient systems and resources to administer the tax because it had been introduced as a temporary tax. Systems had struggled to handle increased volumes and complexities over time. There were shortcomings in legislation on retirement fund tax and the legislation did not keep up with industry developments. There was inconsistent interpretation and implementation of the legislation by SARS.

Ms Sishuba-Mashego made the following proposals:
- Closing the book on retirement fund tax. The tax had collected more than R50 billion over the past ten years.
- Introducing a cut-off date for new assessments.
- Introducing settlement procedures into the retirement fund tax legislation in order to settle current disputes effectively.
- Agreeing on a framework to address inequities in line with the spirit of the law with no interest and no penalties.

Discussion
The Chairperson sensed that the industry was saying that it had been frustrated over the years and the frustrations were not yet really over because the book had not been closed on retirement fund tax.

Mr B Mnguni (ANC) asked how the abolishment of the tax would impact on contributors/beneficiaries.

The Chair said that there had been some reduction of the tax over the years. He asked what was the impact of the reduction.

Ms Padayachee replied that the problem was that the tax had been introduced in 1996 as a temporary tax. Administrators had to deal with tax assessment and audits from SARS. Administrators had to go through documentation that did not exist at times. The lowering of the tax did not benefit the beneficiaries to a great extent because of a down time in the financial market. There were no benefits due to zero and sometimes negative returns on investments.

Ms Sishuba-Mashego replied that the industry had welcomed the reduction of the tax but this did not alleviate the burden. The formula was introduced to tax active members but it did not allow the income of pensioners to be exempt. Pensioners' income was mainly invested in interest bearing instruments and most of the interest bearing instruments were subject to tax. This was not the intention of the legislation.

Dr M van Dyk (DA) noted that there were about 54 formal disputes amounting to R30 million. He asked how many beneficiaries or employees were involved in the disputes. He asked for clarity on measures that were in place to ensure that benefits would be allocated to the beneficiaries following the abolition of the tax.

Ms Padayachee replied that the disputes were appeals and litigation in which the retirement fund industry was involved. The amount was just litigation costs and not the benefit that could be achieved from the litigation. It would take a period of five to ten years for all the disputes to be resolved. Many of the members of the funds had since left the funds and it was the present members who were feeling the tax burden. It was not the correct members who were feeling the brunt of the tax.

Mr van Arde replied that an investigation had been conducted on a number of retirement funds that were in the process of being closed. There were very few active members in some of the funds. SARS had adopted an approach that said that there should be a clearance certificate on retirement fund tax matters before a fund could be closed. It was very difficult to settle outstanding tax liabilities.

Mr Y Bhamjee (ANC) asked if the industry was calling for some compensation.

Ms Sishuba-Mashego replied that the presentation was trying to highlight some of the things that would not be able to be sorted out legislatively.

Mr van Arde replied that the intention was to request a clean cut-off as from 1 March 2007. Conducting further assessments on the funds would create further disputes.

Mr L Johnson (ANC) said that it was worrying to hear that there had not been many benefits to beneficiaries despite the reduction of the tax. Some of the fund managers had received bonuses and some of the funds had been invested in the property market.

Mr van Arde replied that retirement funds had long-term investment strategies and often invested in equities. The retirement fund tax did not intend to tax income earned from equities. It sought to tax income from fixed investments or rentals earned on property. This would typically make up a smaller portion of the investments of a retirement fund. The investment income earned on fixed term deposits or any cash instrument was taxed at 9%.

Treasury Presentation on Taxation Laws Amendment Bills, 2007 (Retirement Lump Sum Payouts)
Prof. Keith Engel (Treasury Chief Director: Tax Policy), Mr Franz Tomasek (Assistant General Manager: Legislation-SARS) gave the presentation (see document attached). There were three basic types of retirement funds: pension, provident and retirement annuity funds. Retirement had three stages: contributions, fund growth and withdrawals. The central question was how much could be withdrawn. The current law had the concept of the greater of 1/3^rd of the total value or an amount bearing a per annum annuity below R1 800. Provident funds could be fully withdrawn. The proposal was that the monetary threshold of R1 800 would be abandoned. The new monetary threshold would be R50 000.

Discussion
The Chairperson said that slides slide 11 and 13 referred to an amount of R300 000 that was tax-free. He asked if they referred to the same amount.

Mr I Davidson (DA) said that slide 13 should clearly indicate that it was referring to a second R300 000.

