The Taxation Laws Amendment Bill, 2000, introduces amendments to the Marketable Securities Tax Act, 1948, the Transfer Duty Act, 1949, the Estate Duty Act, 1955, the Income Tax Act, 1962, the Customs and Excise Act, 1964, the Stamp Duties Act, 1968, the Eskom Act, 1987, the Value-Added Tax Act, 1991, the Tax on Retirement Funds Act, 1996, the South African Revenue Service Act, 1997, the Uncertificated Securities Tax Act, 1998, the Demutualisation Levies Act, 1998, the Eskom Amendment Act, 1998, and the Skills Development Levies Act, 1999.

As was announced by the Minister of Finance in his Budget Review this year, a residence basis of taxation will be adopted with effect from years of assessment commencing on or after 1 January 2001. As a phased approach to this basis, foreign dividends became taxable with immediate effect, i.e. 23 February 2000.

In order to give effect to this proposal relating to the taxation of foreign dividends, it is proposed that a new section 9E be included in the Income Tax Act, 1962. The definition of "resident" as contained in section 9C is used for purposes of the taxation of foreign dividends.

A foreign dividend is in broad terms defined as a dividend received by or which accrued to a person from a company to the extent that―

• the company derives profits from a source outside the Republic; and
• such profits were not already taxed in South Africa.

In terms of the proposed legislation a foreign dividend is deemed to be from a source in the Republic.

Certain amounts received by or accrued to the shareholder are deemed to be foreign dividends. These include―

• amounts which are deemed to be dividends declared by any company in any manner contemplated in section 64C; or
• any amount derived by the shareholder from the disposal by him or her of any share in a company if such amount represents undistributed profits in such company which were available for distribution to such shareholder.

These provisions are dealt with more fully under the sub-heading Anti-avoidance provisions.

Certain relief measures are introduced in order to avoid economic double taxation. These include an exemption mechanism in certain instances and a credit methodology of providing relief where the dividends are not exempt.

It is an accepted international principle (e.g. in Australia) to exempt certain foreign dividends completely. The rationale therefor is that it is expedient from an administrative point of view to exclude dividends in circumstances where the tax payable on the underlying profits to which the dividend relates, is of such a magnitude that a credit equal to virtually the full amount of the domestic tax will have to be granted.

The following rules are proposed to regulate the exemption mechanism:

In order to address the administrative implications in respect of a large number of portfolio shareholders and the potential impact on the local market and the economy, it is proposed that the provisions relating to the taxation of foreign dividends should not apply to dividends declared by companies listed on the Johannesburg Stock Exchange. This will, however, only be the case where dividends are distributed to shareholders that have an interest of less than 10 per cent in the shareholding of the listed company, and if at least 10 per cent of the total shareholding of the company is held in aggregate by South African residents. This exclusion will not apply to dividends distributed to shareholders who hold 10 per cent or more of the shareholding. If the company does not comply with the 10 per cent shareholding requirement on the date of declaration of the dividend and the foreign profits were not taxed in South Africa, the shareholders will be taxed on the foreign dividends, although a credit will be granted in respect of certain foreign taxes paid.

Any foreign dividends received by these listed companies from their subsidiaries will be subject to the normal provisions relating to foreign dividends.

In order to remove the possibility for foreign companies operating in low tax rate countries to list on the JSE after the effective date to utilise the above exemption, it is proposed that a system be introduced whereby such companies will have to be approved in order to qualify for the exemption.

It is proposed that certain foreign dividends which are taxed on a similar basis and rate as is the case in the Republic, should be exempt. In this regard, it was announced that certain treaty countries with a basis and rate of tax similar to the Republic, will be designated by the Minister of Finance in the Gazette.

Any foreign dividends received from profits generated in any designated country will be exempt to the extent that the underlying profits were subject to tax at a rate of at least 27 per cent. For this purpose all taxes on income, including withholding taxes paid by lower tiers, will be taken into account in determining the rate of tax imposed on the profits.

The exemption will not apply in respect of dividends distributed to shareholders who hold less then 10 per cent of the shareholding in a company, other than a company listed on the JSE.

A resident owns 10 per cent of the shares in a company that provides services which is registered in the United States. The profits of the company available for distribution have been taxed at an effective tax rate of 35 per cent. A dividend of R95 000 is paid and withholding tax of R5 000 was imposed on the resident.

As the resident received the dividend from a company in a designated country, the underlying profits were taxed at a statutory rate of at least 27 per cent and the resident owns 10 per cent of the equity share capital of the company declaring the dividend, the dividend will be exempt. The withholding tax may not be set off against the resident’s South African tax liability as the dividend is exempt.

It is proposed that any dividend declared by a South African resident company from profits derived in and outside the Republic, should be apportioned between South African and foreign source income. Only that portion of the dividend declared from profits available for distribution, which relates to income derived from sources outside the Republic should be regarded as a foreign dividend. This may, however, effectively mean that dividends received by the company prior to 23 February 2000, will also be taxed retroactively if the dividends declared from these profits are taxable. It is, therefore, proposed that the on-distribution of foreign dividends which were received by such a company prior to 23 February 2000, be excluded from the tax on foreign dividends.

Dividends declared from profits of a branch will be dealt with in a similar manner as all other foreign dividends as set out hereunder and may, therefore, be excluded from South African tax if it meets certain other requirements. Such a dividend will, for example, not be taxable if―

• the dividend is declared from profits repatriated to the Republic prior to the effective date; or
• the branch is operated in a country where, had such branch been operated in a foreign corporation, the dividends from such corporation would not have been taxable under the exemption provisions.

Furthermore, it is proposed that a de minimis rule be included in the Act, to provide that where the foreign income of a South African resident company does not exceed 25 per cent of the total receipts and accruals of the company, the portion of the dividend relating to the foreign profits should not be regarded as a foreign dividend. This will avoid the necessity of calculating an insignificant percentage of a dividend for purposes of taxing the portion of the dividend relating to foreign income as a foreign dividend and to thereby reduce the administration and compliance burden in administering this proposal.

A South African resident company declares a dividend. Its undistributed reserves consist of profits which arose from South African sourced income taxed in South Africa (R60 million) and profits from operations in the United Arab Emirates which were not subject to tax on income (R40 million).

The company declares a dividend of R50 million. The dividend distributed to shareholders of the company who are South African residents will constitute a foreign dividend to the extent it was declared from untaxed foreign profits. Therefore, 40% of the dividend accrued to the resident must be included in the resident’s income and will be subject to income tax.

Where a dividend is exempt in full or in part, the foreign taxes on income in respect of the profits from which the exempt dividend is distributed, or any related foreign withholding taxes in relation to the dividend, will not be allowed as a credit against the South African tax liability. The reason therefor is that the exempt dividend is not subject to tax in South Africa.

Where resident shareholders hold at least 10 per cent of the total shareholding of the company declaring a foreign dividend, but the underlying profits were not taxed at a comparable rate and basis to that of South Africa, no exemption will apply. In such instance the dividend will be taxed but foreign tax paid on the underlying profits from which the dividend was distributed will be allowed as a credit against the South African income tax payable. The amount to be taxed in the hands of the resident should not be the actual dividend, but the grossed-up equivalent of the pre-tax profit out of which the dividend was declared. A credit should, however, be granted for both the corporate tax and withholding taxes paid in respect of that profit.

Not only the tax in the company declaring the dividend will be taken into account, but a look-through approach (subject to a 10 per cent effective holding by the shareholder) should be adopted to determine the tax on the underlying income. This is not a new principle in the Act as it is already contained in the provisions of section 9D of the Income Tax Act, 1962. This is also the method used in a number of countries, including the United Kingdom.

Where the income from which the dividend is distributed is derived from more than one source, the dividend will be deemed to be distributed on a pro rata basis from the profits derived by the company from the different sources.

The South African resident has a wholly-owned foreign holding company in Switzerland. The Swiss company has interests in five companies:

• Company A, a wholly owned subsidiary in Namibia
• Company B, a wholly owned subsidiary in Switzerland
• a 50 per cent shareholding in company C, located in Australia
• a 50 per cent shareholding in company D, located in the Bahamas
• a 5 per cent interest in company E, located in Israel

The profits of the Swiss holding company available for distribution consist of dividends received in prior years. The relevant information from the perspective of the Swiss holding company is as follows: (C, D, E figures reflect Swiss holding company’s pro rated interest)

None of the companies has investment income which were imputed to the South African resident. The Swiss company declares a dividend of R R390 000 (50 per cent of its profits available for distribution).

