Taxation Laws Amendment Bills [B34-2012]: National Treasury and SARS briefing

Meeting report

Introduction
In the absence of Mr T Mufamadi (ANC), Chairperson, who was engaged in other assignments of national interest, Mr D van Rooyen (ANC), the Committee's Whip, was elected Acting Chairperson. The Acting Chairperson welcomed especially Mr I Mfundisi (UCDP).

Draft Taxation Laws Amendment Bills, 2012: National Treasury briefing
Overall 2012 Tax Process
Mr Ismail Momoniat, National Treasury Deputy Director-General: Tax and Financial Sector Policy, gave an outline:
• February 2012
– Budget Speech
– Release of Budget Review
• Monetary Rates and Threshold Bill (still pending within the National Council of Provinces)
– March release
– May briefing/hearings
– June National Assembly passage
• Taxation Laws Amendment Bills, 2012
• Conclusion of year
– Gambling Tax Bill release
– Retirement Discussion documents, including Post-Retirement Annuity Bill dialogue (Slide 2). He also indicated 2012 Budget Tax Objectives (Slide 3), Tax Bill Process Requirements (Slide 4), and the detailed TLAB Process (Slide 5).

He noted that this year there was a separate Monetary Rates and Thresholds Bill to deal especially with all the capital gains changes. He pointed out that the TLAB also did not deal with areas in which there would be specific legislation, such as gambling and retirement. He further noted that the main TLAB was a Money Bill and Section 77 Bill. The Section 75 Bill would deal with all the administrative issues. As a Money Bill could be amended only in terms of the Money Bills Amendment Procedure and Related Matters Act (No. 9 of 2009), National Treasury now preferred to produce a draft bill before formally tabling it. He regretted that the draft bill was a little late, which impacted on consultation times. He strongly advised Members to refer to the Explanatory Memorandum as the TLAB was hard to understand unless one was an expert.

Main Themes of TLAB (Individual tax payers)
Professor Keith Engel, National Treasury Chief Director: Legal Tax Design, explained the main themes:
• Minor issues (and carry-overs from prior year)
• Individuals
– Completion of medical credit regime
• Savings
– Relief for annuities funded by taxed contributions
– Completion of clean-break of pensions upon divorce
• Employment
– Streamlining variable employment payments (e.g. commissions)
– Employee use of employer-provided rental vehicles (Slide 6)

He noted that there were not many changes for individuals and savings this year. The changes were mostly intended to make life a little easier for everyone. Essentially with the medical credit regime, National Treasury had converted deductions to credits. The aim was to shift the credit more in favour of lower and middle-income people. The bigger changes on retirement would come in the discussion paper. One of the smaller areas in which there were changes was how National Treasury dealt with annuities. As a matter of Government policy, it was preferred that people took annuities; however, there were a number of advantages in taking a lump sum. These needed to be 'unwound', and this process had begun. He explained in detail – and more slowly, in response to a Member's request.

Main Themes of TLAB (Business)
• Debt/share distinction
– Outgrowth of section 45 process
– Classification of instruments
• Merger and Acquisitions
– Prevention of value mismatches
– Roll-over for share-for-share swaps
– Deductible interest for debt incurred to finance share takeovers
• Tax relief for debt cancellations
• Financial intermediaries
– Mark-to-market for banks and long-term insurers
– Real Estate Investment Trust (REIT) flow-through treatment
– Short-term insurer reserves (and reclassification of disguised investment contracts)
– STT relief for market-making in derivatives (Slide 7)

Main Themes of TLAB (International)
• Offshore reorganisation
– Expanded offshore reorganisations
– Tightened participation exemption
• Disposals upon loss of tax residence
• Gateway
– Easing of headquarter company (HQ) criteria
– Relief for foreign funds managed by local South African managers
• Offshore investment
– Relief from effective management and transfer pricing rules in the case of foreign subsidiaries operating in “normal ”taxed countries
– Currency relief for certain cross-border loans representing investment
• Inbound withholding
– Completion of the cross-border withholding interest regime
– Enactment of the cross-border withholding royalty regime (Slide 8)

Individuals, Employment & Savings
Prof Engel gave further details as follows:
Medical credits - Background – current position: Sections 6A, 6B and 18 (See table, slide 10).

