Disaster Management Bills: briefing; Committee Report: Treasury Adjustments Budget

Meeting report

Committee Report on National Treasury Special Adjustments Budget
The Committees read through and considered their reports on the Special Adjustments Budget for National Treasury.

Mr E Njadu (ANC, Western Cape)  remarked that Recommendation 5 on the Land Bank was important. He emphasised the importance of reading the report together.

Dr D George (DA) commented on Recommendation 5 and said that if Treasury is going to recapitalise the Land Bank, it needs to ensure another default does not happen again. He proposed that in addition to the recommendation of Treasury conducting effective oversight, that Treasury “take steps to hold those people responsible for maintaining the Land Bank, accountable for its near failure or collapse”. The Committee and Treasury have the responsibility to find out how this happened, who is responsible and hold those responsible to account.

Ms P Abraham (ANC) agreed with Dr George’s recommendation, as the Committee deals with consequence management.

Ms D Mahlangu (ANC, Mpumalanga) supported the addition proposed by Dr George.

"The Committee notes the R3 billion allocation to recapitalise the Land Bank. The Committee reiterates its observations in Fiscal Framework report of 7 July that “…The Land Bank is a strategic entity that should not be allowed to fail given its contribution to the agricultural sector, and its developmental and transformation mandate. The Committee notes that the Land Bank may require further support for it to become sustainable again. The Committee is aware that the Land Bank has not managed its role efficiently and effectively and will more rigorously monitor its progress in future. The Committee also recommends that NT also fulfils its oversight responsibilities on the Land Bank far more effectively[and holds those accountable for the lapses to account].  The Committee requires a detailed briefing from the Land Bank and National Treasury on the challenges confronting the Land Bank's accountability".

Dr George proposed that National Treasury consider how pension fund members can leverage pension assets without eroding their retirement provision. Treasury should look into this as part of the pension report. He added that the Regulation 28 resolution on pension fund managers being encouraged to invest in infrastructure should be discussed in the future.

Ms Mahlangu raised concern about people taking out pension funds in large numbers and the impact of this. She pointed out the alarming rate at which public servants are resigning to access pension funds and then reapply to join the public service again.

Dr George replied that the concern about people wanting to withdraw pension funds in large numbers during the crisis is valid. However, there is currently an option to receive a house loan via the GEPF and pay it back. He proposed that the definition of the loan be expanded to enable GEPF members to take a loan against their pension via a bank, at the same time the money is invested. An agreement can be made with various financial institutions to make the loan softer with lower interest rates. More options need to be considered otherwise people are left with no other option but to retire early and withdraw funds.

The Chairperson stated that Regulation 28 case was one of the resolutions taken last week and presented in the National Assembly. The Committee’s report was adopted. Subsequent to this, Treasury should brief the Committees on the resolutions that were taken last week. He announced that in the near future, Treasury will be invited to brief the committee on the Regulation 28 and the proposal by Dr George.

"The Committee reiterates its recommendation in paragraph 6.30 of the Revised Fiscal Framework of 7 July 2020 on the need for National Treasury to engage on the feasibility of unlocking domestic investment through impact investments and Regulation 28 of the Pension Funds Act and on the feasibility of prescribing assets for pension funds and report to the Committee on this. It also recommends that National Treasury considers how pension fund members can leverage their pension assets without eroding their provision for retirement. The Committee will call the GEPF, Financial Sector Conduct Authority and National Treasury to brief it on what the rules are and what is feasible in this regard".

Mr Ismail Momoniat, National Treasury Head: Tax & Financial Sector Policy, stated that Treasury will look into the suggestions and report back to the Committees.

Portfolio Committee Vote
Ms Abrahams moved for the adoption of the report with the amendments. Ms M Mabilesta (ANC) seconded.

The majority of the Portfolio Committee adopted the report.

Mr F Shivambu (EFF) stated that the EFF objected to the report.

Select Committee Vote
Mr Njadu said the report was clear and practical and moved for its adoption. Ms Mahlangu seconded.

