National Treasury reported back to the Committee on the four issues still outstanding in respect of the Revenue Laws Amendment Bills, 2008, now that these had been discussed with the Executive. In respect of pre-retirement withdrawals benefits and their taxation, concerns had been raised that the initial proposals by National Treasury might result in disadvantage to those who had worked with one organisation for more than ten years, and that the proposals had been too harsh, especially if individuals had lost their jobs and were forced to take a withdrawal. A new proposal had now been made using a similar formula to that applied for lump sum withdrawals after retirement. The exemption would apply to amounts up to R22 500, the withdrawals would be calculated cumulatively, and the tax rates would be at 18% for amounts between R22 500 and R600 000, 27% tax for amounts between R600 001 and 900 000, and 36% for amounts above this. Members queried the reasons for changing the exemption figure, and whether there was the ability to keep track of multiple withdrawals. It was noted that people needed to be educated on the options and their implications. The second proposal had related to exemption of life insurance from Estate duty, but concerns had been expressed that life insurance often contained both a risk and a savings element and it was difficult to separate the two. There was a danger that taxpayers could transfer savings in one vehicle to the estate, free of duty. Therefore it was decided to withdraw this proposal for the moment, and to consider other options, such as raising the estate duty exemptions. The third proposal related to “deemed employee” regimes, where National Treasury had initially sought to combine the regimes that sought to prevent people from disguising their legal status to circumvent the tax provisions. The attempted consolidation however had resulted in unintended consequences for individuals who were independent contractors, and the uniform 33% rate and denial of business deductions was problematic. It had now been decided, therefore, to revert back to the original rules, so that the regime applied only to companies and trust, and the labour broker regime would apply only to individuals acting in this capacity. Individuals would remain subject to existing anti-avoidance rules. The last issue was concerned with payment of provisional tax. The proposal had initially been that companies must, when making their payment of provisional tax at year end, ensure that 90% of the final tax liability would be paid, instead of relying on the basic amount calculated as the liability for the previous financial year. Criticisms were expressed that because of the requirements of the International Financial Reporting Standards, it was not possible to make calculations on certain items at this point, and it was not practically possible. National Treasury, on reconsideration, had therefore dropped the amount to be paid to 80% of final liability, and had further provided the possibility of waiver of the penalty for under-declarations where the Commissioner was satisfied that the estimate was not deliberately or negligently under-stated. Members had no questions on these last elements of the proposals. However, a general query was raised on the principle of having a list of allowable deductions for the physically disabled, and it was noted that there was an obligation for National Treasury to consult with the affected persons, when drawing up such a list, and that if the system did not work then Treasury would be amenable to considering another method.
The Committee then discussed Clause 10(5)(a) of the Money Bills Amendment Procedure and Related Matter Bill, which, although passed by the Committee, seemed perhaps to be unduly restrictive in setting out the 10% limitation on a conditional appropriation. Members agreed that there could be problems around this, and the Parliamentary Legal Adviser noted that Clause 8(5) dealt already with fiscal responsibility, which might conflict with this. Members agreed that an amendment should be proposed from the floor, during the First Reading Debate of the Bill on Thursday 23 October, and that the Legal Adviser and Committee Secretary would liase to ensure that this could be done.
Revenue Laws Amendment Bills, 2008 (the Bills): National Treasury (NT) Responses on issues raised with the Minister
Mr Cecil Morden, Chief Director: Economic Text Analysis, National Treasury, stated that there were still some issues raised in the Revenue Laws Amendment Bills that, during the time of the last briefing, were outstanding because the matters still needed to be cleared with the Executive. This document now tabled set out the issues and the responses of National Treasury (NT). The four issues contained in the document were based on comments received.
He dealt firstly with the issue of pre-retirement withdrawal benefits. In 2007 there had been one simplification of taxation on retirement lump sums, but withdrawals of pre-retirement were still subject to a different formula. The initial proposal from National Treasury in respect of the 2008 Amendment was to tax the withdrawal at standard marginal personal income tax rates for the annual year of withdrawal, but as standalone income. A tax rebate would then be allowed, but only at 50% of the primary rebate. This would have given a tax exempt threshold of R23 000, but it would aggregate over time so that multiple withdrawals would then be taxed at the higher bracket.