360 (50% of profits)

The taxable portion of the foreign dividend is determined as follows:

• Profits distributed
• A – R35 000 ie (70 000 / 2), (>10%, taxed at 35%, designated) exempt
• B – R125 000 ie (250 000 / 2)(not designated) taxable (grossed-up profit)
• C – R70 000 ie (140 000 / 2)(designated) exempt
• D – R175 000 ie (350 000 / 2)(not designated) taxable (grossed-up profit)
• E – R50 000 ie (100 000 / 2)(< 10% interest) taxable (profit plus withholding)
• Dividend deemed to be distributed pro rata from all profits (grossed-up profit)
• Dividend taxable in hands of South African resident – R350 000 (125 000 + 175 000 + 50 000)
• Credit available for foreign taxes paid – R80 000 (20 000 + 15 000 + 22 500 + 22 500)
• B – R20 000 ie (40 000 / 2) corporate tax
• E – R15 000 ie (30 000 / 2) withholding tax
• Tax paid by holding company - R22 500 ie taxable portion of profits distributed ((840 000 - 70 000 - 140 000)/ 840 000 x 60 000) / 2
• Withholding tax borne by resident – R22 500 ie taxable portion of profits distributed ((840 000 - 70 000 - 140 000)/ 840 000 x 30 000)
• South African tax liability – R52 222
• (350 000 x 30% = 105 000 – 80 000) = R25 000 normal tax plus STC of R27 222 ie (350 000 – 105 000) x 12.5 / 112.5)

Shareholders who have less than a 10 per cent shareholding (i.e. the portfolio investors) will be taxed on the dividend, but will be allowed a credit only in respect of the withholding tax paid offshore. However, where the shares are held in a company listed on the JSE and which satisfies the 10 per cent in aggregate shareholding requirement, the dividend declared out of foreign source income will be exempt.

The amount to be taxed in the hands of a resident with a shareholding of less than 10 per cent will be the aggregate of the foreign dividend and the withholding tax borne by the resident in respect of the foreign dividend. The withholding tax paid will be allowed as a credit against the South African tax liability in respect of the foreign dividend, limited to the amount of South African tax payable.

These provisions are consistent with international norms.

A resident owns 9 per cent of the shares in a company conducting business in Germany. Annually the company distributes all its profits to shareholders in the form of dividends. The company has R10 million of taxable income and declares a dividend of R7 million having paid an amount of R3 million in taxes on income. The resident receives a dividend of R535 500 after the deduction of R94 500 withholding tax. Thus the dividend plus the withholding tax was R630 000 which is 9 per cent of R7 million.

As the resident owns less than 10 per cent of the shares in the foreign company, the foreign dividend accruing to the resident will not qualify for an exemption. The amount on which the resident will be taxed is R630 000 (R535 500 plus R94 500). The resident will be able to claim the withholding tax of R94 500 against the resident’s South African tax liability on the foreign dividend, but limited to the domestic tax liability.

In terms of the provisions of section 9D of the Income Tax Act, 1962, a resident is taxed on the investment income of a controlled foreign entity, but limited to the proportion of such resident’s shareholding or interest in such entity. It is proposed that the provisions of section 9D be extended to also include foreign dividends received by the controlled foreign entity with the result that these foreign dividends will also be imputed to the resident shareholder. To avoid double taxation in the hands of the resident, it is proposed that any foreign dividend declared by a controlled foreign entity to the resident shareholder, should be exempt to the extent that the income from which the dividend is distributed was included in the taxable income of the resident.

The principles relating to exemptions and credit of foreign taxes will also apply in respect of dividends of the controlled foreign entity that are imputed to the resident shareholders.

In the Budget Review it was mentioned that the foreign dividends will not be allowed as a credit for purposes of the determination of STC. Where the amount of the dividend does not fall within the exclusions, i.e. where it was not derived from a designated country or where the underlying profit was not taxed at a rate of at least 27 per cent, the dividend will be taxable. In these circumstances it is proposed that no credit should be provided for purposes of the determination of STC.

On the other hand, to the extent that the dividend falls within the exclusions and is not taxable, such a dividend should be taken into account as dividends received during the dividend cycle in the determination of the STC payable. This is proposed by reason of the fact that the dividend has borne tax at a level which is substantially the same as in South Africa.

Where the foreign tax payable exceeds the South African income tax payable, the excess amount may be set off against any STC which becomes payable after the determination of the excess amount, limited to an amount by applying the STC rate to the profits attributable to the inclusion of the foreign income. Where, however, an amount of investment income of a controlled foreign entity is imputed to a resident company, the excess foreign tax may be set off against such company’s liability for STC imposed on the on-distribution of any dividend which is subsequently received from the controlled foreign entity. This excess will, however, be limited to an amount determined by applying the STC rate to the amount of the taxable income attributable to the imputation of the income of the controlled foreign entity.

Currently section 64C of the Income Tax Act, 1962, operates as an anti-avoidance measure in certain circumstances where a company may attempt to avoid the payment of STC. This is the case where a company would, for example, instead of declaring a dividend and paying STC thereon, lend the profits to a shareholder. Section 64C effectively neutralises such an initiative by deeming certain loans without a market-related rate of interest to be a dividend. It is proposed that the principles contained in section 64C of the Income Tax Act, 1964, relating to deemed dividends, should also apply for purposes of the taxation of foreign dividends. Amounts distributed by a foreign company in the form of, for example, a loan, which would have been regarded as a dividend declared for purposes of STC had such distribution been made from local source profits, will, therefore, also be regarded as a foreign dividend.

The provisions will, however, not apply where a company is being wound up or liquidated, and an amount is distributed by such company out of profits of a capital nature (other than profits of a capital nature derived from the disposal by such company of any interest in any other company with retained profits which were available for distribution by such other company).

In this regard, it is also proposed that the scope of section 64C be extended. Currently the provisions include inter alia a loan by the company to the shareholder where no market related interest is charged and such amount is then deemed to be a dividend declared by the company for purposes of STC. It is recommended that the provisions should also include such a loan made by a company to any resident connected person in relation to a shareholder. Such a loan will then be deemed to be a dividend distributed by the company for STC purposes and in the case of a loan by a foreign company to a connected person in relation to the shareholder, such loan will be deemed to be a foreign dividend distributed to the shareholder.

A further method of avoiding the tax on foreign dividends may be to dispose of the shares instead of declaring a dividend. The accumulated profits in the company are, therefore, recovered without paying tax on the foreign dividend. In this regard, it is proposed that a provision be inserted in the Act to provide that where a disposal of shares takes place, the shareholder will be deemed to have received a dividend to the extent that the proceeds on the sale includes undistributed profits that could have been distributed to such shareholder in proportion to his or her shareholding and would have been taxable as a foreign dividend. The proposed deeming provisions of the disposal of shares will not apply to disposals of shares―

• by South African residents who did not at any time after 23 February 2000, hold 10 per cent or more of the equity share capital of the company;
• to South African residents or foreign companies controlled by residents;
• where the South African controlling company retains the same effective shareholding in the non-resident company as prior to the disposal, except where the main or one of the main purposes of the disposal is the avoidance, postponement or reduction of liability for the payment of tax;
• by a shareholder who acquired such shares from a non-resident unconnected person, to the extent that the undistributed profits were derived prior to the acquisition of the shares by the shareholder;
• to the extent that the proceeds from the disposal have been taken into account in the determination of the taxable income of such person;
• where the Commissioner is satisfied that the disposal of the shares was not effected for purposes of avoiding the liability for tax.

It was announced in the Budget Review that the taxation of foreign dividends will come into effect on 23 February 2000, and will apply in respect of all dividends accrued to or received by residents on or after that date, as well as dividends which accrued to a resident before that date, but which are received after that date.

The second leg of the effective date was proposed to close the opportunity for companies that may wish to backdate dividend declarations. In order to avoid unnecessary hardship, it is proposed that where the dividend was declared prior to 23 February 2000, but paid on or after that date, the provisions relating to the taxation of foreign dividends should not apply if―

• the dividend was declared by a company listed on a recognised stock exchange; or
• in any other case, an affidavit or sworn declaration is provided by the Chief Executive Officer, as well as―
• an external auditor of the company; or
• if the company is situated in a country which does not require compulsory appointment of an external auditor, a registered public accountant of the same standing as a qualified chartered accountant,

that the dividend was actually declared by the company before that date.

In the cases the date of accrual of the dividend to shareholders will be the only relevant date irrespective of the date on which the shareholder receives the dividend.

As announced by the Minister in the Budget Review this year, the provisions relating to non-profit organisations will be reviewed. In order to give effect to this announcement, it is proposed that the provisions of section 10(1)(cB), (cC), (cD), (cF), (cI), (cJ) and (f) be deleted.

It was further proposed that a new definition of a "public benefit organisation" be included in the Income Tax Act, 1962. This definition and other requirements for the approval of public benefit organisations is included in a new section 30. The exemption will, however, be granted in terms of a new section 10(1)(cN) which refers to any public benefit organisation approved in terms of section 30. Certain public benefit activities will be identified by the Minister as approved activities and will be published in the Gazette. In order for a public benefit organisation to get exemption, it must carry on an approved public benefit activity.

