ATC231201: Report of the Select Committee on Finance on the 2023 Taxation Laws Amendment Bill [B36 - 2023] (National Assembly- section 77), dated 01 December 2023

NCOP Finance

Report of the Select Committee on Finance on the 2023 Taxation Laws Amendment Bill [B36 - 2023] (National Assembly- section 77), dated 01 December 2023

1.Introduction and background

Section 77 of the Constitution requires all money Bills to be considered by a procedure for passing revenue Bills established by the Money Bills Amendment Procedure and Related Matters Act, 2009 (Money Bills Act). Section 11 (4) of the Money Bills Act requires the Committee to hold public hearings on the revenue Bills and report to the House.

The 2023 Taxation Laws Amendment Bill (TLAB) was formally tabled on 01 November 2023. On 21 November 2023, the Select Committee of Finance (SeCoF) received a briefing on the taxation Bills from the National Treasury (NT) and the South African Revenue Service (SARS). The Committee received two submissions from Institute of Retirement Funds Africa (IRFA) and Old Mutual. On 29 November 2023, the Committee held the virtual public hearing with Old Mutual. The Committee also considered the 2023 TLAB clause-by-clause and the policy issues. NT and SARS responded to the issues raised. The Committee held a meeting on 01 December 2023 to adopt the report.

2.Overview of the 2023 TLAB

The objective of the 2023 TLAB is to amend the Income Tax Act (ITA), 1962, the Customs and Excise Act (CEA), 1964, the Value-Added Tax (VAT) Act, 1991, the Mineral and Petroleum Resources Royalty Act, 2008 and the Carbon Tax Act (CTA), 2019 to amend certain definitions, provisions and schedules; to make new provisions; and to amend the Taxation Laws Amendment Act (TLAA), 2011, the Taxation Laws Second Amendment Act, 2011, the TLAA, 2012, 2013, 2014, 2015 and 2016 to amend certain effective dates.

3.Summary of proposed amendments to the 2023 TLAB

3.1Tax on individuals, employment, and savings

The 2023 TLAB proposes a rooftop solar tax incentive for individuals who invest in solar Photovoltaic (PV) panels to encourage households to invest in clean electricity generation capacity. The solar tax credit will only be available for a year, calculated as 25 per cent of the cost of the solar PV panels, up to a maximum of R15 000. The credit is available to any individual who owns, rents, or occupies a residence to which the panels are affixed, and has also incurred the costs of the panels.

3.2General Business Tax

The draft 2023 TLAB proposed to amend the ITA to insert section 11G, which reviews the principles of practice note 31 of 1994 regarding interest paid on money borrowed. The concession contained in section 11G, which was deemed narrow by the stakeholders during NT’s public consultation process, has since been expanded to apply to any person that incurs interest expenditure in the production of interest income without regard to any shareholding threshold of any back-to-back lending arrangement. The proposed concession will come into operation on 1 January 2025 to allow for further engagements in the 2024 legislative cycle.

The 2023 TLAB further proposes to clarify the interest limitation rules. The proposed changes include the inclusion of the definition of the term "creditor" in section 23M to clarify that any person to whom interest is payable is considered a creditor for the purpose of the section; classifying exchange gains as interest received or accrued for the purposes of section 23M of the Act; clarifying that the proviso to section 23M(2) is only applicable to interest when withholding tax on interest is payable on the interest, and extending the exemption for lending institutions to also apply to South African banks.

3.3Taxation on financial institutions and products

The 2023 TLAB proposes to amend the ITA to clarify tax treatment of the Corporation for Deposit Insurance (CDI). The government proposes that the receipts and accruals of the CDI be exempt from income tax. The VAT Act was also amended to cater for the CDI.

3.4International Tax

The draft 2023 TLAB proposed to amend the ITA to clarify the foreign business establishment exemption for Controlled Foreign Companies (CFCs). NT has now withdrawn the proposed amendment pending the Constitutional Court judgement.