Exemption for Compulsory Annuity Income Stemming from Non-Deductible Retirement Contributions: Sections 10C, 11(n), paragraphs 5(1) and 6(1)(b) of the Second Schedule (See slide 11)

Completion of “Clean Break Principle” when dividing Retirement Interest in Divorce: Definition of “formula C ” in paragraph, paragraphs 2(1)(b)(iA), 2A and 2B of the Second Schedule (See tables, slide 12 and 13)

Streamlined Timing for certain forms of Variable Cash Remuneration: Sections 7B and 23E (See slide 14)

Rented Employer – Provided Vehicles: Paragraph 7 of the Seventh Schedule (See slide 15)

Business (General)
Prof Engel gave further details as follows:
Importance of Rules Relating to Debt: Need for a Careful Balance between the fiscus (tax impact and risk) and business (need for conduits and need for flexibility (See slide 17).

Debt Versus Shares: Key Commercial Features (See slide 18)

Generic Options for Tax Systems (See slide 19)

New Debt/Share Paradigm: features, tax impact for the issuer and for the holder (See table, slide 29).

“Hybrid Debt Instruments”: Proposal : Sections 8F and 8FA (See slide 21)

Suspended Interest/Royalty Deductions: Sections 23L (See slide 22)

Revised Hybrid Equity Instrument Proposal (Clause 11 of Bill substituting section 8E): Example of proposed results (See slide 23)

“Third party backed/guaranteed shares”: Exemption Example
• Facts:
– Acquiring Company acquires ordinary shares in Operating Company with funding from a bank. Acquiring Company issues preference shares to the bank as a funding mechanism.
– As security for the loan amount, Holding Company of the Operating Company issues a guarantee in favour of the bank that is exercisable upon default by the Acquiring Company on its preference share obligations
• Result: Funding received by Acquiring Company is utilised to acquire shares in an Operating Company. The Holding Company of Operating Company guarantees performance by Acquiring Company on the preference shares issued. Consequently the deeming rules do not apply, and the dividends received by the funding bank retain their nature. (See chart, slide 24)

Substitutive share-for-share transactions : New Section 43 and paragraph 78 of the Eighth schedule: Note:
• It is proposed in the new section 43 that share recapitalisations should have roll-over relief.
• This proposal should also be extended to apply to shares held as trading stock.
• However, this rule will not apply in respect of share to debt conversions and shares that have debt features (i.e. hybrid shares) (See chart, slide 25).

Value Mismatches: Reasons for Change: Sections 24B, 24BA, 24BB, 40CA and 41(2)(See slide 26)

Value Mismatches: current and proposed tax consequences (See chart, slide 27)

Debt Financed Acquisitions: Example (Section 24O and 23K)
It is proposed that interest incurred on funding used to acquire a controlling interest in an entity: such controlling interest is benchmarked at 70% (in line with the “controlling group company ”definition). However, deductions will be subject to SARS discretion in same fashion as indirect Section 45 acquisitions. (Slide 28)

Debt Reduction/Cancellations (Sections 8(4)(m), 20, paragraphs 3(b)(ii), 12(5), 13(1)(g), 20(3)(b), and 56(2) of the Eighth Schedule): Background/ Reason for change
• Background
– Income Tax Act has various provisions dealing with debt cancellations, forgiveness and/or reductions
– These provisions basically subject the amount of the debt cancellation/forgiveness/cancellation to tax by inclusion as revenue or capital proceeds
• Reasons for change
– With the recent global financial crisis, the number of companies that are experiencing financial distress have increased – Relief for these companies is deemed appropriate to encourage risk taking and entrepreneurship
– The tax system appears to discourage risk-taking and view insolvency as a failure, thereby impeding the recovery of companies and other parties in financial distress
– Relief from taxes owed can even give rise to a subsequent tax liability (Slide 29)

Debt Reduction/Cancellations Capital Debt Relief System (See slide 30)

Debt Reduction/Cancellations Proposal: “Ordinary/Revenue ”Debt Relief System (See slide 31)