A concern was raised that this could disadvantage those who had been in service for a long time, particularly those who had worked for more than ten years. Although it was accepted that pre-retirement withdrawals should not be encouraged, it was felt that excessive taxation of these withdrawals could be overly harsh, especially since individuals might have to withdraw funds if they involuntarily lost their jobs. NT had therefore made a revised proposal, which would link the withdrawals to a similar lump sum formula as that used for taxation of withdrawals on retirement, except that only 7.5% of the R300 000 exemption (which now amounted to R22 500) would be used as the threshold for pre-retirement withdrawals. Therefore the threshold would first be at R22 500 as the tax-exempt portion. From there to R600 000, an 18% tax rate would apply, then the next 300 000 would be taxed at R27%, and the remainder above R900 001 at R36%.
The Chairperson asked what was the reason for changing the tax-exempt figure from the initial proposal of R23 000 to R22 500.
Mr Morden noted that there had been some debate as to whether there should be any threshold. However, once the decision was made that this would be useful, it was decided to use the amounts already used in respect of withdrawals at retirement as an “anchor”. The closest whole figure, using a calculation of 7.5 %, was R22 500. The implication was that if the R300 000 exemption should in future be adjusted, there might be adjustments to this figure for the pre-retirement threshold as well.
Dr L George (DA) noted that questions had been raised previously about implementability. He noted that people might move from job to job and make several withdrawals over their lifetime, and he questioned how National Treasury would be able to keep track of withdrawals.
Mr Morden noted that South African Revenue Services (SARS) already had implemented record keeping of withdrawals, and they had the capacity to track this. It was not desirable for people to withdraw their benefits each time they left their jobs, and that was the reason for the cumulative taxation, at a higher rate, for subsequent withdrawals.
The Chairperson noted that people withdrawing would need to apply for tax directives from SARS whenever they made a withdrawal, and since they had only one tax number, that would establish the link.
Mr N Singh (IFP) asked for the effective date.
Mr Morden confirmed it would be 1 March 2009
Ms N Mokoto (ANC) noted that SARS had the capacity to track and trace retirement withdrawals. However, she was concerned that people might not be aware that when they moved from one job to another, they were effectively making a withdrawal. There was no synchronised method for transfer of retirement funds from one scheme to another. She noted that a person working for local, then moving to provincial government, despite the fact that both were government structures, would be subject to two systems. She noted that it was important to deal with this because taxpayers might not be aware that they were committing an offence.
Mr Morden agreed that if a person changed jobs, and the jobs had different retirement funds, particularly in the public sector, there would not be an automatic transfer. Local government was indeed not part of the public service. Employees had the option to transfer their pension funds to the new employer, put the funds in a preservation fund, or withdraw. If there was transfer to a new retirement vehicle, there was no tax implication. The default was that funds should go with a transfer rather than a withdrawal. Only on withdrawal would the tax become effective. The company transferring the funds to the employee would need to get a tax directive, but now the calculations were far easier.
Mr S Asiya (ANC) said that it was necessary to educate people, so that they did not suffer through not knowing the implications of their pension funds. He believed that it was necessary to educate people, through a joint effort by SARS, the employer and employee.
The Chairperson pointed out that this was an important point, as there was a problem with employers not informing their employees what types of funds they were paying into. However, it was not entirely relevant to the points under discussion. The concessions made by National Treasury did seem to cover the concerns raised.
Continuation of briefing
Mr Morden noted that the next proposal, around exemption of life insurance from Estate Duty, was intended to encourage savings for retirement. The initial proposal had been that all forms of life insurance should be exempted from estate duty. However, it was pointed out that life insurance often contained both a savings and a risk element, and that the two were hard to separate. NT was warned that sometimes people could use the savings in one vehicle and then transfer these into the estate tax-free. There was a danger that this proposal might discriminate against different forms of savings. National Treasury had decided, on reconsideration, to shelve this proposal for reconsideration at a later date, as the risks involved were too large.
Mr Singh noted that the proposal had had several positive elements, and he wondered if it was not worth considering it again, rather than merely taking the whole proposal away because of the risk.
Mr Morden said that it was possible to provide further relief in other ways. Currently the relief was targeted at estate duty exemptions, and it was possible to look at further methods of estate duty relief. About a year ago the order of estate duty exemption was increased quite considerably. The most equitable position would probably be to lift that threshold still further, and that would still be explored.