The majority of the Select Committee adopted the report.

Mr Ryder stated that the DA reserves its position until the NCOP plenary.

Mr M Molestane (EFF, Free State) stated that the EFF opposes the report.

Mr Du Toit (FF+, North West)  stated that the FF+ reserves its position until the NCOP plenary.

Disaster Management Tax Relief Bill; Disaster Management Tax Administration Bill: briefing
Mr Momoniat said this briefing contains more detail and an update on what was presented in April. Most of the tax measures due to the COVID pandemic, are covered in the Disaster Management Tax Relief Bill and the Disaster Management Tax Relief Administration Bill, which are split into a money bill in terms of section 77 of the Constitution, and a section 75 non-money administration bill. Later this month, the tax laws amendment and tax laws administration bills will be published. Treasury will present on these once Parliament reconvenes. The two bills were put out for public comment and thereafter were slightly revised.

Ms Yanga Mputa, National Treasury Chief Director: Legal Tax Design, said that Treasury published the bills for public comment on three occasions: 1 April 2020, 1 May 2020 and 19 May 2020. Treasury received 94 comments in the first round, 76 in the second round and 16 in the third round. Treasury revised the bills to take into account the comments received. These Bills were divided in to two according to the Constitution. The proposed tax measures included in the 2020 Disaster Management Tax Relief Bill are:
• Expansion of Employment Tax Incentive age eligibility criteria and amount claimable
• Streamlined special tax dispensation for funds established to assist with COVID-19 disaster relief efforts
• Skills Development Levy holiday
• Increasing the deduction available for donations to the Solidarity Fund
• Adjusting employees’ tax for donations made through the employer.

Mr Christopher Axelson, National Treasury Chief Director: Economic Tax Analysis, stated that the Expansion of Employment Tax Incentive (ETI) was an initiative aimed at minimising the loss of jobs during this critical period. It was implemented on 1 April 2020. He elaborated on the expansion of the claim amount, age eligibility and acceleration of the payment (see document).

Ms Mputa noted that the special tax dispensation is given for four months on COVID-19 disaster relief funds. The COVID-19 Solidarity Fund has applied for approval as a Public Benefit Organisation (PBO)  in terms of section 30 of the Income Tax Act. Once SARS give approval for PBO status, tax exemptions will be applied for a four month period. After the four month period, the special tax dispensation outlined in the COVID 19 draft tax bills will cease to apply and the COVID-19 funds will be required to apply to SARS for tax dispensation applicable to PBOs in terms of the current rules of the Income Tax Act.

The tax-deductible limit for donations to the Solidarity Fund will be increased by an additional 10%, making it 20%. The Skills Development Levy holiday means employers will be exempt from paying skills development levy contributions for four months.

Mr Franz Tomasek, SARS Head: Legislative Policy Tax, Customs and Excise, presented the proposed tax measures included in the Tax Relief Administration Bill. These include:
• Deferral of the payment of employees’ pay-as-you-earn (PAYE) liabilities for a period of four months for tax compliant small to medium sized businesses
• Deferral of the payment of provisional tax liability for tax compliant small to medium sized businesses
• Deferral of interim payments by micro business
• Extension of time periods
• Adjusting employees’ tax for donations made through the employer.

Other COVID-19 tax measures proposals not found in these Bills are:
• 90-day deferral for payment of excise taxes on alcohol and tobacco effected through SARS rules
• Three-month deferral for filing and first payment of carbon tax effected through rules published by SARS
• Case-by-case application to SARS for waiving of penalties
• Postponing the implementation of some Budget 2020 measures
• Expanding access to living annuity funds effected through Regulations issued by Minister of Finance
• Rebate of customs duty and VAT exemption on importation of critical supplies effected though existing law and certificates issued by the International Trade Administration Commission.