Exemption for Government Transfers and Subsidies: Applicable provisions: sections 10(1)(zA), 10(1)(zH), 10(1)(y), new section 12P, 23(n); paragraphs 20(3)(c) and 64A of the Eighth Schedule
• Background
– National funding (by way of a grant) is allocated to various governmental entities and to the private sector.
– The Income Tax Act provides an exemption for certain grants but not all grants under tax legislation or that are approved by Ministerial notice.
• Reasons for change
– The income tax rules for grants require further streamlining
– Although a tax exemption exists, the policy rationale for exempting certain grants (and not others) is unclear
– As a general rule, grants should be exempt from income tax where a grant is deemed to be an incentive and not payment (in full or in part) for goods and services provided
to the Government
• Proposal
– Shift of presumption in favour of exempting rather than taxing genuine grants
– Exemption covers grants in a revised and extended legislative list
– Exemption can also be achieved via approved by Ministerial notice
– Exemption will now include provincial grants (Slide 33)

Anti-Double Dipping Rules for Government Transfers and Subsidies
• Policy
– Taxpayers should not be allowed to obtain tax offsets (such as deductions) for exempt grants
• Proposal
– Exempt grants received in kind (as assets or services) will have a zero tax cost
– Purchases funded with exempt grant will result in:
• Reduction of tax cost; or
• Reduction of deductions (Slide 33)

Technical Correction: Cessions (See slide 34)

Business: Financial Intermediaries and Special Purpose Vehicles (SPVs)
Prof Engel gave further details for:
Annual Fair Value Taxation: Background (Sections 24J(9); new Section 24JB)
• Income tax systems generally impose tax on a realisation basis
• Growing trend towards notional realisation of gains / losses iro liquid financial instruments. That is:
a. Listed and over-the-counter shares
b. Listed and over-the-counter bonds and
c. Derivatives in respect of the above
• Accounting (International Financial Reporting Standards (IFRS) of the International Accounting Standards (IAS) Board 32/39 or IFRS 9) is the key driver behind this trend.
• Banks and other large financial institutions have adopted this method in their systems and expect similar tax treatment.
• Two problems
– Compliance burden of maintaining two separate systems (one for IFRS and one for tax)
– Audit much harder to follow books no longer have any bearing to tax (e.g. extensive reconciliations)
(Slide 36)

Annual Fair Value Taxation: Background
• IFRS fair value assets will be taxed annually on gains/loss:
• Trading assets; and
• Assets to be treated at fair value to prevent mismeasurement
• The new rules essentially place financial assets and liabilities into an IFRS framework for all gain/loss purposes
• The new regime applies to:
• Banks (including local branches of foreign banks)
• Brokers (i.e. authorised dealers)
• The new regime does not apply to unhedged intra-group derivatives
• A one-off transitional charge will apply
• Transitional charge to be spread over 4 years
• The charge applies to the deferred tax difference currently existing between tax and accounting (Slide 37)

Mark-to-market of long term policyholder funds: Sections 29A and new 29B (See slide 38)

New Deduction Formula for Long-term Policyholder Funds (See slide 39)

Real Estate Investment Trust (REITs): Background (sections 1 “REIT ” definition and 25BB)
• Property investors directly invest in immovable properties for rental streams or indirectly through property investment entities
• A steady rental stream acts as a substitute for interest income, and growth in the underlying property as relatively stable method of achieving appreciation.
• Ownership in property investment schemes is highly liquid
• Two main types of property investment schemes exist that operate as international REIT – the Property Unit Trust (PUT) and Property Loan Stock (PLS)
• Both the PUT and the PLS are subject to the same listing requirements for the purposes of the JSE.
• Only the PUT is subject to FSB regulation
• Two different tax dispensations
• PUTs have an explicit flow through of rentals and an exemption for capital gains
• PLSs have a “homemade ”flow -through via dual linked units with debenture interest
• Debenture interest really operates as disguised “deductible ” dividends that will violate the new debt equity rules (Sections 8F and 8FA) (Slide 40)