3.5Tax incentives

The 2023 TLAB proposes to amend the Mineral and Petroleum Resources Royalty Act to refine the royalty rate for oil and gas companies. To ensure that the country is adequately compensated for the loss of its finite resources, the minimum royalty rate for oil and gas will be increased from 0.5 per cent to 2 per cent, with the maximum remaining at 5 per cent. The royalty rate is based on a formula and adjusts according to the oil and gas company’s profitability.

The 2023 TLAB further proposes to amend the ITA to enhance deduction in respect of certain machinery, plant, implements, utensils, and articles used in the production of renewable energy. Introduction of a new section 12BA will allow businesses to deduct 125 per cent of the cost incurred with reference to eligible assets in the year of investment. The proposed enhanced renewable energy tax incentive is intended to encourage businesses to invest in assets used in renewable energy production sooner rather than later. Therefore, the government proposes that the incentive be temporarily available for a period of two years, until 01 March 2025, and apply to currently eligible renewable energy sources.

3.6Value Added Tax

The 2023 TLAB proposes to amend the VAT Act to clarify the VAT treatment of prepaid vouchers in the telecommunications industry. The proposed amendment seeks to introduce a provision in the VAT Act that permits the telecommunications companies to deduct input tax such that a subscriber acquires services from a third-party supplier, whether taxable or exempt, in instances where the telecommunications company acts as an agent for such supplies. NT clarified that this would ensure that the fiscus does not receive output tax twice.

3.7Carbon Tax

The draft 2023 TLAB proposed to amend the CTA to align the fuel emissions factors with methodological guidelines and regulations. NT now proposes that the tables on country specific carbon dioxide emission factors and the default emission factors for fugitive emissions from coal mining, oil and gas operations be withdrawn from the 2023 TLAB. NT will make further announcements in the 2024 Budget, after consultations with the Department of Forestry Fisheries and Environment (DFFE) and SARS.

3.8Customs and Excise Tax

The 2023 TLAB proposes to amend the CEA to provide for a partial refund of the Road Accident Fund (RAF) Levy applicable to the purchase and use of fuel for the manufacture of foodstuffs, in Schedule No. 6 to the CEA. Considering the current electricity crisis, a refund like the diesel refund for farming, forestry, fishing, and mining sectors will be extended to the manufacturers of foodstuffs on the RAF levy for diesel used in the manufacturing process. The refund will apply to the purchase and use of distillate fuel for the manufacture of foodstuffs during the period 01 April 2023 to 31 March 2025.

4.Submissions received during the Committee’s public participation process

4.1Old mutual

Old Mutual commented on Section 23 of the ITA, which deals with the interest limitation rules. Old Mutual argues that the proposed amendments in the 2023 TLAB have the direct and detrimental erosion of pension fund savings, could discourage direct investment in domestic Unlisted Property Sector, have the potential to stifle private sector investment due to reduced returns, and appears to be in conflict with the objectives of fiscal policy.

4.1.1Old Mutual’s recommendations to the National Treasury

Consider stopgap measure until the Conduct of Financial Institutions (CoFI) Act is in effect.
Extend the exclusion in section 23M (6), section 8F(3)(d) and section 8FA(3)(d) to debt funding, to limit the impact of the current interest limitation rules and create a more even playing field with the Real Estate Investment Trust (REIT) sector.
Extend the definition of a REIT in section 1 of the ITA as an interim measure to include unlisted property companies that meet the Johannesburg Stock Exchange (JSE) listing requirements, but which are not listed on an JSE as defined in the Financial Markets Act.
Limit the rules to entities wholly or jointly owned by regulated institutions such as life insurers, short-term insurers, pension funds, provident funds, and other retirement funds, to avoid concerns around the lack of regulation of unlisted property investment vehicles.
Consider excluding infrastructure investments, as defined in the amended Regulation 28 of the Pension Funds Act (PFA), from the application of sections 23M, 8F, 8FA of the ITA, so that the country can mobilise the required funding for much needed infrastructure development.
1. Institute of Retirement Funds Africa

IRFA commented on the transfer of retirement interest from a provident fund to a pension fund and transfer from one retirement annuity fund to another on or after the normal retirement age but before retirement date.

