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FINANCE PORTFOLIO COMMITTEE
18 September 2007
REVENUE LAWS AMENDMENT BILL: BRIEFING
Chairperson: Mr N Nene (ANC)
Documents handed out:
Revenue Laws Amendment Draft Bill, 2007
Explanatory Memorandum on the Revenue Laws Amendment Draft Bill, 2007
Securities Transfer Tax Draft Bill, 2007
Explanatory Memorandum on the Securities Transfer Tax Draft Bill, 2007
Securities Transfer Tax Administration Draft Bill, 2007
Treasury presentation on Revenue Laws Amendment Bill 2007
Audio recording of meeting
The National Treasury and SARS gave a comprehensive briefing on the draft Revenue Laws Amendment Bill for 2007. It will be tabled formally in Parliament at the end of October after public comment had been taken into consideration. The public has an opportunity to comment on it until 8 October.
Mr Ismail Momoniat (DDG: National Treasury) covered the background to the Bill, saying that the Finance Minister had made tax proposals during his annual budget speech and that this was the basis for the annual tax legislation. There were two sets of legislative tax amendments: taxation law amendments (rates and thresholds) and revenue laws amendments (which were the more complex policy proposals). The Revenue Laws Amendments Draft Bill was published on the Department’s website on 11 September and the public had an opportunity to comment on it until 8 October.
Prof Keith Engel (Chief Director: Legal Tax Design, National Treasury) introduced the tax proposals for 2007/ 08 and stated that the bulk of these were related to income tax as it was the main source of revenue. The Taxation Laws Amendment Bill in April 2007 had dealt with adjustments to income tax brackets, the taxation of lump sum benefits on retirement, the monetary thresholds on estate duty, donation tax and capital gains tax (CGT), stamp duties on short term leases and abolishment of Retirement Fund Tax.
The Revenue Laws Amendment Bill main proposals on business tax issues included the reduction of the Secondary Tax on Companies (STC) rate from 12,5% to 10%, capital versus ordinary treatment of shares (in that the disposal of shares will be treated as having a capital nature if held for at least three years), depreciation relief for rolling stock (20% pa) and port infrastructure, commercial buildings and environmental manufacturing structures at 5% per annum. Other issues included:
- An additional R300 000 exemption when employers pay an additional amount to the families of former employees who die from a work related injury.
- The funding of amateur sports activities by professional sports will be deductible if both the professional and amateur sports arms fall within the same taxable entity.
- Banking co-operatives will be eligible for small business tax relief.
Mr Franz Tomasek (Executive Manager: Legislative Policy, SARS) spoke on the merger of indirect taxes on shares, pointing out that this was the area most litigated on. He stated that under the current law the Uncertified Securities Tax (UST) applied to listed shares whereas the stamp duty was applicable to unlisted shares. The proposal was for the merger of the two taxes into a Securities Transfer Tax. He highlighted that rather than this being a new tax it was a merger of the existent ones.
Prof Engel spoke on the STC proposals that decreased the STC rate from 12,5% to 10% from 1 October 2007. The STC was not applicable to all company distributions, but rather dividends and as such distributions of pure share capital were free of STC. The proposed amendments were said to broaden the base by increasing the dividend definition to include unrealised profits and treating all distributions the same. The Bill dealt with schemes designed to avoid the STC through artificial distributions of share capital and share premium. Many people were avoiding the payment of tax on the sale of company shares by entering into two-step transactions.
He said that the current law on capital distributions did not trigger tax and that proceeds from capital distributions were added to CGT when the share was sold. The problem was that the seller may be thought to have cashed out tax-free even though the tax payer still held the share. The proposal was that each capital distribution be treated as a part-disposal of the share thus triggering an immediate loss or gain. The effective date would be 1 July 2008.
He explained that the proposed amendments would simplify intra-group relief. No STC applied for dividends between companies in the same group and only applied when those profits left the group in the current legislation. The proposal was that all dividends be eligible for intra-group relief even if the dividends related to pre-group profits and intra-group relief would no longer be applicable if the company receiving the dividend did not add the dividends to profits.
A proposed remedy to extraordinary dividend stripping would limit the narrow restrictions related to the current anti-dividend stripping rule. Conditions were that the revised rule applied to all dividends that occurred within two years before disposal and that all dividends be extraordinary. The impact of this proposal would be that the disposal proceeds would be increased for the dividend thus increasing gain and denying loss.
Mr Tomasek outlined the current law on capital versus ordinary treatment of shares. In the current law, ordinary revenue was taxed at higher rates than capital gains and a five-year election allowed taxpayers to treat all five-year listed shares as capital gains. The problem was that informal practices had given certain industries a presumption in favour of capital and case law was uncertain on the matter. The proposal was thus that automatic capital gain treatment be given for shares held for at least three years and that the effective date of this be 1 October 2007. Shares to be covered included all listed shares, domestic unlisted shares and units in collective investment schemes.
Prof Engel spoke on intellectual property arbitrage. Some taxpayers transferred intellectual property to tax havens with the result that little or no tax arose out of the transfer. The proposed general rule was that the payor cannot take any deductions when paying for the use of intellectual property if it was previously owned by a resident and the payor or a connected person claimed a deduction in respect of that property.