REIT Proposal
• It is proposed that a unified approach for the property investment schemes will be adopted for financial regulatory and tax purposes.
• The new entity will be called a Real Estate Investment Trust (REIT) in line with the international norms.
• The purpose of the proposed REIT regime is to treat investors roughly similar to the situation in which these investors invested in immovable property directly.
• New regime
• All distributions will be deductible if the entity mostly (i.e. 75%) generates rental and similar income (or REIT dividends from subsidiaries)
• Capital gains from immovable property will be exempt
• Financial instruments will generate ordinary revenue (other than REIT interests)
• REIT classification to be maintained by JSE rules
• Coverage
• Only listed PUTs and PLSs plus their subsidiaries
• Unlisted PLSs to be the subject of discussion in 2013 (Slide 41)

Short-Term Insurance Reserves sections 1 “gross income”,28(2),(5),(6)and (9)
Background
• Short-term insurers are highly regulated by the Financial Services Board (FSB) so that the public has certainty that actual funds are in reserve to pay claims. These deviations justify a deduction for reserves when most entities are not allowed to deduct reserves (section 23(e))
• The tax rules associated with short-term insurers are partially aligned with the system of regulatory reserves.
• It is proposed that the tax system will use the regulatory regime as a comprehensive starting point for all reserve calculations (especially since SAM no longer favours “over -reserving ”).
Proposal
• The proposed tax rules will have an enhanced co-ordination with FSB reserving (and better co-ordinate the specific reserving system and the general tax principles of gross income and deduction)
• The new rules will basically follow FSB reserving, but for
• Unapproved reinsurers
• Formula cash-back cash reserves (but best estimates are ok)
• SARS discretion for denying deductible reserves will be removed (Slide 42)

Investment Contracts Disguised as Short-Term Insurance (new section 28A)
• Current law
• Under the general deduction formula, taxpayers can deduct premiums paid or incurred for risk insurance.
• The deduction for “risk ”insurance premiums is to be contrasted with payments for investments products e.g. endowment policies, bank deposits and debt instruments
• Investments products should not be deductible because they represent a conversion of cash into investment assets.
• The proposal seek to remedy the distortion (i.e. the unintended deduction) by following IFRS standard
• Contracts viewed as investment insurance contract under IFRS will not be allowed as a deduction by the insured policyholder
• Repayment of non-deductible contributions will not be [able to be included] by the insured policyholder
• However, section 28 reserving will continue to be allowed for short-term insurer (query whether these policies should be within a short-term insurer from a regulatory perspective) (Slide 43)

Securities Transfer Tax (STT)
• General rule
• STT applies at a rate of 0.25 per cent.
• This tax generally applies when a person acquires beneficial ownership of a share (that is, STT exemption exists if the broker acquires the share as principal)
• Role of brokers
• All shares on the JSE must be traded through JSE members (i.e. stock brokers)
• Brokers can act as agents or as principal (but the JSE rules prevent banks from acting as brokers)
• Broker exemption has long existed for brokers acting as principal so as to promote liquidity but any transactions blur the agent/principal distinction with
• the broker being the owner with the risk passed on via derivatives
• Banks additionally have indirect control over shares in brokerage subsidiaries with indirect control over the ability to sell
• The new rules will allow for brokers as market-makers in derivatives, thereby ensuring that the principal/agency principal is otherwise maintained (Slide 44)

Prof Engel gave further information on International (Outbound and Inbound) as follows:
Cross Border Reorganisations: Clauses 80(1), 82(1), 83(1), 84(1) and 85(1)
• Purpose or reorganisation rules:
– Current rollover of gains and losses (with deferred gains/losses
potentially triggered at later stage)
• Current forms of restructuring transactions:
– Asset for share transaction
– Amalgamation transaction
– Unbundling transaction
– Liquidation distributions
• Proposed coherent demarcation of each reorg type into the following
broad categories:
– Domestic to domestic transactions
– Inbound transactions
– Foreign to foreign transactions (Slide 46)

Asset for Share Transaction: Clause 80(1); Section 42
This chart indicated qualifying criteria (assets, parties before transaction and parties after transaction). NB: revision limited to foreign to foreign share for share transactions. (See chart, slide 47)

Amalgamation Transaction: Clause 82(1); Section 44
This chart indicated qualifying criteria (inbound and foreign to foreign) and additional criteria for foreign to foreign. (See chart, slide 48).

