Second Revenue Laws Amendment Bill: briefing

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Finance Standing Committee

11 October 2001
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Meeting report

 

FINANCE PORTFOLIO COMMITTEE
12 October 2001
SECOND REVENUE LAWS AMENDMENT BILL: BRIEFING

Chairperson: Ms Hogan (ANC)

Documents handed out:
Second Revenue Laws Amendment Bill
Second Revenue Laws Amendment Bill: Explanatory M emorandum
Proposed changes in the Foreign Tax Policy Arena – PowerPoint presentation
Corporate Restructurings – PowerPoint presentation
[Bill available 17 October 2001]

SUMMARY
A panel of the drafting team briefed the committee on the Second Revenue Laws Amendment Bill. The generic issues in the Bill were first addressed and thereafter a clause-by-clause briefing followed. Certain clauses were skipped for later briefing. At the 16 October meeting the briefing will continue on the clauses as well as the new corporate rules and the proposed changes in the foreign tax policy arena.

(Unless otherwise stated all amendments are in respect of the Income Tax Act 58 of 1962.)

MINUTES
Mr K Louw (SARS Drafting Team) highlighted the main generic issues dealt with in the Bill:
- Objection and appeal procedures
- Siyakha
- The relaxing of secrecy provisions
- Amendments that are required because of court cases that were lost by the Commissioner
- Capital Gains Tax (CGT), foreign dividends, foreign tax credit, foreign currency gains
- Amendments dealing with customs and excise and VAT

Objection and appeal
Using an example to show the workings of the current objection and appeal procedure the presenter said that if a person was unhappy with a tax assessment the first step would be to object. If objection is unsuccessful then the person can appeal. If this whole process fails then civil litigation is embarked upon. The Revenue Service has two levels of courts. The lower level will handle matters where the disputed amount is less that R100 000. The Special Income Tax Court will handle matters of more than R100 000.

SARS wants to facilitate dispute resolution and have a better court procedure. The measures that will be adopted to facilitate settling a matter before it goes to court are the following:

- The Minister will be able to make rules in respect of time lines that have to be followed when dealing with objections;
- During the process parties must meet before hand as in a pre-trial conference so that the issues are clearly defined
- The Bill will allow the Commissioner to write off debts and this will give the Commissioner more settlement powers. The criteria is that all reasonable steps were taken to recover the debt, that it is uneconomical to recover the debt or that it is in the best interest of the State . This gives the Commissioner flexibility to decide how strong the case is.

The main problem is with the Special Court that deals with complex matters. Currently the court follows the procedures of the Magistrates Court and there is no discovery of documents. Often a party to the proceedings is surprised by the information held by the other party. The Bill moves closer to the procedures of the High Court. The Costs clause has not been used by the Special Court only when a trivial case is brought. This needs to be changed because often people withdraw their case a week before it is due to be heard. The Bill now has a more flexible costs clause . At the moment the bench consists of a retired judge, an accountant and a person from a commercial environment. But in complex matters the decision is usually taken on appeal to the High Court or even straight to the Supreme Court of Appeal. It Is therefore envisaged that the bench will consist of three judges so that the number of appeals can be reduced.

Siyakha
The presenter said that this meant the building and changing of the work process of SARS. There were amendments that change the reference from Receiver of Revenue because in Siyakha the office arrangements will be different. At the moment there are 42 offices were all the different kinds of work are done. The different kinds of work done by SARS are now split into three processes and accordingly there will be three types of offices. The first is the processing office, the second is the complaints office and the third is the service centre. The processing office will only deal with the returns that are submitted. The complaints office will fulfill the auditing requirement and the service centre will is where the public can go to. All 42 offices will remain open and more will be opened.

No specific office is referred to in the Bill. It just says payments must be made to the Commissioner because already payments can be made electronically and one would not one to say that payment must take place at an office.

[Through Siyakha, SARS has taken the lead in transforming their organisation into one that prizes efficiency above bureaucracy, customer relations above authoritarianism, and assistance above obfuscation.]

