Revenue Laws Amendment Draft Bills [B81-2008]: briefing; Mineral Resources & Petroleum Royalty Bill [B60-2008]: adoption

This premium content has been made freely available

Finance Standing Committee

18 August 2008
Chairperson: Mr N M Nene (ANC)
Share this page:

Meeting Summary

The National Treasury and the South African Revenue Service presented their draft proposals for the Revenue Laws Amendment Bills They commented that there were exciting measures that would mean a lot to people. They had addressed retirement reforms, introduced a set of measures which would allow benefits for both employees and employers and closed down some possible abuses. They had given effect to Presumptive Turnover Tax (PTT), as well as to Venture Capital Companies (VCC) with a view to aiding small businesses. On low cost housing, they had revised the role of the employer in the housing of employees. There were also proposals on trying to give effect to the Industrial Policy Projects (IPP) and Housing was addressed according to the aim of reversing urban decay. The STC conversion to a shareholder tax was also discussed.

▪ Retirement issue proposals covered the taxation of withdrawals, divorce settlements, default withdrawals and transfers from pension to provident funds.
▪ Individual tax proposals dealt with disability expenses, broad-based employee share schemes and executive share schemes.
▪ Proposals to aid small businesses covered the introduction of presumptive tax and a venture capital company regime.
▪ Business incentives proposals looked at the new depreciation regime for residential units, Urban Development Zones, employer sales of low cost housing, of government business licences, additional allowances for IPP, donations to multi-lateral humanitarian organisations and the promotion of biodiversity.
▪ Proposals aimed at the corporate and commercial sectors of the economy included secondary tax on companies (STC) credits, passive holding companies, company reoganisations, share issue anomalies and intellectual property arbitrage.
▪ Estate duty proposals dealt with the general anti-avoidance rule, time limits for the assessment of the estate, life insurance and pension benefits.
▪ The rationale behind an electricity levy was discussed.
▪ Value Added Tax (VAT) proposals were outlined for Industrial Development Zones, public private partnerships, land reform transactions and storage warehouses.
▪ Customs duties proposals included powers of arrest and the carrying of firearms for the Customs Border Control Unit (CBCU). This was necessary for the CBCU to discharge its mandate. The mandatory advance passenger information proposal was noted.
▪ Tax administration proposals covered provisional tax, estimated employees' tax liability, administrative penalties and advance tax ruling.

There were five additional items in the package of Bills that did not form part of the version submitted for public comment on the 31 July 2008. These items dealt with:
▪ Pension Death Benefits,
▪ Unbundlings with an Exempt Shareholder,
▪ South African Funding for Foreign Public Benefit Organisations,
▪ Mutual Assistance in Tax Collections,
▪ Adjustment of Tax Payment Date.
Mr Momoniat stated that he was mindful of slipping in last minute proposals and noted the time constraint. However, he did not anticipate many objections to these additional items.

The questions from Members concerned: The time frames for public comment due to the additional items for consideration; The possible impact on preservation funds and the use of derivatives for tax avoidance; The possibility of incentivising investment on the AltX instead of using more risky venture capital companies; Job creation related to the Industrial Policy Projects; The possibility of tax evasion for subsidiaries; the electricity levy, the 10% write-off to employers providing low cost housing to employees, treatment of under performing employees with relation to the employee shareholder scheme, disability expenses and estate duty; The low cost housing cost caps; The Department of Environmental Affairs and Tourism readiness to enter into the agreements on biodiversity; References to the term “disabled person” should be changed to “person with disability”.

Meeting report

Mr Ismail Momoniat, Deputy Director General (Intergovernmental Relations): National Treasury, said the Bills would give effect to the Minister of Finance's budget proposals. He noted that there were exciting measures in the works which would mean a lot to people especially retirement reforms. The National Treasury had completed the issue of lump sums, where pre-retirement withdrawals were a proposal. They had begun to change the defaults and had proposed a set of new measures which would allow employers and employees to benefit as well as exciting measures to allow employers to be more generous with BEE through broad based share incentives. They had closed some possible abuses. The amendments addressed the role of the employer in the housing of an employee, gave effect to presumptive tax and the simplification of the Value Added Tax (VAT) burden. They had given effect to venture capital companies (VCC) as yet another exciting instrument which they hoped would give small businesses better access to equity financing. They had attempted to give effect to Industrial Policy Projects. The main aim of the proposals around housing was the reversal of urban decay. He noted Johannesburg as a good example of such success. Indirect tax changes pertained to VAT, estate duty and the electricity levy. He commented briefly on time lines noting that the response of National Treasury and the South African Revenue Service response to submissions as tentatively the 9 September and 16 September 2008 as the tabling of the final Bills.