Unbundling Transaction: Clause 84(1); Section 46 (See chart, slide 49).

Liquidation Distribution: Clause 85(1); Section 47 (See chart, slide 50)

Controlled Foreign Company (CFC) intra group transaction: Clause 83(1); Section 45 (See chart, slide 51)

Capital Gains Participation Exemption: Clause 133(1); paragraph 64B (See slide 52)

Tax upon ceasing to be resident: Overturning Tradehold Decision - Section 9H (See slide 53)

Rationalisation of withholding taxes: Clause 72(1) and 75(1) in respect of Sections 35 and 37J through 37N
(See slide 54)

Removal of CFC exemption from Interest and Royalty Withholding Tax: Clause 22(1)(c) and 22(1)(k), and Clause 75(1) in respect of Sections 37J(1) and 37L(1)(See slide 55)

Relief from Effective Management Test: Clause 2(1)(u); Section 1(See slide 56)

Relief from transfer pricing: Clause 71(1)(e); section 31(See slide 57)

Further refinements to HQ regime: Section 9I
• Current tax qualifying criteria:
– For all prior years, each shareholder satisfy minimum participation of 10%
– For all prior years satisfy the 80/10 asset test (without taking into account money market deposits)
– In current year, 50% passive receipts and accrual test (excluding R5 million de minimis receipts and currency gains and losses)
• Further refinements:
– Exempt dormant companies (no trade +≤R 50 000 assets) from the “always qualification ”
– Relax transfer pricing rules in respect of back-to-back licenses of IP [losses ring-fenced] (Slide 58)

South African managers of foreign investment funds: Clause 2(1)(w); Section 1(See slide 59)

Revised currency rules of intra-group exchange items: Clauses 59(1)(j),(k),(l) and 59(1)(m),(n) and (o)
(See slide 60)

Administration [the provisions contained in Tax Administration Amendment Bill, the Section 75 Bill].
Mr Franz Tomasek, SARS Group Executive: Legislative Research and Development, explained that there were quite a few changes which Members would see in the Tax Administration Amendment Bill which were really just consequential changes and corrections following all the changes that the Committee had made last year. He indicated the highlights.

Administration: One stop border posts (Clause 1)
Background
• Bilateral agreement with Mozambique concluded in September 2007
• Bilateral agreement on annexures relating to officials level in June 2011
• Agreement in principle on annexures after briefing to the Standing Committee on Finance in June 2012
Proposal
• Enactment of a provision to give effect to agreement and its annexures in domestic law, once all requirements of section 231 of the Constitution have been complied with and the agreement binds South Africa (Slide 62)

Administration: Dividends withholding tax notifications (Clauses 5 – 7)
Background
• Exemptions available to approved public benefit organisations, pension funds, etc. and reduced rates to non-residents in terms of Double Taxation Agreements (DTAs)
• Beneficial owner must provide an undertaking to notify company or regulated intermediary if beneficial ownership changes
• Other factors, such as loss of approved status or jurisdiction of residence, may also impact on eligibility for exemptions or reduced rates
Proposal
• Extend requirement to notify company or regulated intermediary of changes in circumstances affecting exemptions or reduced rates (Slide 63)

Administration: Dividends withholding tax refunds (Clauses 9 – 11)
Background
• Refund is available to beneficial owner if withholding tax is over-deducted due to late filing of required notification
• Refund may also arise from foreign tax credit in respect of dividends paid by a non-resident company on listed shares
Proposal
• Extend refund to foreign tax credit cases, within three year period of payment of dividend
• Adequate proof of payment of foreign tax must be obtained (Slide 64)

Administration: Provisional tax estimates (Clause 14)
Background
• Special tax table inserted for retirement fund lump sum benefits with effect from 1 October 2007, retirement fund lump sum withdrawal benefits with effect from 1 March 2009 and severance benefits with effect from 1 March 2011
• Provisional taxpayers ’estimates of taxable income must include retirement and severance lump sum benefits, although taxed using a separate tax table and tax is withheld at source
Proposal
• Exclude retirement and severance lump sum benefits from provisional tax estimates to simplify process
(Slide 65)