Relaxing Secrecy Measures
There are secrecy clauses in the Vat Act, Income Tax Act and Customs and Excise Act to ensure that people make full disclosures of their financial affairs with the peace of mind that the information is treated as confidential. This protects the privacy of individuals but also the trade secrets of companies. But in the performance of the duties of SARS sometimes information must be disclosed when it is the public interest.

The Bill will now allow disclosure when the information is about a crime. The crime must be for a serious offence that carries a punishment of at least a five-year jail term. There will be a procedure that has to be followed before the information is released. The Minister must still sign off on one of them. The first option is that a judge must be approached who must make the decision on all the available information. The second option is that an independent panel will decide.

The other instance where information can be disclosed is if it is for statistical purposes. There already exists a precedent that information is given to the chief of statistical services but the Bill goes further to allow disclosure to the National Treasury for the purposes of policy formulation. Here there is no formal procedure - the Commissioner just decides. This information will be of a general nature and not related to a specific individual.

The same disclosure will be able to be made to the Department of Trade and Industry and the SA Reserve Bank. In the case of the Reserve Bank a duplication exists because they collect the same information as customs collect as far as exports are concerned. Information sharing will be a reciprocal process.

Currently if the taxpayer waives the right to secrecy, SARS still cannot disclose it. The Bill therefore contains a new clause that states that if consent is given or the right waived then the information can be disclosed.

Clause by clause briefing on the Bill
Mr Louw pointed out that the first 16 clauses has been dealt with.

Clause 17 is an amendment to the Estate Duty Act as a result of a court decision that went against the Commissioner. In terms of the Income Tax Act if it was practice to deal with a situation in a certain way and the Commissioner was taken to court and lost, then previous matters dealt with according to that practice were closed and the taxpayer could not reopen his matter. The Estate Duty Act did not provide for this so the amendment extends this principle to the Estate Duty Act or the Commissioner will face practical problems.

Clause 18 is the fist of the amendments to the Income Tax Act. Clause 18(1)(c) extends the definition of gross income. This amendment was due to a court case that had been lost. There was a motor manufacturer who used some of the cars as demos and some as company cars for employees. Then after six months the cars were sold. The Commissioner said that the amounts that accrued were taxable but the court said it was of a capital nature. The amendment makes sure that the amounts are part of gross income.

Clause 19 is a consequential amendment.

Clause 20 deals with the secrecy provisions in the Income Tax Act.

Clause 21 is a relief to the taxpayer.

Clause 22 deals with a recoupment provision and caters for a deficiency in the current provision. Parties could avoid the provision by selling an asset to a related party at the tax value and then having it resold to a another party at market value.

Clause 27 deals with section 10(1)(e) of the Income Tax Act and relates to the levies paid by members of share bloc companies and home owners associations. There was a deficiency in this section in that it was aimed at immovable property but there was no specific reference to immovable property in the clause. The amendment remedies this.

Clause 28 also deals with the recoupment and relates to the scrapping allowance of section 11(o).

Clause 29 deals with the depreciation allowance for gas pipelines. The previous provision needs further refinement. The allowance was restricted to persons who used it solely for the transmission of gas so that lessors could be excluded. This provision now conflicts with the provisions of Gas Bill which states that a person that applies for a licence for the transmission of gas and a licence for the trade in gas, the activities must be done in the same entity. The provision in the Income Tax Act is therefore relaxed but if the entity wants to use the allowance the activity must still be connected to its main business.

The presenter said that Clause 32 needs to be flagged. It deals with the tax deduction for a donation to a public organisation. The deduction will only be allowed if the donation is to an organisation whose sole activity is to perform one of the listed functions determined by the Minister. The amendment aims to prevent cross subsidisation.

Clause 33 is also a consequential amendment.

Clause 34 is an extension of the ring fencing provision. In Section 23A depreciation allowances are not only granted to persons who actually used the asset in the business. For example, the Banks would lease machinery to the lessee and would then claim a depreciation allowance. The amendment still allows this but only in respect of the rental income. i.e. the depreciation allowance can only be set off against the rental income not the other activities of the bank. this however only applied to assets listed in section 12B and C but the amendments now extend it to assets in section 11(e).

Clause 35 is a technical amendment to have clarity. It deals with the interaction between Vat and Income Tax.

Clause 36 is just clarification and contains no new principles.