Prof Keith Engel, Director (Legislative Oversight and Policy Co-ordination): National Treasury, commented on Retirement Issues. Discussed under this heading, was the taxation of pre-retirement withdrawals. He reported that they had adopted a neutral approach. The proposal was a standalone system that would aggregate over time. The balance was to be struck between promotion and penalisation.

Mr Momoniat added that they were trying to find a balance between being tough and not making it impossible for taxpayers.

Prof Engel discussed the proposed amendments to Divorce Settlements. They were trying to promote the clean break principle by having the non-member pay tax in the amount awarded to them from the member's retirement fund. This was an improvement over the current system where spouses were tied until the member was out of the system. On Default Withdrawals, he reported that the NT was in favour of keeping the money in the tax system only taxing that portion that was withdrawn.

He remarked that there was complexity in the type of retirement system South Africa has. The two broad categories were pension funds and provident funds. In a pension fund the money grows tax-free. Upon retirement, the holder is allowed to withdraw one third of the amount, with two thirds continuing in annuity. With a provident fund everything may be withdrawn upon retirement. The proposal was that the transfer from a pension to a provident fund should be a taxable event, as this was a move from a strict regime to a less strict regime.

He noted Repayable Employee Benefits as presenting the anomaly of money paid in advance to an employee (for example, payment during maternity leave). The problem arises, in terms of taxing, in the event of the money being returned to the employer. The employee was taxed upon receiving the payment and the proposal was to provide a rebate in the event of such a return.
Fringe Benefits were said to include cellphones and computers provided to employees for business, use. This proposal looked at a practical way to deal with the personal use of such benefits. This equipment would not be classified as a fringe benefit if it were mainly for business use.

There were three Deemed Employee Regimes. All three related tax anti-avoidance regimes were to be consolidated which would be important to small business in terms of cash flow, with a move to more objective rules.

The proposal to regularise payments on Donations via Payroll was noted for the benefit of reducing employee income tax as well as encouraging regular donations to Public Benefit Organisations (PBO).

Mr Cecil Morden, Chief Director (Economic Tax Analysis): National Treasury reviewed the proposal on Learnership Additional Allowances. He stated that it was aimed at encouraging employees to embark on these programmes, by creating parity between allowances for learnerships and apprenticeships.

Prof Engel noted that they were trying to clean up their disability expenses regime by replacing the term “handicapped person” with “disabled person”. In line with more modern thinking, a list of deductible expenses would be drafted by SARS and the list would be reviewed annually. An additional comment was that the new definition would require that the disability last more than one year and be conditional on the provision that maximum corrections should have been made.

On BEE structure he clearly stated that they wanted to promote a more broad based system. To incentivise this, the NT proposed a share scheme for employees. This was not just meant for the top end executives. The key changes were: raising the tax-free ceiling to R50 000 over 5 years (previously R9 000 over 3 years), lowering employee participation from 90% to 80% and permissible restrictions were relaxed – the employer may now re-acquire shares during restriction period at initial market value if the employee is subsequently engaged in misconduct/poor performance.

Prof Engel pointed out that Executive Share Schemes were being used for tax avoidance. They had made an effort to shut down the next generation of these schemes.

Mr Franz Tomasek General Manager: Legislative Policy, SARS, presented the proposals on Presumptive Turnover Tax (PTT). This was an alternative small businesses could elect to use. It would allow the small businesses to calculate what was earned during the year in order to be taxed. This also provided for a statement of assets and liabilities and a maximum of 3 payments for the year. Pay As You Earn (PAYE) income tax was not covered by PTT. The basic rules were in place to prevent abuses and cherry picking. Small businesses would be saving on compliance costs and the implementation date was set as from March 2009.