Administration: Provisional tax penalties (Clause 15)
Background
• Imposition of understatement penalty discretionary for taxpayers with a taxable income of more than R1 million but compulsory, with a potential waiver based on circumstances, for those up to R1 million
• Taxpayers who underestimate their provisional tax at the end of a tax year (but have paid enough employees ’tax and provisional tax)may be subject to an understatement penalty and have to seek a waiver
Proposal
• Bring imposition of penalty for higher income taxpayers in line with other taxpayers
• Make it clear that no penalty is due on an underestimate if enough employees ’tax and provisional tax has been paid by the end of the tax year (Slide 66)

Administration: Regulation of tax practitioners
Background
• Regulation of tax practitioners is a long standing issue, first raised in 2002
• Registration required from June 2005, first round of draft legislation proposing a statutory regulator released in February 2007, followed by a second round in July 2008
• Minister raised question of impact of personal non-compliance by registered tax practitioners in 2012 Budget Speech
• Meetings between Minister, Commissioner and tax practitioner associations thereafter to address question
Proposal
• Phase 1: Recognised controlling body in Bill
• Phase 2: Evaluate phase 1 and introduce statutory regulator (Slide 67)

Administration: Recognised controlling body (Clauses 23 and 55 – 59)
Proposal
• Tax practitioners must be registered with a directly relevant statutory regulator or recognised tax practitioner ’s association
• SARS recognises tax practitioner associations based on:
– Relevant and effective qualification and experience requirements, CPE, codes of ethics and conduct and disciplinary code and procedures
– Tax exempt status as an association to promote the common interests of members carrying on a profession
– Minimum membership (or likely membership in a year) of 1 000
• A recognised association must be given notice and opportunity to take corrective action if it no longer meets requirements
• Minister may appoint a panel of retired judges or similar persons to handle disciplinary matters for a recognised association
• Reportable misconduct expanded to cover additional tax specific misconduct (Slide 68)

Prof Engel, in Closing and Going Forward, emphasised more taxpayer workshops:
• 01 - 21 August 2012
– More taxpayer workshops
– Bill redrafting – extensive, as always, he noted
• 22 August taxpayer hearings before the Standing Committee on Finance
• Further changes to the Bill
– State Law Advisers
– Parliamentary Law Officers
• 04 September response document before the Standing Committee on Finance
• 11 September formal Ministerial introduction before the National Assembly (Slide 69)

Mr Momoniat noted that the date for the Minister's formal introduction of the Bill was rather tight and might have to be reviewed.

Discussion
The Acting Chairperson noted the need for amendment of tax laws from time to time to take account of fiscal projections as outlined in the fiscal framework, and to respond to the dynamic environment in which South Africa's financial systems existed. In the main, there would be some technical corrections when required to make sure that the tax laws remained relevant. To this end It was critically important to interrogate the relevancy and applicability of South Africa's tax laws on a continuing basis. The briefing had been an introductory one. There would, of course, be public hearings, on 22 August, with feedback from National Treasury on 04 September. Following the formal Ministerial introduction, the Committee would hope to adopt the TLAB on 18 September.

Mr N Koornhof (COPE) found the presentation vast and highly technical, and asked why, with reference to the REIT proposal, capital gains would be exempt (slide 41).

Prof Engel replied that REITs were not subject to Capital Gains Tax because the REIT regime was like a conduit - it was a flow-through. Generally if one held units in a REIT, when one sold the units one would be subject to Capital Gains Tax. When the REIT itself sold the property, it was exempt. This was how collective investment schemes worked. The way South Africa managed flow-through schemes was more generous than in other countries. From a savings perspective, South Africa was probably more active in promoting savings than most other countries.

Mr Koornhof was concerned at the time frame. The State Law Advisers would need three weeks to study the Bill, and it would be difficult to have the Bill ready for formal introduction on 11 September. It will not be a disaster if the Bill were to be introduced in October.

Ms Z Dlamini-Dubazana (ANC) concurred. Time was required. It was indeed a complicated bill. Members must fully understand all the amendments.