The Chairperson noted that the main problem was that this proposal was directed at one vehicle.
Continuation of briefing
Mr Morden noted that the third issue was that of the “deemed employee” regimes. The Income Tax system contained three regimes that attempted to prevent employees disguising their legal status to circumvent Pay As You Earn (PAYE) payments, and obtain other tax benefits. For instance, employees who could disguise themselves as trusts or companies might postpone or defer their taxation. The personal service company and trust rules sought to prevent this. Another layer of protection existed via the “labour broker” rules. National Treasury had, in its initial proposal, tried to consolidate all the rules into the “personal service provider” regime, which had sought to simplify enforcement and compliance. However, this had resulted in unintended consequences for individuals who were independent contractors. The uniform 33% rate was problematic, as well as the denial of business deductions. National Treasury now therefore proposed to revert back to its original rules, so that the regime applied only to companies and trusts, while individuals remained subject to existing anti-avoidance rules. The labour broker regime would apply only to individuals acting as labour brokers.
Mr Morden noted that the last issue was around provisional tax payments. It was largely an administrative issue but had important cash flow implications. Currently companies had to make a minimum of two payments for provisional tax in each financial year - one at the six month mark, and another at the end of the financial year with a final top-up, where applicable, within six months after closure of the financial year. Companies had originally had the option to fall back on the "basic amount" calculated on the tax liability for the previous financial year, and this was preferred by many companies whose companies and businesses had grown, but they were effectively under-paying in the current year. Therefore, National Treasury had proposed that the second estimate must now amount to 90% of the final amount due. The “basic amount” was no longer to be used. Failing this, a 20% penalty on underestimates would be levied. Taxpayers had argued that this flat 90% requirement was far too harsh, particularly because the complexities of International Financial Reporting Standards required tax adjustments and there was a lack of tax practitioners that would result in delays. A number of key items could also only be calculated after year end. Some businesses, such as life insurance, had unique features that complicated accurate estimates of tax liability at year end. Having reconsidered the issue, SARS had noted that a number of documents would be available to taxpayers for at least eleven months of the year, by the end of the year, and taxpayers were likely to have at least some sense of income in the last month of the financial year as well as how many adjustments needed to be made. However, it was conceded that achieving the 90% minimum might be difficult, despite the fact that this was the figure set in many other jurisdictions. SARS had therefore now proposed a reduction to a payment of 80% of final liability. There was also provision being made for companies who, having made an estimate, nonetheless unwittingly had a shortfall. The Commissioner could waive the penalty if satisfied that the estimate was not deliberately or negligently under-stated.
Mr S Marais asked for permission to ask a general question on the Revenue Laws Amendment Bill, which was not related to the presentation this morning. He noted that there were quite a number of questions that he had addressed to National Treasury, without response so far, and asked that a written response be provided. He noted in particular that he addressed NT on comments around tax for the disabled
The Chairperson said that the Committee should also have sight of the submission, as it had come from a particular sector.
Mr Morden said that this issue raised by Mr Marais concerned the deductibility of certain expenses relating to disability. The last Revenue Laws Amendment Act noted that a list would be provided of allowable deductions, and this was generally done by rules within SARS or by regulation. It would be primarily a SARS responsibility to liaise with the associations representing disabled people in order to come up with a list. National Treasury would play a role in the process. However, the list should not be spelt out in the Amendment Acts. He felt that a meeting should be set up with the various role players.
Mr Marais accepted Mr Morden's good faith, and said that he would certainly try to attend any meeting. He noted that the associations representing the disabled had been concerned about the objectivity of the “list” and the concept that it should be decided upon by an institution not directly concerned with disability. They were not entirely in agreement with the drawing up of a list, as they felt that it could not adequately cater for the various categories of expenses, which were entirely personal to each disabled person, as well as who would determine what went on the list, and who would adjudicate the merits of requests for exemptions. The associations felt that it would be discriminatory if the practical issues were not taken into consideration.
The Chairperson asked if this was an amendment that introduced something new.