Ms Mputa stated that another proposal was postponing the implementation of some of the announced Budget 2020 measures. The 2020 Budget announcement included two measures that would broaden the corporate income tax base. Both measures were to be effective for years of assessment commencing on or after 1 January 2021. In response to concerns, the Minister announced that the effective date for these measures would be postponed to 1 January 2022.

Mr Axelson said that there was also a proposal to expand access to living annuity funds. This would temporarily allow individuals who receive funds from a living annuity to immediately either increase (to 20% from 17.5%) or decrease (from 2.5% or 5% to 0.5%) the proportion they receive as income, instead of waiting up to one year till their next contract “anniversary date”. The proposed measures will be implemented for a limited period of four months starting from 1 May 2020 and ending on 31 August 2020. He elaborated on the regulations which effect the proposed measures.

Mr Axelson presented the initial take up of the tax measures. Preliminary data from SARS up to 25 June shows that over 9 000 firms have used the PAYE deferral in April and 7 000 firms in May. The total relief for those two months was around R750 million. The Skills Development Levy exemption has provided relief of R1.6 billion. Excise duty and fuel levy deferrals amounted to R7.5 billion. The case-by-case relief has received 255 applications and 434 small, medium and micro-enterprises (SMMEs) filed VAT returns more frequently. Treasury expects an increase in these figures over the next few months.

Mr Momoniat noted that the aims of the tax measures were to maintain productive capacity, especially among small businesses, and ensure income for those who are employed. He highlighted that there is still great uncertainty about the pandemic.

Discussion
Mr D Ryder (DA, Gauteng) stated that Treasury’s response to the pandemic has been quick and well-executed. He added that many businesses are still prevented from generating income due to lockdown restrictions. Particularly, the hospitality, personal care and liquor industries. Most of the tax relief measures are merely deferrals of liability of four to six months. There is no clarity on how long the lockdown will last, therefore, will there be an automatic or case-by-case extensions of the deferral. Of the measures not mentioned in these bills, what are those related to the liquor industry? The presentation mentions that “over 9,000 firms utilised the deferral of pay-as-you-earn in April”. This is 9 000 firms out of how many total firms?

Mr Axelson replied that there are around 180 000 companies that pay corporate income tax. The deferral to PAYE is open to all these companies and it up to the companies to take it up and make submissions.

Mr Tomasek replied that there is a philosophical issue around home office claims. To the extent that a deduction is permitted and it is not something being reimbursed by the employer, the employer is essentially shifting part of the cost of employment to the employee. For instance, one of the issues with the car allowances is that it becomes part of a salary earner’s package and shifts some of the business expenditure to the earner’s personal expenses. There are complexities that have to be considered before allowing deductions. However, there are strict rules around home offices due to abuses that occurred years ago. If employers were to reimburse costs such as internet expenses attributable to work, this would not be taxable.

Dr George stated that a tax relief of 4 months is not enough. He asked if Treasury considered bringing the minimum down to 0 and extending the relief for a longer period. Has Treasury considered expanding tax relief around home office claims by relaxing some of the rules? Individuals who have car or travel allowances will not be able to claim, and will have a tax burden at the end of the year. Has Treasury considered slightly amending the formula because of this?

Mr Axelson replied that Treasury’s concern on taking the living annuity down to 0 is that it can become a vehicle for estate duty avoidance as living annuities are exempt from estate duty. One of the rules around qualifying for home office claims is that at least 50% of a worker’s time must be spent working at home.

Mr Momoniat stated that the 2020 Disaster Management Tax Relief Bill and 2020 Disaster Management Tax Relief Administration Bill only deal with the specific measures mentioned in the two earlier announcements. The Bills do not cover some of the proposals raised by Members, such as home office claims and interest. 

Mr Shivambu proposed that the Committee seek independent legal guidance on the permissibility of the executive announcing laws, which are then passed immediately without a public consultation process in Parliament. Parliament becomes a ‘rubber stamp’, which is not how a constitutional democracy is designed to function. Parliament is only involved later to endorse the laws, with very little space to have a different perspective.