Mr Momoniat agreed that it was undesirable to rush the Bill, but it needed to be passed before the end of the year. Every year National Treasury gave much thought on how to manage the process better and have more time available. 90 per cent of the problem was with National Treasury: there were many tax proposals, and these were driven by many things - new proposals, new priorities, tax avoidance measures to prevent mischief, and efforts to resolve issues left over from the previous year. Because tax proposals were market sensitive, it was not possible to announce changes until Budget Day. Thereafter meetings and consultations were held in order to go into the detail. It was aimed to prepare the Bills by 01 June, if possible, but often it was not possible until July, and then the parliamentary recess and school holidays might add to the delay since not everyone who might want to comment could do so. The date of 11 September, even for National Treasury, put great stress. On the other hand, National Treasury was under pressure to complete the Bill so that it could focus on the next year's proposals. Sometimes he wondered whether splitting up the bills was positive or negative, because it meant more travelling for senior National Treasury staff. National Treasury had an open mind to discussion on this issue. 10 per cent of the problem was related to when the Committee sat and to the parliamentary schedule, and somehow it was necessary to find a way through all these constraints, since the TLAB would be there every year, and therefore had to be a priority. Moreover, it was incredible how many financial bills there were, and he acknowledged that the Committee was particularly busy. For the public, it would be important and helpful to extend the comment period. However, National Treasury was faced with a dilemma, though it complied with the legally required time limits. It might be able to reconsider the 11 September date, but he emphasised that the Bill must be passed by the end of the parliamentary year.

Prof Engel added that the biggest problem was that November offered only a limited time to pass the Bill. Indeed, it was necessary to expedite progress in September. If one waited until October, that might not leave enough time for the Bill to be passed by the National Council of Provinces (NCOP) and for it to receive the President's assent. He wondered if Members might like a separate session with National Treasury internally to go through the workings of the Bill. He remarked humorously that the workshops were all about fights; 'We don't want this, we don't want that!' Members might get lost in the fights, but might find it fun. He understood that Members were not tax lawyers.

Ms Dlamini-Dubazana sought more information on the Clean Break proposal (Slide 13).

Mr E Mthethwa (ANC) asked how the division of interest between a divorced couple would be effected if the other partner was not working. Would the other partner open a special account in which he or she accrued the interest alone?

Mr Momoniat said that there had been many comments on tax matters in case of divorce.

Prof Engel had hoped that it would not be necessary to introduce yet more changes; however, this had been necessary. This year the reason was that National Treasury had solved the pension problem for private pensions but not for public pensions. When the divorce happened, one divided the pension. When the pension went to the spouse, that was tax free as long as it remained in the pension fund. However, when you moved it over and divided it in half, as long as it stayed in the pension system, neither party was taxed. It was when the spouse took it out that it was taxed. The division itself of pension assets was not a taxable event. It was only the withdrawal of pension assets that was taxable. That withdrawal could happen as a lump sum or as an annuity. The most important part of this slide was the last column. When one yielded half to a non-member, nothing happened. In order to obtain the tax-free treatment, the spouse must make an election. If the spouse did not make this election, the spouse was faced with the tax. Needless to say there were many angry spouses, because they did not get the proper elections. Thus the spouses were getting tied again to their ex-spouses. Under the new measures, the elections had been done away with. However there were some differences of wording between the tax laws and the divorce laws. Also there were transitional rules, with many complications.

Mr Morden added that part of the question concerned if the other partner was not working. If the spouse was not working, he or she had the option to take the cash. In terms of the rules this would be taxed. Alternatively, the spouse could put the money into a preservation fund. Whether or not the spouse was working, the rules were the same.

Ms Dlamini-Dubazana asked for clarity on the provisional tax estimates. Which Act enabled those who wanted to make lump sum withdrawals from provident funds?

Mr Tomasek replied that it was the Income Tax Act (No. 58 of 1962). The actual provisional tax estimates were contained in the Fourth Schedule.

The Acting Chairperson wanted to ensure that Members had the opportunity to attend and learn from the various conferences on taxation, also the stakeholder workshops. Where would they be held?

Mr Momoniat replied that, given the technical nature of the workshops, there were many that took place. National Treasury sought to consult as extensively as possible with all who might be affected by tax proposals. Members of Parliament would be welcome to attend. All these workshops finally fed into the response process.