Prof. Engel replied that the slides referred to the same R300 000. The first R300 000 and any non-deductible contribution made were tax-free. The next R300 000 would be taxed at 18%.

The Chairperson asked if there was no limit for the non-deductible amounts. Prof. Engel agreed.

Mr Davidson said that slide ten said "good bye to (2) old formulas". He asked what informed the decision to say good-bye to the formulas.

Prof. Engel replied that the formulas had serious problems. There was an averaging formula that looked at prior years of service and average salaries level. The lump sum and years of service were irrelevant. One was being given an exempt amount not because of years of service but to enable them to pay off their debts or invest differently. There was an incentive in the system to contribute as time went on. The earlier one contributed the earlier they received a deduction. The earlier they contributed their more they received a tax free growth. The average salary formula sought of rewarded large salaries but there was a R60 000 cap.

Mr Tomasek gave a preliminary response to the joint submission by LOA, SAFSIA and IRF. He said that the government had continually engaged the industry on some of the issues raised. There was a whole range of issues involved. There were weaknesses that needed to be sorted out and there were grey areas on interpretation. Some administrators had taken fairly aggressive positions on certain issues while others had taken conservative positions. It was interesting that there were no reflections on such positions in the presentation and it had been claimed that there were huge amounts of money involved. The question should be whether the people who had taken aggressive positions should be rewarded. This was one issue that SARS and Treasury would have to consider with the industry.

He said that the Katz Commission had recommended a more comprehensive taxation regime on the retirement fund industry. The government had gone the opposite direction in abolishing the tax. The presenter had indicated that the amount of tax paid was a relatively small proportion of the total income of the fund. This was an important point to notice. There were systems issues with the retirement fund tax and those would have to be sorted out with the industry. There were many requests for assistance in the interpretation of the legislation as from 2003. The industry at times did not like the kind of interpretation given to them and this was the source of some of the disagreements.

Prof. Engel added that Treasury had held back on legislative changes because it knew that the tax was on its way out. Treasury was aware that there were some flaws. The law was the law and SARS had to apply the systems as they existed. There was a need for further engagement so as to resolve issues in a reasonable way.

He said that the presentation had referred to audits going back to 1996. The question was how one could go back to 1996 if there was no general three-year rule or something abusive going on.

Mr van Arde replied that the tax had always been a self-assessed taxation. SARS had an opportunity to audit this and wanted to go back right to inception of the tax. Because of the complexity of the legislation, missing one or two periods would throw out all the total calculations. One had to reconstruct the total records right from inception. There was the problem of the retention of documents and documents often did not exist.

Mr Mnguni said that some of the people who contributed to retirement funds received (on retirement) less than what a non-contributing pensioner was getting at the moment. This was unfair. It had been said that the tax on retirement funds had been abolished but this was not entirely true. A layman would expect not to pay tax on retirement. He asked if the government could not come up with a different wording rather than simply saying that the tax had been abolished.

Mr Tomasek replied that there were interesting sets of issues tied to the issue of a contributor getting less money. Some of the issues were the kinds of investments made by the fund and fees paid. There were complicated issues and this was one of reasons for the move towards a social security system. The intention was to ensure that people who were at the lower tier of a retirement fund had access to a vehicle that was transparent and cost efficient for them. The idea was to ensure that a contributor did not end up in a worse position than somebody who had made no contributions.

With regard to the abolition of the retirement fund tax, he said that the tax took place in three levels: contribution to the fund, growth in the fund and the actual withdrawal. People often looked at the final withdrawal phase but there were other two phases that they should bear in mind. At the moment people were getting deductions for the contributions. The intention was to do away with the tax on the growth and all that remained was the final tax upon withdrawal. The important point to bear in mind was that people would still have access to the tax thresholds upon withdrawal from the fund. People very rarely retired with a retirement fund that would pay them as much as they were getting when they were working.

Mr Johnson said that Mr Tomasek had said that social security would become transparent and cost efficient. This implied that social security was costly and not transparent. He asked who benefited the most between members of the retirement funds and social security pensioners. People who invested their money expected better returns at the end.

Mr S Asiya (ANC) said that he was a bit confused by the issues under discussion. It would be difficult for him to explain the issues to his constituency. The Committee should invite Fidentia and the Public Investment Corporation for discussions on this matter.

The Chairperson thanked all the presenters and adjourned the meeting.