Mr Momoniat replied that the permissibility is a matter for  Parliament to take up. Treasury’s approach when it comes to tax legislation and what comes into effect has been legally consistent in the past. When the Minister announces changes in rates and personal income tax, the changes tend to come into effect from 1 March. When the Minister announces changes in excise duties and such, the changes take effect at the time of the announcement.

Ms Mputa explained that there is a code in the tax legislation that allows the Minister to make an announcement in the budget speech, and the announcement may be applied and Parliament has a period of 12 months to pass the legislation. In the Pienaar Brothers (Pty) Ltd court case at the North Gauteng High Court in 2017, the judgment agreed that it is international practice for countries to accept that retrospective amendments may be appropriate where a retrospective provision corrects an unintended consequence or addresses tax avoidance or might otherwise lead to a significant behavioural change that will create undesirable consequences. In the process, Parliament is given leeway to conduct legal analysis of Treasury, which also assists Treasury to do things properly.

Mr Tomasek stated that in the Pienaar Brothers court case, Parliament had not rubber stamped the remedy announced by the Minister on budget day. The taxpayer raised concerns over Parliament having done something different from what the Minister originally announced. The court concluded that limiting Parliament to take on the approach announced by the Minister, would be antithetical to the purpose of a constitutional democracy.

Ms Abrahams asked why the Tax Laws Amendment & Administration Bills briefing can wait until Parliament reconvenes and if this is a request for an extension. She requested clarity from Treasury on where the Solidarity Fund is placed and which Bill deal with it. Is there special tax or interest considerations for companies with an annual revenue below R1 billion? With the postponement of liabilities, does the interest rate remain the same?

Mr Momoniat replied that Treasury is not asking for a delay in the process. The statement that the briefing will be after Parliament reconvenes is a prediction based on Parliament’s schedule. In this instance, Parliament is scheduled to have public hearings after the Bills have been tabled, followed by a response from Treasury and SARS. Therefore, it is likely that this process will be done some time in August.

Ms Mputa replied that the Solidarity Fund was established in terms of the Companies and Intellectual Property Commission (CIPC) as a non-profit company with the registration number 2020\179561\08.

Mr Axelson replied that there are two regimes – the turnover tax regime and the small business corporations regime – to help smaller firms pay a lower or simplified version of tax. All the deferrals are interest free. In effect, government is giving an interest free loan to these businesses.

Mr Ryder asked if the statement that tax relief measures and benefits are being made for tax-compliant businesses, is a principle being applied throughout. Specifically, is it being applied to the taxi industry, which is known for being non-compliant? 

Mr Tomasek replied that he cannot speak on the degree of tax compliance measures in transport. However, government’s initiatives among small businesses do require a leakage into being tax compliant. From a revenue perspective, tax compliance is an appropriate measure.

The Chairperson announced that there will be public hearings next Wednesday 22 July 2020 on the Disaster Management Tax Relief and Administration Bills. Treasury and the South African Revenue Service (SARS) will respond to the public submissions on 28 July 2020. On Tuesday and Wednesday 4 and 5 August 2020, there will be Committee deliberations and voting. He requested Members to encourage more public stakeholders to participate in hearings and make submissions. He noted that the demographics of public submissions need to be diversified.

He pointed out that the taxi industry question raised by Mr Ryder is important, as the taxi industry transports 68% of commuters in South Africa. The Minister of Transport and National Treasury are both relevant to looking into this matter.

The Chairperson appealed to Treasury to attend to the economic recovery plan as soon as possible, as conditions are getting worse. It looks like a V-shaped recovery will take a long time to achieve. The recovery plan should also include clear timelines.

Ms Mahlangu requested that NCOP Members speak to their Provincial Legislature Chairpersons on their mandates for certain Bills. The consolidation of final mandates is to happen on 17 July. 

The Chairperson, in closing, thanked Members, Treasury and all stakeholders for attending the meeting.

The meeting was adjourned.