The Acting Chairperson asked if there was any best practice model for the board proposed for regulating tax practitioners. Were there countries with such structures that South Africa could follow. It was regrettable that the Committee had lost the chance to go to India as part of its endeavour to understand the concept of the tax ombuds office and its functionality. He hoped that the next study tour would include examination of possible models for the tax practitioner regulatory board. He noted that South Africa had a plethora of regulatory boards and asked if it was not feasible to think of incorporating the proposed board into what existed already.

Prof Engel replied that National Treasury did many international comparisons. However, one should not be a slave to them. It was important, however, to know what other countries were doing in order to benchmark. When it came to savings models, South Africa tended to look to the United Kingdom, which was a major competitor.

Mr E Mthethwa (ANC) asked about trade union leaders who received cars from the trade union for official purposes but no salary or other benefits.

Mr Tomasek replied that in this case the person concerned would have to follow the same rule as anyone else. Therefore if one was using the car for union purposes there was no taxable benefit to the person. However, to the extent that there was private use, then it would be subject to tax.

Prof Engel added that if the trade union was the employer then the union official was clearly in the company car regime. If the car was used as a private benefit then a tax should be imposed.

Mr Morden said that the union might in some cases be regarded as a second employer of the official. To the extent that a portion of the official's use of the car was for private purposes it should be taxable.

Mr Mthethwa asked SARS how it determined, in cases of tax penalties, if the tax payer had submitted an 'innocent' estimate. What happened if the tax payer made such an estimate more than three times?

Mr Tomasek replied that a tax payer had to show SARS that he or she had made a reasonable attempt to make an accurate estimate of tax liability based on the information that he or she had. Clearly if a tax payer had submitted a dreadfully wrong tax estimate three times in a row, SARS would be more sceptical the third time, as it would expect SARS to learn from its mistakes.

Mr Mthethwa asked SARS how it would control associations of tax practitioners. He noted that most of the insurance brokers had been in this field, and asked SARS how it would control such people who did e-filing for clients and charged them money for the service. Very few people had a deep understanding of tax issues unless they worked with them on a day-to-day basis. Would there be some kind of examination for would-be tax practitioners?

Mr Tomasek replied that SARS had certainly made international comparisons. Australia had just revised its system and worked on the independent board model. Malaysia had a system. The United States had a system where if one was not an attorney or an accountant, one was regulated by the Internal Revenue Service (IRS), under which one had to become an enrolled tax agent after undergoing an examination. Admittedly the IRS subcontracted that examination at the moment. So there was a precedent for regulation. The problem was that the existing regulatory boards were role-specific. Potentially tax practitioners could be part of the Law Society of South Africa. There was no board that was particularly aimed at tax, which was a mix of tax and law and other things, as a subject. SARS would consider a tax practitioner as someone who charged for giving tax advice. If someone gave you tax advice for free it was probably worth what you paid for it. SARS was not seeking to regulate those people. An insurance broker might provide free tax advice incidental to the main service that he or she was providing, but that insurance broker would not assist you to fill in your tax returns. Someone who did e-filing for you and charged for it would be considered a tax practitioner. Such a person would have to be registered with SARS, and, if Parliament passed the proposed legislation, would have to be registered by a tax practitioners association, which would then regulate them. Something to bear in mind was that this Bill was not seeking to go to the second stage yet. The whole point of a statutory regulator was to be looked at in 18 months time, once the compulsory membership of a tax practitioners association had been tested.

Mr Momoniat observed that many tax practitioners were also financial practitioners.

Ms J Tshabalala (ANC) needed time to study the presentation, and asked if SARS found it hard to recover what was due to it in respect of employer-provided vehicles that the employer had rented (slides 6 and [15]).

Prof Engel replied that the tax rules were designed around the assumption that the employer owned the car (slide [15]).

The Acting Chairperson said that the Committee's biggest challenge was the time scale, which was very tight. At the same time it was vital not to compromise the content of the Bill, as the Committee sought to achieve a fully inclusive product. He asked Members to study the Bill's provisions thoroughly and ensure that the provisions suited Members' political mandates. This was a critical responsibility for public representatives.

The meeting was adjourned.