Clause 37 is a consequential amendment due to the new corporate rules going to be dealt with later.

Clause 41 relates to long term insurers.

Clause 42 is a textual amendment.

Clauses 43 & 44 are amendments related to the mining industry. If a mine is bought as a going concern. i.e. all the assets are bought not the shares. So when the assets are transferred then Section 37 of the Income Tax Act applies. The government mining engineer places a value on the depreciable assets and this is the basis that the transferee mine claims an allowance. In a decided case, assets moved across with the depreciable assets but with no immovable property only the mineral rights. The question that needed to be decided was if the mineral rights were mining property and the court said not, it only includes immovable property. This was a problem because if the assets are transferred, the recoupment provisions do not apply and therefore the definition of mining property is extended to include mineral rights. The provision will also apply to the leasing of mining property.

Part III is the new Corporate Rules and will be dealt with later.

Clause 50 and 51 relate to the reporting of unit portfolios.

Clause 52 relates to office restructuring.

Clause 53 adds a new offence.

Clause 54 – 65 is the Appeal Procedure.

Before dealing with Clause 37 the presenter said that the Capital Gains Tax amendments are clarification and it also grants relief to the taxpayer in some instances. He commented that that all the implications of a new act cannot always be predicted, therefore the amendments were necessary. He noted that the media had reported that there was great uncertainty surrounding the implementation of CGT on 1 October 2001. He said there is no real uncertainty but if the amendments are not done then there will be uncertainty.

Clause 67 amends definitions in Schedule 8. The definition of pre-valuation date is clarified in that an asset held on 1 October 2001 is still in the hands of the owner if the asset was sold before the 1 October but not yet transferred.

The presenter said that the amendment to the definition of ruling price will be explained later.

The definition of ‘value shifting arrangement’ is limited so that it only applies to transactions between connected parties.

Clause 68 deals with the ambit of the CGT regime. The old clause has unintended consequences for trading stock so the amendment makes it clear that trading stock is excluded.

Clauses 71 & 72 contain no new principle and are only clarification.

Clause 73 amends Item 11 of Schedule 8 and clarifies what is and what is not a disposal for the purposes of CGT. The change of trustees of a trust is not disposal. If a spouse is sequestrated, the property of the other spouse passes to the curator until proof is provided that it belongs solely to that other spouse. In this process there are two disposals i.e. property passing to the curator and then back to the other spouse. The clause now states that this is not a disposal for the purposes of CGT.

Clause 75 amends Part IV of Schedule 8, Item 15. If assets diminish in value because of use, then the loss is disregarded. This only applies if the interest has a fixed life.

Clause 77(a) & (b) are technical amendments. Sub (c) is intended to avoid a situation where a person could run into double taxation in relation to CGT and Income Tax.

Cause 78 deals with the base cost of an asset and applies when a non-resident moves to SA. It is a technical amendment because the valuation date was wrong in the Act. If a non-resident comes to SA, the growth can only be determined from the date a person becomes a resident except if the asset is situated in SA.

Clause 79 deals with identical assets and will be dealt with later.

Clause 80(a) is a consequential amendment and sub (b) also prevents double taxation.

Clause 81 is a reformulation of paragraph 27 of schedule 8 and has no new principle.

Clause 82(c) avoids a double deduction for Income Tax and CGT.

Clause 83 was highlighted as an important change. The valuation date value of listed instruments, shares and derivatives is determined by taking the average price over the last five days prior to 1 October 2001. The UK followed this approach. Then many associations said that that this approach left room for price manipulation especially if the shares were thinly traded or were suspended. After consultation with the JSE a recommendation was made that the average of all the transactions on the last five days should be used. All the prices were determined and listed on the SARS website according to this method. A proviso was built in that where the average of the 5 days exceeded the simple average of the ruling price of a specific share during the first 14 days of September by more than 5% then SARS reserves the right to investigate and after consultation between the Commissioner the JSE can determine a new base price.

There have already been investigations and there was only one case where it looked like manipulation. A new price was determined and notice was given to the company concerned before the final decision.

As far as off shore listings are concerned, the valuation is done one day prior to 1 October 2001.

At this point there was an extended power failure and the meeting adjourned.

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