Venture Capital Companies (VCC) were a concession based on some cases for incentives to address the market failure of lack of equity financing for small businesses. People would be encouraged to invest in small businesses through the VCC and would be able to recover a deduction. Under this heading, the detailed requirements and excluded investee activities were covered. A concluding comment was made that there should be a sunset clause, as with any other investment, to give time for the VCC incentive to work through the system. There should not be a problem with the list of excluded activities. This incentive was meant for medium to high-risk business as they were the ones who needed help obtaining financing the most. This was the rationale behind this targeted investment.

The low-income housing proposal was aimed at encouraging more development by the developers. This would be achieved through low cost housing rentals focusing on simplifying housing provided by the employer and the accompanying depreciation regime. He noted the revised definition, being that low cost housing has a cost of up to R200 000 for free standing houses and up to R250 000 for apartments. The prescribed 5-unit minimum was a precaution against people claiming for property such as holiday houses.

The Urban Development Zone incentive was a pre-existing incentive designed to rejuvenate key inner cities and was set to expire in 2009. Among the proposals was that it be extended by 5 years.

Moving to employer sales of low cost housing he commented that this was sometimes necessary to promote the sale of housing at, cost two employees. The proposal was there be a mechanism to provide for it 10% write-off when selling property to employees.
The Amortization of Government Business Licences. This proposal was premised on the fact of that licences were sometimes very expensive to obtain and were often essential to the establishment of a business for instance a gaming license for a casino. This was clearly a business expense, however the expenditure is often not deductible. Therefore, in order to correct this, the licence expenditure would be a written off over the life of the licence.

He reviewed the background of industrial policy project and reported on the distinction between Greenfield’s and Brownfields projects in South Africa. The minimum criteria mentioned were energy efficiency spending more than 2% of the wage bill on training and a detailed skills development programme. Additional proposals on industrial policy projects were also made pertaining to the scoring criteria and additional allowances.

On donations to multilateral humanitarian organizations, Mr Tomasek reviewed the background for this proposal and stated that PBOs would be given diplomatic immunity status. This would allow more control to SARS. If funds donated were not used for public benefit the PBO would waive diplomatic status and SARS would be able to tax the funds. In this way the tax bill would not go to the donor and parity would be preserved.

On the promotion of biodiversity, Mr Morden commented that there was a need to bring the private sector into the debate. He remarked that the tax system did not provide deductions for private landowners and that there were incentives to be provided for conservation in this regard. This would of course be subject to restrictions in the use of the land. He then outlined the proposed amendments for the promotion of biodiversity.

Prof Engel noted that the dominant issue on Secondary Tax on Companies (STC) credit reform, was this shift from company level tax to individual tax. One consequence of the current system was that it makes companies look less profitable because profits are reduced by a dividend tax. For the new tax would apply at shareholder level at a rate of 10% and would apply to only dividends declared by South African residents. He added that treaties needed to be signed and ratified in order for this to take effect. The target date envisaged was that it would be done by 2009. There would be a three-month window for adjustments after the announcements.

The tax would fall on the beneficial shareholder at a flat rate 10%. Notable were the exemptions pertaining to pension funds and dividends declared between South African companies would also be exempt. They did not want to carry the old system of STC credits into the new system. As such a compromise was proposed: taxpayers could carry STC credits for a transitional period of three years. The new dividend definition was necessary as there was a new tax and therefore a new tax base. The old system was based on company law and company law was about to change. His additional comment was that the technical issues could be discussed in the hearings.

On Dividends Tax Withholding, Professor Engel reported that the STC collection mechanism would be placed with a new withholding regime and commented on the relieving mechanisms of simplifying assumptions for administrative convenience and that the tax withheld was due at the end of the month following a month of the dividend. Mr Tomasek responded to criticisms of this proposal by stating that he had looked at a OECD comparative information series and could establish that a dividend withholding tax was an international practice.

Prof Engel pointed out that there was an implicit benefit for companies to hold financial instruments with passive Holding Companies (PHC). An arbitrage of around 12% arose from the difference between company tax at 28% and the upper level individual tax of 40%. By holding individual income in these PHCs, a person could avoid tax of a 12%. He reviewed the proposed PHC and commented that it was a fairly narrow regime.