In respect of trading activities in which such entities are engaged, the extent to which they are permitted will be set out by the Minister of Finance by way of Regulation . A similar requirement is applicable in respect of funds approved in terms of section 10(1)(fA).

Social and recreational clubs and professional bodies which were previously exempt in terms of section 10(1)(cB), are now granted exemption in terms of section 10(1)(d).

The provisions of section 18A, relating to deductions in respect of donations to certain educational institutions, will also be amended to permit the Minister to identify certain public benefit activities which a public benefit organisation may carry on in order to qualify for this benefit. As was announced by the Minister in the Budget Review, it is proposed that the current provisions be extended to include the following categories of public benefit organisations:

• pre-primary schools that offer an approved educare programme;
• primary schools;
• organisations mainly involved in preventing HIV infection or providing care to those whose livelihoods have been impoverished by AIDS;
• childrens’ homes providing care to abandoned, abused or orphaned children; and
• organisations mainly involved in caring for destitute aged persons.

Donations to these organisations will, therefore, also be tax deductible. The limit of the deduction will also be increased to the greater of R1 000 or 5 per cent of taxable income.

Section 10(1)(fA) which currently grants an exemption to a fund which provides funds to certain exempt institutions, will also be amended to permit these entities to provide funds to approved public benefit organisations.

Certain consequential amendments will also be effected to inter alia the Transfer Duty Act, 1949, the Estate Duty Act, 1955, the Stamp Duties Act, 1968, and the Skills Development Levies Act, 1999, to give effect to these proposals.

• to defer the payment of tax by avoiding the liability for employees’ tax;
• to be taxed at the company rate as opposed to the higher marginal rates applicable to individuals; and
• to circumvent the limitation of deductions of expenses associated with employment income.

In 1990 certain provisions were inserted in the Fourth Schedule to the Income Tax Act, to provide that persons providing personal services (i.e. labour brokers), are subject to the payment of employees’ tax, unless an exemption certificate is granted. These provisions do, however, not address the circumstances where a company is not a labour broker, but still makes available the services of an individual to be rendered to a client, which would normally have been rendered in terms of a contract of employment.

• the remuneration payable to such a company or trust by the client be subject to employees’ tax;
• the allowable deductions of such a company or trust for tax purposes be limited to the amount of the remuneration paid to the shareholder or other employees of the company;
• the income of such a company be taxed at a rate of 35 per cent.

1. such person would be regarded as an officer or employee of such client, if such service was performed other than through the company or trust; or
2. such person is subject to the control or supervision of such client as to the manner in which his duties are performed or as to his hours of work; or
3. the amounts paid or payable for such person’s services consist of or include earnings of any description which are payable on regular daily, weekly, monthly or other intervals; or
4. where more than 80 per cent of the income which is derived during the year of assessment from services rendered, consists of income received from one client of the company or trust,

except where such company or company employs more than 3 full time employees (other than such person) during the year of assessment, none of whom are connected persons in relation to such person. All these employees must be involved on a full-time basis in the business of such company or trust of rendering such services.

• relating to the limitation of the deductions and the determination of the rate of tax, apply in respect of years of assessment commencing on or after 1 April 2000 and which end during the 12 month period ending 31 March 2001; and
• which makes provision that the remuneration paid to the company be subject to employees tax, apply with effect from 1 August 2000.

Prior to its repeal by the Eskom Amendment Act, 1998 (Act No. 126 of 1998), section 24 of the Eskom Act, 1989 (Act No. 40 of 1989), provided that Eskom is exempt from the payment of any income tax, stamp duty, levies or fees which would otherwise have been payable by Eskom in terms of any law, excluding customs and excise and sales tax.

• the Minister of Finance must determine the tax values of Eskom’s capital assets for the purpose of calculating depreciation allowances; and
• in granting any special tax allowances to Eskom, the Commissioner shall obtain prior approval of the Minister of Finance.

The Act also endeavoured to repeal the specific exemptions in respect of marketable securities tax, transfer duty and stamp duty. The references in this Act to the provisions relating to the exemption contained in the Marketable Securities Tax Act, 1948, the Transfer Duty Act, 1949, and the Stamp Duties Act, 1968, were, however, incorrect with the result that the withdrawal of these exemptions effectively did not come into operation.

• section 10(1)(cK) of the Income Tax Act, 1962, which grants an exemption in respect of the receipts and accruals of a company, the sole object of which is to supply electricity and of which Eskom is a member; and
• section 10(1)(t)(xii), which grants an exemption to KESCOR (Pty)Ltd. This company was formed on 11 May 1990, with purpose of providing electricity as cheaply and economically as possible to the inhabitants of KaNgwane. The shares in the company were allocated on a n equal basis to Eskom (50 per cent) and the KaNgwane Electricity Trust (50 per cent).

It is, furthermore, proposed that the references in the Eskom Amendment Act, 1998, to the Marketable Securities Tax Act, 1948, the Transfer Duty Act, 1949, and the Stamp Duties Act, 1968, be amended to effectively address the exemptions from marketable securities tax, transfer duty and stamp duty.

As far as the withdrawal of the exemptions of Eskom, its subsidiaries and KESCOR are concerned, the amendments will come into operation on 1 January 2000.

The provisions relating to the Inquiries in the various tax Acts, provide that the Commissioner may authorise any person to conduct an inquiry for the purposes of the administration of the relevant Act. A judge must grant an order in terms of which such person is designated to act as presiding officer at the inquiry.

For the purposes of such an inquiry, the presiding officer so designated has the same power to enforce the attendance of witnesses and to compel them to give evidence or to produce evidential material as are vested in a President of the Special Court contemplated in section 83 of the Income Tax Act, 1962. The President of the Special Court may also, where any person during the sitting of a court wilfully insults a member of the court or any officer of the court attending at the sitting, or wilfully interrupts the proceedings of the court or otherwise misbehaves himself, in terms of section 85 of the Income Tax Act, 1962, make an order committing that person to imprisonment of any period not exceeding three months or order that person to pay a fine. It is proposed that the provisions of section 9C be extended to also provide that the presiding officer shall also have such powers as relates to contempt, as are vested in the President of the Special Court.

The provisions on Inquiries provide that the person whose affairs are being investigated shall be entitled to be present throughout the inquiry, unless the presiding officer otherwise directs. This implies that if during such inquiry, the affairs of any other taxpayer are subject to the inquiry, the person shall not be entitled to be present. It is, therefore, proposed that this provision be amended to provide that such person may be present at the inquiry during the entire time that his affairs are being investigated.

The provisions relating to Inquiries in terms of the Income Tax Act, 1962, and the VAT Act, 1991, provide that that the person designated as the presiding officer shall be subject to the secrecy provision contained in those Acts. It is proposed that these provisions be extended to provide that the secrecy provisions shall apply to any person present at the questioning of any person, including the person being questioned. A subsection is also added to provide that if any person fails to comply with the secrecy provisions, such person shall be guilty of an offence and liable on conviction to a fine or imprisonment for a period not exceeding 2 years.

New subsections are added to provide that any person who fails to produce any evidence as and when required, refuses to be sworn or make an affirmation, fails to answer any question or gives false evidence shall be guilty of an offence.

A new provision is also added which provides that the evidence given under oath or solemn declaration at the inquiry may be used by the Commissioner in any subsequent proceedings to which the person whose affairs are being investigated is a party, or to which a person who had dealings with such person is a party. A person may also not refuse to answer any question on the grounds that it may incriminate him or her. Such incriminating evidence shall, however, not be admissible in any criminal proceedings against the person giving the evidence, other than in proceedings where such person stands trial on a charge in connection with an offence relating to failing or refusing to give evidence or gives false evidence as contemplated in these provisions.

A provision is also introduced to provide that such an inquiry shall proceed notwithstanding the fact that any other civil or criminal proceedings has commenced or will commence unless a competent court otherwise directs.

CLAUSE

See notes on WITHDRAWAL OF TAX EXEMPTION OF ESKOM.

CLAUSE

See notes on AMENDMENT OF INQUIRY PROVISIONS.

CLAUSE

Subclause (a): See notes on WITHDRAWAL OF TAX EXEMPTION OF ESKOM.

Subclauses (b) and (c): See notes on PUBLIC BENEFIT ORGANISATIONS.

Subclause (d): This amendment is consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943).

CLAUSE

See notes on AMENDMENT OF INQUIRY PROVISIONS.

CLAUSE

The Adjustments of Fines Act, 1991 (Act No. 101 of 1991) makes provision that if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined at a ratio as set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law.

Currently, the maximum amount of the fine is determined at a ratio equivalent to R60 000 where the maximum period of imprisonment prescribed is 3 years and R300 000 where the period of imprisonment prescribed is 15 years.

It is proposed that section 15 be amended to delete the amount of the maximum fine contained in that section, which will have the effect that the provisions of the Adjustments of Fines Act, 1991, will apply.

CLAUSE

This amendment is consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943).

CLAUSE

This amendment is consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943).