He then looked at the problem clash between the long-term insurer “four fund approach” and the Controlled Foreign Company (CFC) rules. The long-term insurer investment into a foreign Collective Investment Scheme (CIS) triggered CFC status and section 9D income. The proposal was thus to ignore the long-term insurer held in foreign CIS investments attributed to investment policies. The CIS is still a CFC but no section 9D income results from the investments.
Mr Cecil Morden (Chief Director: Economic Tax Analysis, National Treasury) spoke on depreciation incentives for rolling stock and other assets. Under current law rolling stock was entitled to a tax depreciation write-off only over 14-15 years. The proposal was thus it receive a tax write-off over five years.
Prof Engel explained that co-operative banks were community-based financial services cooperatives with their main objective being to provide accessible banking facilities and not generate shareholder profit. The Co-operative Banks Bill formalises and regulates the banks so as to provide customers with greater levels of confidence. The proposal was to grant these cooperative banks small business relief.
Mr Tomasek stated that under the current law the amateur arms of professional sporting bodies enjoyed tax exempt status. However, the problem with this was that the professional body’s sponsorships and other sources of income were fully taxable. The proposal was that amateur and professional bodies be allowed to recombine tax free and that special deductions be allowed for professional bodies with amateur wings.
He said that under current law, compensation for occupational death benefits was tax exempt whereas the top up benefits were taxable. The proposal was that up to R300 000 of “top-up” benefits will be exempt if the benefit is due to occupational death and benefit is over and above Compensation for Occupational Injury and Death Act (COIDA).
Regarding the repeal of financial instruments limits, Prof Engel said that under the current law, reorganisations that mainly relied on financial instruments were prohibited so as to ensure that only active companies were given relief. However, compliance with this legislation was overly onerous and the proposal was to repeal all the financial instrument limits from domestic reorganisation provisions.
Mr Morden noted that there was need to clarify the difference in definition between import and excise duties. The proposal clarifies that excise duties are also imposed on imported goods.
On the matter of dried maize, under current legislation there was a problem with the VAT treatment being dependent on how the dried maize would ultimately be consumed. The proposal was that all the maize be zero rated.
Further comments can be found in the comprehensive briefing document (see Powerpoint presentation).
The Chairperson asked for what other purposes other than for consumption by humans and as animal feed may dried maize may be used.
Mr Morden noted that there was a typing error in slide 84 of the presentation and that under current law only dried maize for human consumption was zero rated and stated that the proposal was for all dried maize to be zero rated irrespective of its end use.
Mr M Johnson (ANC) asked for clarity on the impact of the amendments as they were heading towards the medium term budget framework. He said that owing to the very technical nature of the presentation, the Committee may not be able to engage as thoroughly as they had hoped to as they had not had an opportunity to consider the implications of many of the proposals. He commented that although there has been progress in the filing of tax returns to SARS, the technical requirements had become more onerous.
The Chairman stated that in an effort to simplify laws it was imperative that more laws be added to mitigate against possible abuse. The Committee, National Treasury and SARS would need to find a suitable time for all parties to properly discuss the Revenue Laws Amendment Bill.
Mr Momoniat responded that there was a need to deal with tax legislation in a different manner to other laws. He noted that the time frames for public comment was very short as it was mainly experts that were expected to comment. Prof Engel added that the complexity in tax law was owing to the fact that it dealt with every transaction in the economy and as such the tax legislation had to cater for all these transactions.
Mr K Moloto (ANC) asked for clarity on the issue of extraordinary dividend stripping. He also asked about private equity deals related to the use of debt finance and the impact this had on the tax base.
Prof Engel stated that extraordinary dividend stripping occurred when the selling company just wanted money and did not care where it came from. The parties planned to generate a loss through a two-step transaction where a dividend would be declared followed by a sale of the shares at the reduced price.
There was a sharp divide in tax law between equity and debt financing. Equity financing had the benefit of flexibility, was a better way of facilitating finance growth and provided limited liability.
Mr N Singh (IFP) asked which matters were of particular importance to the public where a lot of public comment may be expected. He asked for more information on the “tax holiday” proposed for co-operative banks.
Mr Johnson requested further clarity on the tax deductibility of sporting organisations.
Mr Tomasek responded that as the professional bodies were a business they were not tax exempt whereas the development of amateur sport by these professional bodies was to be encouraged and ought thus be tax deductible.
The Chairperson thanked the presenters.
Committee Minutes and Reports
The Committee adopted with corrections minutes dating back from May 2007.
The Chairperson noted the lack of Committee Reports on the Stats SA, National Treasury and SARS Annual Reports 2005/06. This was a matter of grave concern as these Departments were already well into the next financial year. He stated that committee reports needed to be timeously produced. The Chairperson tasked the Committee administrators with the extraction of recommendations made on these annual reports at past Committee meetings.
When Mr Moloto enquired if a permanent committee secretary would be appointed, the Chair said that he was awaiting the appointment of another person after the promotion of their former administrator.
He closed the meeting.
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