Financial & Advisory Services Ombudsman; Small Business Tax Amnesty Debt Waiver Regulations: briefing

FINANCE PORTFOLIO COMMITTEE
30 March 2007
FINANCIAL AND ADVISORY SERVICES OMBUDSMAN; SMALL BUSINESS TAX AMNESTY DEBT WAIVER REGULATIONS: BRIEFING

Chairperson: Mr N Nene

Documents handed out:
Leaderguard Determination
Financial Advisory and Intermediary Services Act (Act 37 of 2002)
SARS presentation on the Small Business Tax Amnesty Debt Waiver Regulations
Small Business Tax Amnesty and Amendment of Taxation Laws Act (Act 9 of 2006)

Financial and Advisory Services Ombudsman Website

Audio Recording of the Meeting

SUMMARY
The Financial Advisory and Intermediary Services Ombud was concerned that the prevalence of numerous criminal financial schemes gave the impression that many of the Ombud’s judgements were “hollow.” The Act was clear and sufficient, but the implementation and administration of licences which were the entry point to the industry, was where the focus had to be.

The Revenue Service took the Committee through the proposed Regulations for the Small Business Tax Amnesty Debt Waiver. Applicants had to satisfy the requirements as set out in section 2 of the Amnesty Act. To apply for the waiver, the applicant had to submit an application form to the Commissioner by no later than 31 May 2007, to the address and in the manner and form prescribed.

MINUTES
Financial Advisory and Intermediary Services (FAIS) Ombud
Mr Charles Pillai, the Financial Advisory and Intermediary Services (FAIS) Ombud, took the Committee through the recent Comrie judgement concerning a company, LeaderGuard Securities, that ran a criminal financial scheme. Many people had been deprived of much of their savings through such criminal schemes. He gave the example of an individual in Durban named Mervin Dennis who set up a scheme that deprived investors of about R90 million. After the closure of Dennis' scheme, it was discovered that one of the brokers of his scheme had set up a similar scam. We have the laws aimed at preventing these abuses, but do we have willing regulators and courts to eliminate.

What became obvious here was that even when complaints were received about certain schemes and the Ombud had made a determination, they were “hollow judgements” unless there was tough action by the regulators and courts to eliminate this kind of fraud. The determinations were made against brokers who usually ‘went under,‘ or disappeared. The real people who ran the schemes were therefore never punished. This painted a very bad picture about the regulatory and prosecuting frameworks in the country that claimed it had a highly regulated system.

With reference to the LeaderGuard Securities case, some of the company’s actions violated the Banking Act and there were no audited financial statements which was a necessary requirement as the company was a recipient of funds from the public. Mr Pillai’s office then examined the FAIS Act to determine why such a company was allowed to continue trading and no one had been arrested. The legislation was clear and sufficient, but its implementation and the administration of licences, which wwere the entry point to the industry, was where the focus had to be.

Discussion
Mr B Mnguni (ANC) asked if the Ombud had reported the matter to the Financial Services Bureau (FSB). He was concerned that no-one had been arrested in the LeaderGuard scandal. Did the FSB know about this, and what was its reaction?

Mr Pillai replied that they did refer some matters to the FSB where the Ombud did not have information. In the case of LeaderGuard, they were in contact with the FSB. For example, the FSB brought in independent auditors after the Ombud received complaints and acted.

The Chairperson then read out a note received from Mr Barrow of the FSB. In it, Mr Barrow said that the FSB would welcome an opportunity to appear before the Committee as it was of the view that the Ombud’s finding in the LeaderGuard matter was “fatally flawed.” The Chair said that the media was not the proper forum for the FSB and the Ombud’s office to air their disagreements as it could create a negative impression and undermine the public’s confidence in them.

South African Revenue Service (SARS) Presentation
Mr Frans Tomasek, Assistant General Manager: Legislation, reminded the Committee that the objectives of the amnesty were to broaden the tax base; facilitate the normalisation of the tax affairs of small businesses; increase and improve the tax compliance culture, and facilitate participation in the taxi recapitalisation program.

A key definition was for "business tax debt" which was essentially any additional tax, penalties and interest relating to the taxes on the business for the period covered by the amnesty. For example, income tax payable in respect of an amount received by, or accrued to a person in the carrying on of a business for years prior to the 2006 year of assessment, or employees' tax payable in respect of any remuneration paid to employees engaged in the carrying on of a business in the period up to 28 February 2006.

Applicants had to satisfy the requirements as set out in section 2 of the Amnesty Act. That is, the applicant had to be an individual (including a deceased or insolvent estate); an unlisted company (including a close corporation or co-operative) where all the shares or members' interests were held by individuals throughout the 2006 year of assessment; a trust where all beneficiaries of that trust throughout the 2006 year of assessment were natural persons, and the gross income from the business had to be less than R10 million in the 2006 year of assessment.

Amnesty relief had to be not available because the tax, levy, contribution, additional tax, penalty or interest became payable as a result of any return, declaration or information already submitted to SARS, or was payable by the applicant in terms of an assessment issued by SARS.

To apply for the waiver, the applicant had to submit an application form to the Commissioner by no later than 31 May 2007, to the address and in the manner and form prescribed. The application had to be accompanied by a statement of assets and liabilities at the end of the 2006 year of assessment and all returns outstanding from that applicant as on 31 December 2006 (with an exception for cases where the applicant also had an amnesty application pending).

If records were insufficient, the applicant could provide reasonable estimates of the required amounts. The fact that that an estimate had been used had to be disclosed to the Commissioner.
The Commissioner had to approve the application if the applicant met the requirements unless, before the submission of the application: the Sheriff of the High Court had attached the assets of the applicant in execution of a writ of execution obtained on behalf of the Commissioner in satisfaction of the debt to be waived, sequestration or liquidation proceedings had been instituted against the applicant, or the Commissioner had formally notified the applicant of an audit or investigation (the exclusion fell away if the notice was withdrawn or the applicant was notified that the audit or investigation had been concluded).

The amount to be waived was the business tax debt outstanding as on the 31 December 2006. Any credits or refunds due on that date had to first be set-off against the business tax debt outstanding on that date. However, amounts in excess of a cap of R1 million and amounts paid after the 31^st of December 2006 that exceeded the actual underlying tax (that is, the tax on which the additional tax, penalty and interest were calculated) and any other tax debts of the applicant outstanding on that date could not be waived.

The Commissioner and the applicant had to sign an agreement which provided the balance of the tax debt (if any) together with interest be settled within six months from the date of the signature of the agreement (with a discretion to extend the six month period) and for any other conditions that the Commissioner may require for purpose of the waiver.

The Commissioner was not bound to the waiver if the applicant failed to make full disclosure in their application form, statement of assets and liabilities or returns as required in terms of the
Regulations, supplied any materially incorrect information or failed to comply with any condition contained in the agreement. The Commissioner had to maintain a register of applicants' details, the amounts waived, and the periods to which the waivers related. Reporting was aligned with the reports submitted in terms of the main amnesty legislation.

Discussion
The Committee thanked SARS for obeying their directive that Regulations be brought before them as well as the enabling legislation.


The meeting was adjourned