CLAUSE

See notes on PUBLIC BENEFIT ORGANISATIONS.

CLAUSE

See notes on AMENDMENT OF INQUIRY PROVISIONS.

CLAUSE

This amendment is consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943).

CLAUSE

The Adjustments of Fines Act, 1991 (Act No. 101 of 1991) makes provision that if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined at a ratio as set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law.

Currently, the maximum amount of the fine is determined at a ratio equivalent to R60 000 where the maximum period of imprisonment prescribed is 3 years and R300 000 where the period of imprisonment prescribed is 15 years.

It is proposed that section 28 be amended to delete the amount of the maximum fine contained in that section, which will have the effect that the provisions of the Adjustments of Fines Act, 1991, will apply. The effect thereof will be that the maximum monetary penalty will be equal to R40 000.

CLAUSE … AND SCHEDULE 1

Rates of normal tax payable by persons (other than companies) and companies are enacted by clause ? and Schedule 1 to the Bill.

The rates for persons (other than companies) apply in respect of the year of assessment ending on 28 February 2001 or 30 June 2001 and are provided for in paragraph 1 of Schedule 1.

The rates for persons (other than companies and trusts) and special trusts consist of a progressive rate structure ranging between 18 per cent on the lowest income segment (amounts up to R35 000) and 42 per cent which is reached on the income segment above R200 000.

The rates for trusts (other than special trusts) consist of a rate of 32 per cent on taxable income which does not exceed R100 000 and 42 per cent on the income exceeding R100 000.

• persons (other than companies) and special trusts are provided for in paragraph 1(a) of Schedule 1; and
• trusts (other than special trusts) are provided for in paragraph 1(b) of Schedule 1.

A "special trust" is defined as a trust created solely for the benefit of a person who suffers from:

1. any "mental illness" as defined in section 1 of the Mental Health Act, 1973 (Act No. 18 of 1973); or
2. any serious physical disability,

where such illness or disability incapacitates such person from earning sufficient income for the maintenance of such person. Where the person for whose benefit the trust was created dies before or on 28 February 2001, such trust will be deemed not to be a special trust and the rates provided for in paragraph 1(b) of Schedule 1 will apply in respect of such trust.

The rates for companies apply in respect of years of assessment, i.e. the financial year of the company concerned, ending during the 12-month period from 1 April 2000 to 31 March 2001, and are provided for in paragraphs 2(a) to (h) inclusive, of Schedule 1.

Those rates are as follows:

1. Taxable income derived otherwise than from gold mining, long-term insurance business, or by a foreign company through a branch or agency in the Republic or a qualifying company enjoying tax holiday status: 30 cents per R1, but in the case of a company which mines for gold and which is exempt from secondary tax on companies in terms of an option exercised by it, 38 cents per R1 of its non-gold mining taxable income (paragraph 2(a) of Schedule 1).
2. Taxable income derived by a company which qualifies as a small business corporation, 15 cents per R1 up to R100 000, and 30 cents per R1 of taxable income exceeding R100 000 (paragraph 2(b) of Schedule 1).
3. Taxable income derived by an employment company, 35 cents per R1 of taxable income (paragraph (c) of Schedule 1).
4. Taxable income derived by a company from gold mining: an amount determined in accordance with one of the following formulae―

1. where such company is not exempt from secondary tax on companies:

185

y = 37 – x ; or

 

2. where such company is exempt from secondary tax on companies:

y = 46 – x ,

as provided for in paragraph 2(b) of Schedule 1.

1. Taxable income in the form of "recoupments" of capital expenditure accruing to companies which are or have been gold mining companies: the average rate of tax, determined as provided, or 30 cents per R1, whichever is the higher (paragraph 2(c) of Schedule 1).
2. Taxable income derived from long-term insurance business: 30 cents per R1 in respect of the insurer’s individual policyholder fund, company policyholder fund and corporate fund (paragraph 2(d) of Schedule 1).
3. Taxable income (excluding from gold mining, long-term insurance business or a qualifying project enjoying tax holiday status) derived by a company which has its place of effective management outside the Republic and which carries on trade through a branch or an agency within the Republic: 35 cents per R1 (paragraph 2(e) of Schedule 1).
4. Taxable income derived by a qualifying company which has been granted tax holiday status in terms of section 37H of the Income Tax Act, 1962: zero cents per R1 (paragraph 2(f) of Schedule 1).

For purposes of paragraphs (b) and (c)―

27. the gross income for the year of assessment does not exceed R1 million;
28. none of the shareholders or members at any time during the year of assessment of the company or close corporation hold any shares or has any interest in the equity of any other company as defined in section 1 of the Act (other than a listed company); and
29. not more than 20 per cent of the gross income of the company or close corporation consists collectively of investment income and income from the rendering of a personal service;
30. such company is not an employment company;

27. dividends; and
28. any proceeds derived from investment or trading in financial instruments (including futures, options and other derivatives), marketable securities or immovable property;

27. which is a labour broker as defined in the Fourth Schedule to the Act, other than a labour broker in respect of which a certificate of exemption has been issued in terms of paragraph 2(5) of the said Schedule; or

(bb) which is a personal service company as defined in the Fourth Schedule to the Act.

CLAUSE

Subclauses (1)(a), (b), (d) and (h): See notes on TAXATION OF FOREIGN DIVIDENDS.

Subclause (1)(c): See notes on PUBLIC BENEFIT ORGANISATIONS.

Subclause (1)(e): Deletion of obsolete provision.

Subclause (1)(f): As announced in the Budget Review, restraints of trade paid to natural persons or employment companies will be included as income in the hands of the recipient and deducted in the hands of the payer over the period of the restraint or 3 years, which ever period is longer. This applies to all payments made on or after 23 February 2000.

A new paragraph (cA) is inserted in the definition of "gross income" to include in gross income any compensation for any restrain of trade imposed on any person who―

• is a natural person;
• is or was a labour broker as defined in the Fourth Schedule (other than a labour broker in respect of which a certificate of exemption has been issued in terms of such Schedule);
• is or was a personal service company as defined in the Fourth Schedule; or
• is or was a personal service trust as defined in the Fourth Schedule.

The introduction of paragraph (cA) to section 11 is proposed to provide for the deduction of any amount actually incurred by any person in the course of the carrying on his trade, as compensation in respect of any restraint of trade imposed on any other person, to the extent that such amount constitutes income in the hands of the recipient. The amount shall be allowed to be deducted over the number of years, or part thereof, during which the restraint of trade applies or three years, whichever period is longer.

It is, furthermore, proposed that a new paragraph be added to section 23 to disallow the deduction of any expenses in respect of the payment of any restraint of trade, except as provided for in section 11(cA).

Subclause (1)(g): All private sector pension funds are required to register with the Registrar of Pension Funds and to comply with the provisions prescribed with the Pension Funds Act, 1956 (Act No. 24 of 1956). A pension fund is required to hold sufficient assets to satisfy the rights and reasonable benefit expectations of the members of the fund.

A substantial amount of excess assets have, however, accumulated over the years and the total amount of surplus in South African retirement funds is estimated to be in the region of approximately R80 billion.

The Registrar has in the past refused to register rules which would permit the employer to participate in surplus assets of a retirement fund, other than by way of a reduction in their contribution rates to the fund.

Subsequent to a recent judgment of the Supreme Court of Appeal, the Appeal Board established in terms of the Financial Services Board Act, 1990 (Act No. 97 of 1990), found that nothing in the Pension Funds Act, 1956, prevents the repatriation of any residual surplus in a retirement fund to the employer on liquidation of the fund, if an appropriate rule providing therefor is in place. The Financial Services Board, has now issued a circular explaining the circumstances under which consideration will be given to registering a rule change which will permit the repatriation of surpluses.

In the event of any such rules being amended and surpluses being refunded to employers, the view is held that such surplus should be subject to tax in the hands of the employers. Although the existing provisions of the income Tax Act allow for the taxation of certain amounts recouped, it is proposed that legislative amendments be introduced to ensure that the full amount of any repatriation of the surplus assets to employers is taxed.

As was announced in the Budget Review, these provisions came into operation with immediate effect and, therefore, apply in respect of any amount of surplus assets repatriated by a retirement fund, which is received by or accrues to the employer on or after 23 February 2000.

Provisions are also introduced to disallow the set-off of any assessed loss of the employer against income of this nature. The reason for introducing such a provision is to ensure that employers will not be able to arrange that the repatriation takes place in a year of assessment in which the employer is in an assessed loss position, thereby avoiding or postponing taxation on the repatriation. The United Kingdom introduced such a provision for a similar reason.

Subclause (1)(i): The definition of "prescribed rate" currently provides for a specific rate of interest in respect of―

• interest payable to any taxpayer under the provisions of section 89quat(4); and
• interest payable in any other case.