He then reviewed company re-organisations, specifically de-grouping charges, elections and reorganizations and share issue and anomalies.

On intellectual property he commented that the proposal for last year was overly broad and that they had narrowed down to three situations. The great concern in situation two was takeovers.

On estate duty, they’re introducing a general anti-avoidance rule as a stopgap. The sections covered were time limits for assessment as well as life insurance and pension benefits.

Mr Momoniat discussed the environmental levy. This pertained particularity to the electricity levy. He commented that this was a form of carbon tax which was becoming an increasingly bigger issue. The tax would be mainly and ESKOM but would also cover the big in municipalities and any generating companies - basically all big generators of electricity in South Africa. He stated that the great advantage was that the generators would pass on the cost to the mega users as well. He added that there were some legal complexities regarding the Electricity Act and the MFMA. Mr Morden outlined the legislation and regulation regarding the electricity levy. He commented that SARS used draft rules and schedules which would be available on the web site. This was not yet a broad based carbon tax and they were excluding co-generators and smaller generators for the moment.

Under the next section which dealt with value added tax, Mr Tomasek reviewed industrial development zones. The key question here was what happened if goods were returned after 30 days. He presented their proposals by way of an answer to this question.

In order to avoid a overlap in the area of public private partnerships (PPP), their proposals state that the rule would apply only to parties privy to a PPP agreement and that the PPP activities of an entity would be ring-fenced from other activities.

Land reform transactions: this was an issue that arose as government buys land from commercial farmers for redistribution to previously disadvantaged farmers. These commercial farmers were registered for VAT. This leads to a situation were government was paying itself VAT. Their proposal was that there be a return to the status quo prior to the amendments that put this in place. Effectively these kinds of land purchases would be zero-rated. He also summarized the background and proposals for storage warehouses and the repeal of the Stamp Duties Act.

The comments that arose from the section on customs duties were: the Customs Border Control Unit (CBCU) had to be empowered to make arrests and carry firearms in order to execute their mandate of border control and the proposal on advance passenger information (API) pertained to people arriving, so that authorities could get information about people before they landed. This was necessary for risk profiling and would be important for 2010. It would be expected by our international partners that there be strict controls over the disclosed information. On the Customs and Excise Act, the difficulty was in the one-size-fits-all approach. They had proposed levels of accreditation in order to facilitate certain clients having access to certain services and expedited clearance. Also mentioned was the periodic clearance of goods and loss allowances. He reported that the Customs and Excise Act was now in line with the other Acts (Income Tax Act and Value-Added Tax Act) through the creation of similar provisions in respect of refunds and drawbacks, as well as underpayment of duty.

Under the heading of tax administration, their proposal on provisional tax was that businesses should determine the second provisional tax payment only with reference to 90% of the actual tax liability for the year. Here they would delete the option of relying on the basic amounts. He noted and that this would perhaps be contentious. Estimated employees tax liability was highlighted and in order to support the modernisation of the SARS system, the Commissioner be allowed to make a reasonable estimate of employees tax in certain circumstances in order to issue a notice of assessment. Administrative penalties changes were said to be minor but needed to be flagged as there are a number of consequential amendments posed to support the implementation of the administrative penalty regime. Advanced tax rulings proposal was that a ruling that was similar to one already published need not be published.

On the discussion of the additional items, Mr Momoniat commented that he was mindful of the slipping in of new things and noted time constraints. They did not anticipate many objections and it was worth mentioning that these items were not in the 31 July 2008 version released for public comment.

Mr Tomasek remarked that that have this legislation out by the following day for public comment. Retirement-death benefits were reviewed with the resultant proposal that there would be tax on the no lump sum if the beneficiaries elect to receive an annuity.

Unbundlings with a tax-exempt shareholder were clarified as the reverse of a merger or acquisition and they proposed that the 20% test should look at subsidiaries as a total and not just focus on shares distributed.

Domestic PBO conducting fundraising for foreign causes was already done through regulation and they proposed that it be brought into legislation within a year as an amendment to the Ninth schedule of Section 30 of the Income Tax Act.