Mr Morden said that the proposal to provide for a list was based on previous interaction with players. The feeling was that, given the uncertainty and discretion exercised previously, a more objective list or set of categories would provide a better basis for exemptions. National Treasury was given to understand that some of the associations were amenable to the concept of a list, but were concerned that in compiling that list there must be interaction with those affected. He said that National Treasury could try the system, but if it did not prove effective, then they would be willing to follow another route.
The Chairperson asked if the Bill set out that a consultation process was required.
Mr Morden confirmed that it did.
Mr Singh noted that a further document had been received from PriceWaterhouseCoopers, and he asked whether they would be heard by the Committee.
The Chairperson noted that this firm had already had the opportunity to comment. The comment had been made at one meeting that perhaps, after the opportunity for engagement, the Committee should then try to find time to engage again with stakeholders. However, that was for consideration in future. It would not be fair to give another opportunity to this firm, without doing the same for other stakeholders.
Current world financial market situation
Mr S Asiya (ANC) noted that the Chairperson had, in his opening remarks, mentioned the world financial situation. He asked whether the Minister would be coming to address the Committee at any stage on the situation and its implications.
The Chairperson agreed that this would be important. The problems around the global economy had to do with financial markets and the predictions on failure. There had been some comment that "over-innovation" had led to the problems, and he noted that
Money Bills Amendment Procedure and Related Matter Bill: Clause 10
The Chairperson noted that the Committee had adopted this Bill. However, on looking at the matter again, he thought that perhaps his understanding of Clause 10 was not quite the same as what was contained in Clause 10(5)(a). This subclause noted that a subdivision of a main division within a vote could be appropriated conditionally, provided that this was limited to no more than 10% of the funds appropriated for a main division. He could not recall whether the 10% figure had been specifically discussed, and felt that no percentage should be specified, lest it render the Bill ineffective.
Mr K Moloto (ANC) noted that the rationale in having the clause was that the conditional appropriation should ensure that the money requested for the main division should be spent effectively. If, for instance, 50% of the money was to be appropriated, this might paralyse the Department. He believed that Parliament would exercise its powers responsibility and suggested that perhaps it should need to give very good reasons why it wished to appropriate more than a certain figure, although he would also not like to see undue limitations. He proposed that perhaps the whole of subclause 10(5)(a) should be removed, and then that a provision be included that Parliament must exercise this mandate responsibly. He would not like to see the situation where appropriation would have the effect of freezing money that was intended for contracts or salaries, nor that the obligations of a department could not be met.
Mr Singh could not recall a firm decision on the percentage, although he did recall that there were discussions on virements, and what was allowed under the Public Finance Management Act (PFMA). He did recall some discussion around the threshold and the percentage.
Dr George supported removal of the subclause as suggested by Mr Moloto.
Adv Frank Jenkins, Parliamentary Legal Adviser, said that this issue was not discussed to the same extent as other issues in the Bill. The purpose was as stated by Mr Moloto. He pointed out that Clause 8(5), which dealt with fiscal responsibility and responsibly when exercising the powers to amend Money Bills, might well be in conflict with a 10% limitation.
Mr Moloto said that there seemed to be a practice in Parliament where an amendment could be tabled in the House, together with the Bill.
The Chairperson noted that Rule 254(1)(a) noted that after a Bill had been placed on the order paper for the second reading, a Member could propose amendments.
Adv Jenkins suggested that this would generally be the correct approach. In practice, however, when a Bill had been proposed by the Committee (such as the Powers and Privileges Bill) the first and second readings would occur on the same day. If this practice were to be followed for this Bill, then this Committee would not have time to adopt a report suggesting the removal of Clause 10(5)(a). He suggested that it would be preferable to propose an amendment from the floor, during the First Reading Debate, so that the issue could be dealt with after the first reading but before the second reading debate. This was scheduled for Thursday, so the amendment would need to be on the order paper today. He suggested that he and the Committee Secretary should liase to get this done properly.
Other Committee Business: Programme and Invitation
Members noted the programme and invitation from Business Unity South
The meeting was adjourned.
- Revenue Laws Amendment Bills: National Treasury responses on issues raised with Minister & Draft Money Bills Amendment Proc
- Revenue Laws Amendment Bills 2008: National Treasury responses on issues raised with Minister & Draft Money Bills Amendment Proc
- Report-back by National Treasury and the South African Revenue Services on the draft Revenue Laws Amendment Bill
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