The definition, furthermore, provides that the Minister my from time to time fix a different rate by notice in the Gazette. In order to remove the reference to a specific rate in the Act, which is in any event determined from time to time by the Minister by notice in the Gazette, it is proposed that the definition be amended to only refer to such rate determined by the Minister.

Subclause (1)(j): This amendment is of a textual nature.

CLAUSE

The Adjustments of Fines Act, 1991 (Act No. 101 of 1991) makes provision that if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined at a ratio as set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law.

Currently, the maximum amount of the fine is determined at a ratio equivalent to R60 000 where the maximum period of imprisonment prescribed is 3 years and R300 000 where the period of imprisonment prescribed is 15 years.

It is proposed that section 4 be amended to delete the amount of the maximum fine contained in that section, which will have the effect that the provisions of the Adjustments of Fines Act, 1991, will apply. The effect thereof will be that the maximum monetary penalty will be equal to R40 000.

CLAUSE

This clause increases the primary rebate from R3 710 to R3 800, and the rebate in respect of persons over 65 years from R2 775 to R2 900.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

Subclause (1)(a): This amendment is consequential upon the amendment to section 8(1)(f) by section 14 of the Revenue Laws Amendment Act, 1999 (Act No. 53 of 1999).

Subclause (1)(b): See notes on insertion of paragraph (eB) in the definition of "gross income" in section 1 of the Income Tax Act, 1962.

Subclause (1)(c): See notes on insertion of section 12D in the Income Tax Act, 1962.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

Subclauses (1)(a), (b), (d), (e) and (f): See notes on PUBLIC BENEFIT ORGANISATIONS.

Subclause (1)(c) and (n): See notes on WITHDRAWAL OF TAX EXEMPTION OF ESKOM.

Subclause (1)(g), (i), (k), (l) and (m): See notes on TAXATION OF FOREIGN DIVIDENDS.

Subclause (1)(h): Section 10(1)(hA) currently exempts from income tax any interest received by or accrued to any non-resident or any company which is managed and controlled outside the Republic. Subparagraph (v) of the proviso to this paragraph, however, provides that this exemption does not apply to any interest received by or accrued to a company which is managed and controlled outside the Republic, if such interest is effectively connected with the business carried on by that company in the Republic. It is proposed that the exclusion from the exemption be extended to persons other than companies if the interest is effectively connected with the business carried on by such person in the Republic.

Subclause (1)(j): See repeal of section 19 of the Income Tax Act, 1962.

CLAUSE

Subclause (1)(a): See insertion of section (cA) in the definition of "gross income" in section 1 of the Income Tax Act, 1962.

Subclause (1)(b): See insertion of section 12D in the Income Tax Act, 1962.

Subclauses (1)(c) and (d): These amendments are consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943) and the promulgation of the Long-term Insurance Act, 1998 (Act No. 52 of 1998).

CLAUSE

One of the entrenched principles of the South African tax system is that a deduction in respect of the wear and tear or depreciation of structures or works of a permanent nature is not granted for tax purposes. The reasoning behind this principle is that works of a permanent nature have a longer lifespan or period of use and are, therefore, not subject to wear and tear and depreciation to the same extent as machinery and plant. Permanent is, however, a relative concept and in determining whether or not a structure or work is intended to last for a sufficiently long time to be permanent, regard must be had to not only the nature of the structure, but also to the use to which it is to be put.

Over the years the allowance has been extended to certain types of works of a permanent nature. This includes, for example, buildings used by hotelkeepers or used in the process of manufacture, and permanent structures used by certain co-operative societies for storage.

International companies have recently started expressing their interest in the exploration of certain gas fields in Southern Africa. The development of natural gas is an important contributing factor to the economic development of Southern Africa. The possibility of such exploration is, however, dependent on the economic viability thereof and the disallowance of the depreciation of pipelines could have an adverse effect on the investment decision. This is so as investors are reluctant to commit to substantial outlays on pipeline networks which, under the current tax system, are disqualified from any such allowance. To this end the depreciation allowance would encourage and support the significant capital investments which would be required for such a project.

Similarly, the tax-exempt status of Eskom is about to be withdrawn. Eskom will, therefore, become subject to income tax and the disallowance of the depreciation on the installation of new transmission cables from the date it becomes a taxable entity may have a detrimental effect on the cost of supplying electricity.

Comparative studies also show that a depreciation allowance on transmission lines and pipelines is granted for tax purposes in a number of countries. It is, therefore, clear that internationally it is acceptable practice to grant a deduction in respect of a greater spectrum of permanent structures of this nature.

It is, therefore, proposed that the depreciation allowances be extended to include―

• pipelines used for the transmission of natural oils and refined by-products of such natural oils;
• railway lines and electricity and telephone transmission lines.

The depreciation allowance will, however, only be available in respect of new and unused structures, which are used directly by the owner thereof in carrying on its sole business of transmitting or transporting the relevant products.

• pipelines used for transporting gas or oil – 10 years;
• electricity and telephone transmission lines - 20 years; and
• railway lines - 20 years.

The depreciation allowance will be granted in respect of all new and unused assets contracted for and the construction, erection or installation of which was commenced on or after 23 February 2000. In terms of the normal tax principles, the depreciation allowance will only commence in the year that the assets are first brought into use by the owner thereof. Furthermore, it will also only apply in respect of assets acquired by a taxable entity.

CLAUSE

See notes on PUBLIC BENEFIT ORGANISATIONS.

CLAUSE

CLAUSE

See notes on insertion of paragraph (eB) in the definition of "gross income" in section 1 of the Income Tax Act, 1962.

CLAUSE

It was proposed in the Budget Review that section 22 of the Income Tax Act, 1962, be amended to withdraw the LIFO (last-in-first-out) option for valuing marketable securities. This amendment gives effect to this proposal. Furthermore, this will ensure that no taxpayer may use the LIFO method of valuation of trading stock.

CLAUSE

Subclause (1)(a): Section 23(d) of the Income Tax Act, 1962, currently provides that no deduction shall be allowed in respect of any tax, duty, levy, interest or penalty imposed under the Act, any additional tax imposed under section 60 of the Value-Added Tax Act, 1991 and any interest or penalty payable in consequence of the late payment of any tax, duty or levy payable under any Act administered by the Commissioner, the Regional Services Councils Act, 1985 and the KwaZulu and Natal Joint Services Act, 1990.

It is proposed that this provision be amended to also include the Skills Development Levies Act, 1999, and therefore to disallow the deduction of any interest or penalty payable in terms of that Act as a deduction for income tax purposes.

Subclause (1)(b): In so far as this subclause―

• inserts paragraph (k), see notes on TAXATION OF EMPLOYMENT COMPANIES; and
• inserts paragraph (l), see notes on insertion of paragraph (cA) in the definition of "gross income" in section 1 of the Income Tax Act, 1962.

CLAUSE

Section 23B of the Income Tax Act, 1962, currently provides that where an amount qualifies for a deduction or an allowance under more than one provision of this Act, a deduction or allowance in respect of such amount or any portion thereof, shall not be allowed more than once in the determination of the taxable income of any person.

It is proposed that this section be amended to refer to any amounts taken into account in the determination of the taxable income of the person. This has always been the interpretation of the provisions, but an amendment is proposed to provide clarity in this regard.

CLAUSE

As far as the limitation of deduction of expenditure incurred in respect of the acquisition of trading stock is concerned, the provisions of section 23F are amended to provide that―

• where a taxpayer has disposed of any trading stock during any year of assessment in the ordinary course of his trade for any consideration the full amount of which will not accrue to him during such year; and
• any expenditure incurred in respect of the acquisition of such trading stock was allowed as a deduction under the provisions of section 11(a) or (b) during that year or any previous year of assessment,

the amount of the expenditure shall be deemed to have been recovered or recouped and be included in the income of the taxpayer for the year of assessment during which such trading stock was disposed of.

There shall, however, be allowed to be deducted in―

• that year, so much of such expenditure which bears to the full amount of such expenditure, the same ratio as the amount of such consideration which has accrued to the taxpayer during such year bears to the full amount of such consideration;
• any subsequent year of assessment, so much of such expenditure which bears to the full amount of such expenditure, the same ratio as the amount of such consideration which has accrued to the taxpayer during such subsequent year bears to the full amount of such consideration; or
• any year of assessment during which it is shown by the taxpayer that the consideration will never accrue to him, so much of such expenditure as has not been allowed as a deduction in terms of the provisions of the section, to the extent that the expenditure was actually paid.

A further subsection is added to provide for the case where a right or interest in an asset that is trading stock is disposed of, which has the effect that the remaining right or interest does not constitute trading stock. In this instance, the expenditure which was previously allowed as a deduction, which relates to the right or interest held and not disposed of (which no longer constitutes trading stock) will be deemed to have been recovered or recouped by the taxpayer and included in his income for such year of assessment.

CLAUSE

As was mentioned in the Budget Review, a number of legislative amendments are being introduced to address certain tax avoidance schemes. In this regard, a new section 23H is proposed, to provide that where any person has incurred any expenditure, which is or was allowable as a deduction in terms of the provisions of section 11(a), (b), (d) or (d) of the Income Tax Act, 1962, the amount allowed to be deducted in any year of assessment shall be limited to the expenditure relating to goods supplied, services rendered or benefits received during the relevant year of assessment.

These provisions will, however, not apply―

• where all the goods or services are to be supplied or rendered within 6 months after the end of the year of assessment during which the expenditure was incurred, or such person becomes entitled to the full benefit in respect of which the expenditure was incurred within such period; or
• where the aggregate of all amounts of expenditure incurred by such person, which would otherwise be limited by this section, does not exceed R50 000; or
• to any expenditure to which the provisions of section 24I, 24J, 24K or 24L applies; or
• to any expenditure actually paid in respect of any unconditional liability to pay an amount imposed by legislation.

The Commissioner has a discretion, which is subject to objection and appeal, to determine that if the apportionment of the expenditure in accordance with the section does not reasonably represent a fair apportionment of such expenditure in respect of the goods, services or benefits to which it relates, he may direct that such apportionment be made in such other manner as to him appears fair and reasonable.

If it is during any year of assessment shown by any person that―

• the goods or services in respect of which the expenditure is incurred, will never be received by or be rendered to him; or
• he will never become entitled to any other benefit in respect of which the expenditure is incurred,

the expenditure will be allowed in that year, to the extent that such expenditure has actually been paid by him.

CLAUSE

Deletion of obsolete provision.

CLAUSE

These amendments are consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943), and the promulgation of the Short-term Insurance Act, 1998 (Act No. 53 of 1998).

CLAUSE

This amendment is consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943).

CLAUSE

See notes on PUBLIC BENEFIT ORGANISATIONS.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

Section 55(2)(k) of the Income Tax Act, 1962, and section 1(2)(g) of the Estate Duty Act, 1955, previously read exactly the same, referring to the application for a determination of the surface value of farming property. The appropriate section of the Estate Duty Act was, however, amended by the Abolition of Restrictions on the Jurisdiction of Courts Act, 1996 (Act No. 88 of 1996), to delete the provision which provides that the decision of the Board shall be final. No similar amendment was done in respect of donations tax, and it is, therefore, proposed that section 55(2)(k) of the Income Tax Act, 1962, be amended to bring it in line with the corresponding provisions of the Estate Duty Act, 1955.

CLAUSE

See notes on PUBLIC BENEFIT ORGANISATIONS.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

See notes on AMENDMENT TO INQUIRY PROVISIONS.

CLAUSE

The Adjustments of Fines Act, 1991 (Act No. 101 of 1991) makes provision that if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined at a ratio as set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law.

Currently, the maximum amount of the fine is determined at a ratio equivalent to R60 000 where the maximum period of imprisonment prescribed is 3 years and R300 000 where the period of imprisonment prescribed is 15 years.

It is proposed that section 75 be amended to delete the amount of the maximum fine contained in that section, which will have the effect that the provisions of the Adjustments of Fines Act, 1991, will apply. The effect thereof will be that the maximum monetary penalty will be equal to R20 000.

CLAUSE

Section 83(19) currently provides that the President of the Special Court may indicate which judgments or decisions of the court he considers ought to be published for general information. A copy of the judgement or decision of the court so indicated must then be referred to the appellant or his representative concerned in the case with a written request that the appellant give his consent in writing to the publication thereof. If the appellant fails to give his written consent to such publication, the registrar of the court must refer the matter to the President who may authorise the publication of the judgment or decision, if he is satisfied―

• that the appellant’s consent to publication has been unreasonably withheld; and
• that such judgment or decision is in a form which does not reveal the identity of the appellant concerned in the case.

In the past, these provision have been accepted and followed with very few problems. Recently, however, publishers and academics have voiced the opinion that the provisions of section 83(19) should be reviewed. The reason for this is the fact that important principles concerning taxation in general and the provision of the Act in particular may go unreported where the taxpayer refuses permission for publication. In essence, these parties propose that permission for the publication of judgments should be withheld in exceptional circumstances only. The presiding judges are sufficiently aware of the sensitivity of a specific case and are, therefore, in as good a position as the taxpayer to decide whether a specific judgment should be reported or not. It is, therefore, proposed that subsection (19) be amended to this effect.

CLAUSE

The Adjustments of Fines Act, 1991 (Act No. 101 of 1991) makes provision that if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined at a ratio as set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law.

Currently, the maximum amount of the fine is determined at a ratio equivalent to R60 000 where the maximum period of imprisonment prescribed is 3 years and R300 000 where the period of imprisonment prescribed is 15 years.

It is proposed that section 84 be amended to delete the amount of the maximum fine contained in that section, which will have the effect that the provisions of the Adjustments of Fines Act, 1991, will apply.

CLAUSE

The Adjustments of Fines Act, 1991 (Act No. 101 of 1991) makes provision that if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined at a ratio as set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law.

Currently, the maximum amount of the fine is determined at a ratio equivalent to R60 000 where the maximum period of imprisonment prescribed is 3 years and R300 000 where the period of imprisonment prescribed is 15 years.

It is proposed that section 85 be amended to delete the amount of the maximum fine contained in that section, which will have the effect that the provisions of the Adjustments of Fines Act, 1991, will apply.

CLAUSE

Currently section 99 of the Income Tax Act, 1962, provides that the Commissioner may declare a person to be the agent of another person and the person so declared an agent may be required to make payment of any tax due from any moneys which maybe held by him or due by him to the person whose agent he has been declared to be. It is proposed that this provision be extended to also include any outstanding penalties and interest.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

The Adjustments of Fines Act, 1991 (Act No. 101 of 1991) makes provision that if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined at a ratio as set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law.

Currently, the maximum amount of the fine is determined at a ratio equivalent to R60 000 where the maximum period of imprisonment prescribed is 3 years and R300 000 where the period of imprisonment prescribed is 15 years.

It is proposed that section 10 be amended to delete the amount of the maximum fine contained in that section, which will have the effect that the provisions of the Adjustments of Fines Act, 1991, will apply. The effect thereof will be that the maximum monetary penalty will be equal to R40 000.

CLAUSE

See notes on TAXATION OF FOREIGN DIVIDENDS.

CLAUSE

See notes on TAXATION OF EMPLOYMENT COMPANIES.

CLAUSE

See notes on TAXATION OF EMPLOYMENT COMPANIES.

CLAUSE

The definition of "official rate of interest" currently provides for a specific rate of interest

In terms of paragraph 20 of the Seventh Schedule, the Minister of Finance may by notice in the Gazette amend the definition so as to vary the rate of interest specified therein. It is proposed that the definition be amended to only refer to such rate determined from time to time by the Minister.

CLAUSE

Currently the Act provides that the benefit of any holiday accommodation provided by an employer to an employee be calculated at the cost of the accommodation where such accommodation is hired from any person other than an associated institution in relation to the employer. In any other case, the benefit is calculated at a fixed rate of R100 per person per night, notwithstanding the fact that the cost to the employer may be much higher than that amount. In the case where the employer provides the accommodation the employee is subject to tax on the cost to the employer. This is especially beneficial where the employee is provided with holiday accommodation in a foreign country. An amendment is considered necessary as it was never the intention that an employee should be better or worse off where the accommodation is provided by an associated institution as opposed to the employer. It is therefore proposed that the provisions be amended to subject to tax the actual cost of providing the accommodation.

It is proposed that this provision be amended to delete the reference to the fixed amount of R100 and to determine the value at the actual cost to employer in the case of rented accommodation, or in any other case to the rate at which such accommodation could normally be let.

CLAUSE

The Adjustments of Fines Act, 1991 (Act No. 101 of 1991) makes provision that if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined at a ratio as set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law.

Currently, the maximum amount of the fine is determined at a ratio equivalent to R60 000 where the maximum period of imprisonment prescribed is 3 years and R300 000 where the period of imprisonment prescribed is 15 years.

It is proposed that section 10 be amended to delete the amount of the maximum fine contained in that section, which will have the effect that the provisions of the Adjustments of Fines Act, 1991, will apply. The effect thereof will be that the maximum monetary penalty will be equal to R10 000.

CLAUSE

Subclause (a): This amendment is consequential upon the amendment to the definition of "official rate of interest".

Subclause (b): This amendment is of a textual nature.

Subclause (c): Deletion of obsolete provision.

Subclause (d): This amendment is of a textual nature.

CLAUSE

Section 47B is inserted in the Customs and Excise Act, 1964, to provide for the introduction of an air passenger tax on international air travel from the Republic. The tax will be payable by the airline carrier who will recover the cost from their travelling client as an integral part of their ticket price. The tax will be charged against all international passengers with the exception of children under 2 years, employees of the airline carriers carried in the course of their duties and persons carried in pursuance of international obligations. This section is enabling in many respects as provision is made for various matters to be prescribed by rule.

CLAUSE

Subsection 49(5B) is inserted in the Customs and Excise Act, 1964, to enable the Minister to ensure that all the provisions of any agreement concluded relating to the preferential treatment of Goods, origin provisions and other customs matters are enacted into law in accordance with the Constitution.

CLAUSE

Section 75(1)(b) of the Customs and Excise is amended to provide for the inclusion of the fuel levy in the rebate provisions under this subsection.

CLAUSE

Subsection 49(9) does not explicitly provide for the refund of duty paid at the general rate where an importer at the time of importation in all respects qualify for the preferential rate but does not then present the prescribed proof of origin. This insertion provides for such circumstances.

CLAUSE

In terms of section 105 of the Customs and Excise Act, 1964, the Minister of Finance may by notice in the Gazette amend the definition so as to vary the rate of interest specified therein. It is proposed that the definition be amended to only refer to such rate determined from time to time by the Minister.

CLAUSE

This clause provides for the amendment of Schedule No. 1 to the Customs and Excise Act, 1964, and the date of commencement thereof. Such amendments are reflected in Schedule 2 to this Bill and arise from the taxation proposals which were tabled by the Minister of Finance during his Budget Speech.

CLAUSE

This clause seeks the continuation of the amendments to the Schedules to the Act effected by the Minister during the 1999 calendar year and an amendment made this year.

CLAUSE

Subclause (1)(a): See notes on WITHDRAWAL OF TAX EXEMPTION OF ESKOM.

Subclauses (1)(b), (c) and (d): See notes on PUBLIC BENEFIT ORGANISATIONS.

CLAUSE

• a franking machine impression;
• a receipt issued by a revenue office (which at that stage included the magistrates’ offices); or
• a special receipt or payment on declaration, if the computer programme of the firm is approved by the Commissioner.

The purpose of the 1998 amendment was to reduce the number of revenue stamps held in stock at the various offices. Certain problems have, however, been experienced in relation to the amendment as from the beginning of 1999, magistrates’ Offices have discontinued the services which they previously rendered on behalf of SARS. Furthermore, the Post Offices sell revenue stamps on behalf of SARS and to accommodate the rural areas, it was arranged with the Post Offices to hold larger quantities of revenue stamps at their branches. The Post Offices’ current systems do however, not allow for the issuing of receipts for stamp duty for amount exceeding R400-00.

Deeds Offices also experience a problem with the abovementioned amendment as mortgage bonds may not be removed from a Deeds Office once approved by the Registrar. As not all attorneys who are required to stamp the bonds at the Deeds Offices have franking machines, this has also presented some difficulties in getting the bonds stamped.

It is, therefore, proposed that section 5 be amended to delete the reference to a minimum of R400-00 for purpose of affixing stamps.

CLAUSE

The Adjustments of Fines Act, 1991 (Act No. 101 of 1991) makes provision that if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined at a ratio as set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law.

Currently, the maximum amount of the fine is determined at a ratio equivalent to R60 000 where the maximum period of imprisonment prescribed is 3 years and R300 000 where the period of imprisonment prescribed is 15 years.

It is proposed that section 27 be amended to delete the amount of the maximum fine contained in that section, which will have the effect that the provisions of the Adjustments of Fines Act, 1991, will apply. The effect thereof will be that the maximum monetary penalty will―

• for any offence contemplated in subclause (a), be equal to R40 000; and
• for any offence contemplated in subcluase (b), be equal to R10 000.

CLAUSE

The Adjustments of Fines Act, 1991 (Act No. 101 of 1991) makes provision that if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined at a ratio as set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law.

Currently, the maximum amount of the fine is determined at a ratio equivalent to R60 000 where the maximum period of imprisonment prescribed is 3 years and R300 000 where the period of imprisonment prescribed is 15 years.

It is proposed that section 28A be amended to delete the amount of the maximum fine contained in that section, which will have the effect that the provisions of the Adjustments of Fines Act, 1991, will apply. The effect thereof will be that the maximum monetary penalty will be equal to R10 000.

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See notes on AMENDMENT OF INQUIRY PROVISIONS.

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These amendments are consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943).

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These amendments are consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943) and the promulgation of the Long-term Insurance Act, 1998 (Act No. 52 of 1998).

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These amendments are consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943) and the promulgation of the Long-term Insurance Act, 1998 (Act No. 52 of 1998).

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See notes on WITHDRAWAL OF EXEMPTION OF ESKOM.

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In terms of section 17(2)(c) no input tax deduction may be made in respect of the acquisition of a motor car, except where the motor car is acquired by a vendor for purposes of making a taxable supply of that motor car, as in the case of a dealer in motor cars. The reason is that a large number of motor cars are acquired for private purposes but registered in the names of vendors who would otherwise have been in a position to deduct input tax in respect thereof and thereby obtain an unfair advantage.

In recent years double cab light delivery vehicles have become increasingly popular as private family motor cars. The definition of "motor car" for that reason includes double cab vehicles on the grounds that the area of the cab exceeds the area available as loading space. Input tax is accordingly denied in terms of section 17(2)(c).

Some motor vehicle manufacturers have started making adjustments to certain models by increasing the loading space. If this should lead to these models falling outside the ambit of the definition of "motor car" input tax will become deductible, which may lead to the distortion of consumer preferences as far as this type of vehicle is concerned.

It is accordingly proposed that the definition of "motor car" be amended to specifically include double cab light delivery vehicles.

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Value-added tax in South Africa is a destination based tax which imposes tax on the consumption of goods and services in South Africa. The supply of goods which are exported is therefore subject to the zero rate of VAT (or the VAT paid refunded). Services supplied to a recipient who will consume those services outside the Republic are also subject to the zero rate.

The international community has, in recent years, started to make use of training facilities available in the Republic. Employees of employers who are not residents of the Republic and who are not registered as vendors, are sent to the Republic to undergo vocational training, after which they return to their own countries where they are employed. Although the training takes place in the Republic, the services are evidently only consumed once the employees apply their newly acquired skills at their place of employment outside the Republic.

It is accordingly proposed that a new paragraph (r) be introduced to section 11(2) to provide for the zero-rating of training services supplied in these circumstances, where those training services do not constitute educational services which are exempt from VAT in terms of section 12(h) of the Act.

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Subclause (a): As the Act stands, vendors falling within Categories A and B have to furnish returns every second month while vendors falling within Categories C and D have to furnish returns every month and every six months respectively.

Certain vendors such as the management companies of groups of companies or property owning trusts only supply management or administrative services to the other companies in the group or are only engaged in the letting of fixed property or the renting of movable goods to connected persons. It is common practice for these vendors to charge a fee and issue a tax invoice in respect of these supplies only once a year.

As these vendors do not make any other taxable supplies, it follows that all but one of their VAT returns furnished in a year are "nil"-returns. Certain costs still have to be incurred by the Commissioner in issuing and processing these returns. Experience also indicates that these returns are often furnished late, which causes additional costs to be incurred in follow-up actions.

In order to save time and costs for both vendors and the Commissioner it is proposed that section 27(1) of the Act be amended to provide for a new Category E. Vendors falling into this category will have tax periods of 12 months which will normally end on the last day of their year of assessment for income tax purposes. Vendors who meet the requirements for being placed in this category, which are dealt with in subclause (e), may, however, apply in writing for their tax periods to end on the last day of any other month.

Subclause (b): The proposed amendment to paragraph (a) of subsection (2) is consequential upon the amendment dealt with in subclause (a). Vendors who do not fall within Categories C or D or the new Category E, all three of which are dependant upon certain circumstances being met, shall automatically fall within Category A or B.

Subclause (c): The proposed amendment to the proviso to subsection (3) is consequential upon the amendment dealt with in subclause (a).

Subclause (d): The proposed amendment to the proviso to subsection (4) is consequential upon the amendment dealt with in subclause (a).

Subclause (e): The proposed subsection (4A) sets out the requirements which a vendor must meet in order to be placed in Category E. All of the following requirements must be complied with.

1. The vendor must be a company or a trust fund. As companies and trust funds must account for VAT on the invoice basis, the possibility of postponing the liability to account for VAT by postponing the payment of the consideration for the supply is eliminated.
2. The vendor’s enterprise must be comprised solely of one or more of the activities of letting of fixed property or the renting of movable goods to, or the management or administration of companies which are connected persons in relation to the vendor. Where supplies are made to persons who are not connected persons or where, for instance, goods are supplied under an agreement of sale, the vendor does not meet the requirements for being placed in Category E.
3. The recipients of the supplies must be registered as vendors and must be entitled to a full deduction of the tax in respect of these supplies. This requirement is aimed at preventing any advantage to the group of companies by postponing the liability to account for output tax.
4. It must be agreed between the vendor and the recipients of the supplies that tax invoices will only be issued once a year and that the consideration for these supplies will also only become payable once a year, at the end of the vendor’s year of assessment. This requirement is aimed at preventing, as far as possible, a mismatching of input tax and output tax.
5. The vendor must apply in writing to the Commissioner to be placed in Category E.

The Commissioner may at any time change the vendor’s category to a different category if the vendor so requires, when the Commissioner is satisfied that the vendor’s circumstances have changed to such an extent that he no longer meets the requirements of Category E or when the vendor’s falling into Category E results in any loss, including a loss of interest, to the State.

Subclause (f): The tax periods of all vendors, whether they fall into Category A, B, C, D or the proposed Category E, normally end on the last day of a month. Paragraph (ii) of the proviso to subsection (6), however, allows a vendor to end his tax periods on any day within 10 days before or after the last day of the month on which his tax period would normally have ended.

This proviso creates a mechanism which is used by some vendors to postpone their liability to account for VAT by manipulating their tax periods to either exclude large supplies made during the last few days of a month, or to include large supplies received during the first few days of the following month. This causes a mismatching of input tax and output tax with a resultant loss to the State.

The proposed amendment to paragraph (ii) of the proviso to subsection (6) still allows a tax period to end within 10 days before or after the last day of the relevant month, but requires that it ends on a fixed day, approved by the Commissioner. This means that a vendor can, for example, choose to end his tax periods on the 27^th day of the month (a fixed date) but that he may also choose to end his tax period on the last Friday before the end of the month (a fixed day, but not a fixed date).

A vendor will no longer be allowed to end each tax period on a different day, but will only be allowed to change the fixed day with the prior approval of the Commissioner.

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Section 28(1) requires of a vendor to furnish a return within the period ending on the twenty-fifth day of the first month commencing after the end of the tax period, or where the tax period ends on a day within ten days after the end of the month, on the twenty-fifth day of the month during which the tax period ended.

If a return is not furnished by the twenty-fifth day referred to, the vendor is liable to pay a penalty.

When the twenty-fifth day of a month falls on a Saturday, Sunday or public holiday it is often not possible to determine whether the return was furnished within the prescribed period. It is therefore proposed that the proviso to section 28(1) be amended to resolve this issue and to make it clear that when the twenty-fifth day does not fall on a business day, the return must be furnished on the last business day before the twenty-fifth day of that month.

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Section 31(3) authorises the Commissioner to estimate the amount upon which a vendor has to pay tax and to issue an assessment on that basis. Such estimated assessments are usually issued in those cases where circumstances indicate that the amount of tax accounted for by the vendor is less than the amount which he should have accounted for, but where his actual liability cannot be determined accurately, usually because of a lack of accounting records, tax invoices, et cetera.

Although it is standing practice when issuing an estimated assessment to duly consider all arguments which a vendor may put forward, vendors more often than not lodge objections and appeals against estimated assessments. Dealing with these objections and appeals is extremely time-consuming and costly, while many of these cases can be resolved by agreement between the Commissioner and the vendor.

It is accordingly proposed that section 31 of the Act be amended by the insertion of a new subsection (5A) to authorise the Commissioner to agree with a person in writing as to the amount upon which tax shall be payable. To the extent that an assessment is issued upon an amount agreed to in this manner, the assessment shall not be subject to objection and appeal. It follows that if agreement was reached on the amounts of taxable supplies made and received and therefore on the amount of tax payable, that amount may not be objected to. Should the Commissioner, however, levy additional tax in terms of section 60 of the Act, to which the vendor did not agree, he may still object to the additional tax levied.

Section 78(2) of the Income Tax Act, 1962, contains similar provisions.

CLAUSE

In terms of section 39 of the Act a vendor is penalised for not furnishing a return and for failure to pay the tax as calculated on that return within the time allowed for furnishing the return and paying the tax due. The penalty which is levied in terms of section 39 amounts to 10 per cent of the amount of tax payable by the vendor.

Where a vendor is required to furnish a return but no tax needs to be paid by the vendor, or a refund of tax is due to the vendor, no penalty can be levied in terms of section 39. As a result of this, vendors have fallen into the habit of not furnishing "nil" returns and refund returns within the prescribed period, causing the Commissioner to incur substantial costs in follow-up actions.

It is accordingly proposed that a new section 39A be introduced to provide for penalties to be levied in those instances where returns are not submitted timeously, in circumstances where penalties cannot be levied in terms of section 39.

The penalty amounts to R100 for the first return furnished late after the Act has been amended and increases by R100 for each subsequent return furnished late, up to a maximum penalty of R1 000 per return.

The Commissioner has a discretion to remit penalties levied under this section to the extent that he is satisfied that the failure to furnish the return timeously was not due to negligence or an intent to postpone the furnishing of that return.

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In terms of section 43(1)(a) of the Act the Commissioner may require that a vendor furnish security for VAT payable where that vendor has been convicted of an offence under the said Act or has repeatedly failed to comply with the requirements of the said Act.

The Commissioner administers various Acts and by its very nature a person who is registered as a vendor under this Act will probably be registered as a taxpayer under the Income Tax Act and may from time to time be involved in transactions falling under some of the other acts.

In order to further improve the Commissioner’s efficiency in collecting tax, it is proposed that paragraph (a) of section 43(1) be amended to authorise the Commissioner to require a vendor to furnish security for VAT payable where that vendor has been convicted of an offence under any Act administered by the Commissioner or has repeatedly failed to comply with the requirements of any act administered by the Commissioner.

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See notes on AMENDMENT OF INQUIRY PROVISIONS.

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The International Telecommunication Union ("ITU"), an agency of the United Nations, has been invited to hold its "Africa Telecom 2001" exhibition of telecommunication equipment in South Africa. An international precedent exists obliging host countries to provide relief from tax to the ITU. In terms of the amendment introduced by this clause the supply of any goods or services by the ITU in connection with "Africa Telecom 2001" will be exempt from value-added tax. The ITU will thus not have to register as a vendor for value-added tax purposes. Relief for value-added tax incurred by the ITU will be granted in terms of section 68 of the Value-Added Tax Act, 1991, which deals with tax relief to diplomatic missions.

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These amendments are consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943) and the promulgation of the Long-term Insurance Act, 1998 (Act No. 52 of 1998).

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Amendment of Tax on Retirement Funds Act, 1996, to include foreign dividends in the determination of the income of any untaxed policyholder fund or any retirement fund.

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These amendments are consequential upon the repeal of the Insurance Act, 1943 (Act No. 27 of 1943) and the promulgation of the Long-term Insurance Act, 1998 (Act No. 52 of 1998).

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See notes on AMENDMENT OF INQUIRY PROVISIONS.

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This provisions makes provision for the exemption from income tax of the receipts and accruals of the Umsobomvu Fund.

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See notes on WITHDRAWAL OF TAX EXEMPTION OF ESKOM.

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See notes to PUBLIC BENEFIT ORGANISATIONS.

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This amendment is consequential upon the amendment of section 4 of the Skills Development Levies Act, 1999, by section 112 of the Revenue Laws Amendment Act, 1998 (Act no. 53 of 1998).

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Section 13 of the Skills Development Levies Act, 1999, currently provides that the provisions of the Income Tax Act, 1962, relating to representative taxpayers as contained in the Fourth Schedule to the Income Tax Act apply for purposes of the Skills Development Levies Act, 1999. It is proposed that this section be amended to only refer to the provisions relating to representative taxpayers.

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This clause provides the short title and commencement date of the Bill.

The following bodies were consulted on the draft legislation:

ACCOUNTING FORUM

AFRIKAANSE HANDELSINSTITUUT (AHI)

AIRLINES ASSOCIATION OF SOUTHERN AFRICA (AASA)

ASSOCIATION FOR THE ADVANCEMENT OF BLACK ACCOUNTANTS OF SOUTH AFRICA (ABASA)

ASSOCIATION OF LAW SOCIETIES (ALS)

ASSOCIATION OF UNIT TRUSTS (AUTSA)

BANKING COUNCIL

BAPTIST UNION

COMMERCIAL AND FINANCIAL ACCOUNTANTS (CFA)

COMMUNITY CHEST

COSATU

DEPARTMENT OF FINANCE

DEPARTMENT OF WELFARE

DIAKONIA COUNCIL OF CHURCHES

ESKOM

FINANCIAL AND FISCAL COMMISSION (FFC)

INSTITUTE OF RETIREMENT FUNDS (IRF)

JOHANNESBURG STOCK EXCHANGE (JSE)

LIFE OFFICES ASSOCIATION (LOA)

NAFCOC

NATIONAL BUSINESS INITIATIVE

NEDLAC

NON-PROFIT PARTNERSHIP

SOUTH AFRICAN CATHOLIC BISHOP’S CONFERENCE

SOUTH AFRICAN CHAMBER OF BUSINESS (SACOB)

SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS (SAICA)

SOUTH AFRICAN RUGBY AND FOOTBALL UNION (SARFU)

TAX ADVISORY COMMITTEE (TAC)

USAID

VATCOM