On the ministerial acceleration of returns for payments due, Mr Tomasek highlighted the situation where received bank transfers or deposits were not appearing in the SARS account. This account ran on a cash basis at the moment and there was a problem with ensuring funds had been transferred. Their proposal was that the Minister of Finance be granted the power to move any date for payments falling on 31 March forward by a maximum of two business days.

The reciprocal assistance in collection of taxes no longer complied with the OECD model. If a person denied that there was a tax liability they would have to bring it into the President of the tax court into the fray. They had tidied up the provision by removing the interposition of the President of the tax court from the process.

Discussion
The Chairperson was concerned that the five new additional items fell short of the one month that taxpayers had to comment on the draft bills that were published on 31 July 2008 for public comment. He noted the importance of this issue to the broader requirement of public participation.

Dr D George (DA) pointed to the section on retirement reforms, particularly taxation on withdrawals. He commented on the use of a tax neutral annuity in the form of a preservation fund. There had been no mention of preservation funds. He asked if the new tax regime would influence withdrawals from preservation funds as these funds held a lot of money.

Prof Engel responded that the intention was that preservation funds are included under the blanket term “pension”. He referred to the fact that the old law allowed a timing benefit. The new regime would not create such concerns regarding leakage.

Dr George asked if they had considered other solutions to SARS' problem with accounting (moving forward payment dates) as they were making it the customers' problem.

Mr Tomasek responded that the payment date interventions were meant to create engagements with taxpayers to get an idea of who would pay when. The NT was working with banks on real time information. Their concern regarded shifting the issue to the taxpayer. He commented that SARS' concern was meeting their targets as this had macro economic implications, as to the deficit. SARS was looking forward to comments on how this would be received. He clarified that it was not SARS intention to squeeze the taxpayer for money they did not have. The taxpayer would only have to pay 30 days later therefore they were not denying taxpayers significant cash flow.

Dr George remarked that there was significant risk in Venture Capital and asked if they could incentivise investment in the AltX [the Alternative Exchange on the JSE for shares in smaller companies].

Mr Morden responded that for venture capital companies, they should not lose sight of what they wanted to achieve. This was an equity gap that most particularly affected unlisted businesses. If the intention was to help them obtain equity financing then there was no rationale at this point for continuation beyond the point of listing. The possible exception to this rule would be junior mining and this was a case where the incentive may continue as their risk remained much higher.

Mr K Moloto (ANC) referred to the Industrial Policy Projects (IPP) and to the old strategic Industrial Policy. The comment was made that not many jobs were created. He asked how they would address this so that it no longer applied.

Mr Morden responded that on the IPP, the objectives were to upgrade technology, increase energy efficiency and develop cleaner technologies and skills development. The NT did not think that this would create jobs. Rather it was their intention to facilitate growth.

Mr Moloto referred to the inclusion of derivatives in the proposal for Executive Share Schemes and asked how these derivatives could be utilized for tax avoidance.

Prof Engel reviewed the issues around executive share schemes [from submission] and commented that this defeated the NT avoidance rule by not providing the shares and opting instead to pay out the cash value of the shares. That defeated the anti-avoidance rule because the employees never actually got the shares.

Mr B Mnguni (ANC) referred to the 10% exemption to employers providing low cost housing to employees, especially farm workers. What happened if the farmer decided to sell the farm and the new owner wanted to expel the farm workers?

Mr Morden responded that the housing issue was two fold. It provided incentives for employers to provide rental accommodation or to buy property for an employee. He stated that one would presume that the new farmer would use the houses for rental to employees as that was what they were intended for. If this did not happen, there should be a claw-back available here.
 
Mr Mnguni referred to the Employee Shareholder Scheme and the treatment of under-performing employees. He queried the taking back of shares and how they would work that out.

Prof Engel responded that what could happen if employees under performed, this could be as simple as low productivity or as serious as misconduct, was that their shares could be taken back at 100% value.

Mr S Marais (DA) asked about the Electricity Levy and commented that this was a contentious issue. He asked if one could see this as a disincentive or a penalty to communities. He specifically requested clarity on how this proposed benefit would be ring-fenced so that it was not just another form of revenue for ESKOM.