IRFA noted that NT accepted the additional amendments to paragraph (ii)(dd) of the provisos to the pension and provident fund definitions, in its response document to SCoF. However, whereas the proposed amendment to paragraph (ii)(dd) of the proviso to the definition of “pension fund” was included in the 2023 TLAB, the proposed amendment to the definition of “provident fund” was not included.

IRFA’s recommendations to National Treasury

Expand the definition to include a transfer of a retirement interest to a pension fund. Paragraph (ii)(dd) of the proviso to the definition of ‘‘provident fund’’ be amended as follows: “…where the employee elects to transfer the retirement interest to a pension fund, provident fund, pension preservation fund, provident preservation fund or a retirement annuity fund …”.
Substitute subparagraphs (c) and (d) in paragraph 6A of the Second Schedule to the ITA with the following subparagraphs: “(b) pension preservation fund or provident preservation fund into another pension preservation fund or provident preservation fund or a retirement annuity fund; [or] (c) pension or provident fund into another pension or provident fund that is subject to an involuntary transfer [.]; or”. Add the following subparagraph after subparagraph (d) in paragraph 6A of the Second Schedule to the ITA: “(e) retirement annuity fund into another retirement annuity fund.”

5.National Treasury’s response to the issues raised by the stakeholders

5.1Old Mutual

NT did not accept any of the recommendations made by Old Mutual.

NT explained that there has been no clarity provided from the unlisted property companies or regulated institutions providing funding as to which specific amended provision within section 23M has resulted in a step change for the industry. Also, the principles of section 23M have not changed. If interest is paid from a debtor to a creditor, there is a direct or indirect relationship between the debtor and creditor; and the interest is not taxed, the ability to deduct the interest is tested against the entity’s level of earnings, and it is limited if the interest expense is excessive. All interest deemed to be excessive is carried forward to the following year of assessment. NT suggested to hold a meeting with all the stakeholders, including the SARS and FSCA to discuss this issue in detail.

NT said that regulation of the unlisted property companies is required. The focus of current regulation of insurers and retirement funds does not include the items of REIT regulation included in the JSE Listings Requirements. NT further responded that infrastructure and social impact funds should invest by applying entrenched guiding tax principles as set out in the ITA and tax incentives should not be granted.

5.2Institute of Retirement Funds Africa

NT accepted the proposed changes by IRFA and proposed to consider these changes in the next legislative cycle.

6.Committee observations

6.1The Committee notes the withdrawal of the proposed amendments in the 2023 TLAB related to Carbon Tax and International tax. The Committee further notes the proposal in the General Business Tax to extend the implementation date for the review of the principles of practice note 31 of 1994, to 01 March 2025, to allow further engagements in 2024.

6.2The Committee notes from NT’s responses that the Section 23M concerns raised by Old Mutual are not applicable to the 2023 TLAB.

6.3The Committee notes and welcomes NT’s responses to IRFA’s submission that its proposed technical changes will be considered in the next legislative cycle.

7.Recommendations

7.1The Committee recommends that NT should adequately consider the stakeholders comments and submissions before the Bills are tabled in Parliament, to avoid withdrawal of some proposed amendments.

7.2The Committee recommends that NT should note the concerns raised by Old Mutual and consider its proposals in the next legislative cycle.

The Select Committee on Finance, having considered and examined the Taxation Laws Amendment Bill [B36 - 2023] (National Assembly – section 77), referred to it, and classified by the JTM as a section 77 Bill, accepts the Bill.

Democratic Alliance reserved its position.

Report to be considered.

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