Mr Momoniat responded that the electricity tax was driven by the fact that South Africa did need to reduce carbon emissions. A levy was the most effective way to reduce demand and users might actually end up with a lower electricity bill. The intention was not to generate revenue. Besides which, this would form part of general revenue and would not go to ESKOM. This was a tax on the generators and ideally they would pass it on to the users.

Mr Marais commented on disability expenses. He stated that this was contentious, specifically referring to the medically related expenses and asked what they meant by this. He touched on the definition of disability and pointed out that there were expenses directly related to a person being disabled that an able bodied person would not have. The use of the term ‘persons with disabilities’ was more in line with the Constitution and human rights, adding that this was very important.

Mr Morden responded that he agreed with Mr Marais on the disability issue and added that the NT would need to fine-tune their thinking upon further consultation. The intention was to develop a list of what was reasonable as medically related expenses and update it regularly.

Mr Momoniat thanked Mr Marais for the suggestions on the wording change to “persons with disabilities” and responded that they would certainly take that on board.

Mr N Singh (IFP) requested clarity on the low cost housing cap amounts of R200,000 and R250,000 and asked if this was a SARS bracket or a Department of Housing bracket.

Mr Morden responded that they had grappled with this issue of the R200,000/ R250,000 cap. They had to have a cut-off point at the lower end of the market. This was the cut-off point the NT had worked out. The Banking Council agreed that it seemed reasonable for the next two to three years. It should be borne in mind that this figure excluded land. He was not of the opinion that there was a case to be made for increasing the amount.

Mr Singh noted that when biodiversity was mentioned in the presentation there was talk of agreements with the Department of Environmental Affairs and Tourism (DEAT). He asked if DEAT was geared up to enter into those agreements.

Mr Morden responded that they had been in discussion with biodiversity agencies and would take their word for it that the DEAT and others were capable of engaging in agreements. The incentives would only come into effect once the agreements were signed.

Mr Singh sought clarity on the provisions for life insurance and pensions with regard to estate duty.

Prof Engel responded that the estate duty would kick in on 1 January 2009.

Mr Mnguni referred to dividend tax and asked what the possibilities were with tax evasion for subsidiaries.

Prof Engel responded that company to company dividends have an anti avoidance provision in the event of individuals setting up a company to collect the dividends, as the company would always get the exemption. This was provided for in the Passive Holding Companies section.

Mr Momoniat remarked generally that comments from the members and the public would be very important.  Even comments on fundamental policy issues were considered very useful.

The Chairperson remarked that the Committee should hold back on questions until the hearings had been completed and thereby allowing space for the submissions.

The Chairperson referred to PTT, stating that there was mention of basic restrictions. He queried what would happen if turnover exceeded the threshold in those three years. Could the company move to another category or would they be stuck for three years?

Mr Tomasek responded that businesses would be pushed out of the system if they exceeded the R1 million upper limit. If the movement was voluntary, this would have to be done at the beginning of the tax year. If however, the million was exceeded (and the excess was significant), the company would come out automatically, even if it was halfway through the tax year. This was a distinction that needed to be drawn and an important point was that the excess should not be temporary or nominal.

The Chairperson asked who determined if funds had not been used appropriately by a Public Benefit Organization (PBO)

Mr Tomasek responded that they could review the PBO tax returns and statements to see if the set criteria for the use of the funds, had been met.

Adoption on Mineral Resources and Petroleum Royalty Bill
The Portfolio Committee on Finance adopted the Mineral Resources and Petroleum Royalty Bill without amendments:
The Portfolio Committee on Finance, having considered and examined the Mineral and Petroleum Resources Royalty Bill [B59 – 2008] (National Assembly – sec 77), referred to it, and classified by the JTM as a Money Bill, reports that it has agreed to the Bill.

The Portfolio Committee on Finance, having considered and examined the Mineral and Petroleum Resources Royalty (Administration) Bill [B 60– 2008] (National Assembly – sec 75), referred to it, and classified by the JTM as a sec 75 Bill, reports the Bill without amendments.

Money Bills Amendment Procedure and Related Matters Bill
The scheduled deliberations on the Bill were postponed until 22 August 2008.

The meeting was adjourned.

Share this page: