SARS Preliminary response to submission on Capital Gains Tax

Meeting report

FINANCE PORTFOLIO & SELECT COMMITTEE: JOINT SITTING
13 February 2001
TAXATION LAWS AMENDMENT BILL: SARS PRESENTATION

Relevant document:
SARS preliminary response to the representations made to the Finance Portfolio & Select Committees on the proposed introduction of Capital Gains Tax

Chairpersons: Ms B Hogan (Portfolio Committee); Ms Q Mahlangu (Select Committee)

SUMMARY
The SARS presented a concise, detailed preliminary response to the submissions made so far regarding the introduction of the Capital Gains Tax. The presentation document sets out clearly why some of the proposed input to amend the Taxation Laws Amendment Bill is feasible and why some is not. Much of the discussion dealt with technicalities that had already cropped up in previous meetings. The ensuing discussion thus focussed mainly on issues of clarification.

MINUTES
Mr Kosie Louw (SARS) made a presentation to the Portfolio and Select Committees on their responses to the public hearings. For detail on the presentation please refer to the document.

Discussion
Ms Fubbs (ANC, Gauteng) asked, with respect to primary residences, what happens in cases of polygamous marriages where each wife has a house. Would each house be regarded as a primary residence for tax purposes?
She also asked what happens if a person has more than one residence because his business requires him to travel a great deal and to stay for indefinite periods in a various cities.
Mr Louw (SARS) stated that in order for a residence to qualify as a primary residence two conditions must be fulfilled. First, it must be used by the taxpayer and second, it must be used as a main residence. He made the point that polygamous marriages are now included in the Bill and as long as these requirements above are met, the individual is entitled to the exemption.

Mr Booi (ANC) noted that an asset is regarded as a personal asset if it is acquired by a person for his "use and enjoyment". How does one measure "use and enjoyment"? Mr Booi's concern was that this might be open to abuse.
Mr Louw stated that the asset must primarily be used for consumption purposes. He added that the term "use and enjoyment" is used as a matter of clarity.

Mr Andrew (DP) referred to the presentation document as he asked the following questions:
(i) Relating to partnerships (Pg 10) he asked when do SARS envisage making the
changes that they refer to.
(ii) On the issue of emigration (Pg 9) he asked what about blocked rands and
whether an exemption should be allowed in this regard.
(iii) Mr Andrew asked for clarity on wrap funds (Pg 8) especially from an investors
point of view. Specifically when the tax is to be paid and by whom.
(iv) He felt that foreign insurance policies (Pg 6) should entitle a person to claim a
deduction because of the depreciating value of money.
(v) Mr Andrew was concerned over the valuation of intangible property (Pg 12&13)
prior to the valuation date. He felt that SARS was punishing the honest taxpayer.
(vi) He asked why controlling interest of listed shares (Pg 16) is regarded as being
50% or more. Mr Andrew stressed that in other parts of our law controlling interest does not necessarily have to be as high as 50%.
(vii) Referring to foreign prizes (Pg 21), he asked how could SARS justify taxing
foreign winnings if they do not allow foreign losses. He stated that he does not
see the logic.

Mr Louw gave the following responses:
(i) Normal common law rules apply to partnerships. These in turn are applied in the
Income Tax Act. Mr Louw stated that in most cases large partnerships hardly ever use common law principles. He therefore stated that they need to adjust legislation to refine the rules. Mr Louw proposed to firstly offer a practice note and thereafter to draft appropriate legislation.
(ii) Mr Louw stated that adjustments would be made to legislation but that blocked
rands are in any case excluded and therefore do not fall in the tax net.
Mr Andrew reacted that blocked rands are not in rand currency but are assets in rand value.
Mr Louw's response was that if this is the case normal rules apply. The issue was whether SARS retain taxing rights over the asset and whether they have jurisdiction.
(iii) Wrap funds are not to be seen as entities on their own. It is an underlying part of unit trusts. Each time a wrap fund manager makes adjustments a disposal takes place and the tax incidence falls on the unit holder.
Mr Andrew stated that so many transactions take place on a daily basis and asked how they are reported. He added that circumstances might necessitate an investor to request his wrap fund manager to liquidate part of his investment to pay the CGT. Is this not harsh?
Mr Tomasek (SARS) responded that big investors normally demand reports on a monthly basis. Mr Engel (National Treasury) stated that cash flow problems might require an investor to liquidate some of his investments. He added that this is a common practice and not only applies to wrap funds.
(iv) Mr Louw stated that the full premium is not regarded as capital. He stressed that there is no justification for saying that the person is entitled to a deduction. Once the policy is cashed in at the end, only then may the premiums be deducted. Mr Louw pointed out the fact that the taxing only takes place at the end of the transaction is in itself a benefit.
(v) Mr Louw explained that previously SARS had disregarded all losses but now they narrowed it down to transactions that are tainted.
(vi) Controlling interests percentages vary in company law. They range from 50%+1 to 75%. Mr Louw felt that it is administratively difficult to put a % on controlling interest. Where does one draw the line? Mr Tomasek added that it is not always clear where control falls.
(v) Mr Louw pointed out that to allow losses would create problems from an administrative point of view.

Mr Durr (ACDP, Western Cape) asked the following questions:
(i) Why is the cost of a valuation not regarded as a deductable cost? Additionally, must an asset be valued even if it is not to be disposed of.
(ii) Relating to Land Bank valuations, is there a probability that SARS would take the cascading effect of property into consideration.
(iii) When valuing farming equipment, will the depreciated value or the market value be taken into consideration?
(iv) Mr Durr felt that emigration needs to be defined.
(v) Could SARS elaborate on the cascading effect of moving an asset through a
company.
(vi) Should the law books be cluttered with issues like winnings from foreign lotteries. They very rarely if ever occur.

Mr Louw's responses:
(i) SARS are not forcing people to value their assets. Alternatives do exist. Mr Louw explained that in order for the cost of a valuation to be a deductable expense it must be incurred in the process of generating income.
(ii) Mr Tomasek stated that it is an issue to be discussed with Agro SA.
(iv) Mr Louw said that there is no need to define emigration. SARS merely deals with residence and non-residence principles.
Mr Louw stated that the issues in question (v) and (vi) are outside his realm of expertise and that he would refer them to the National Treasury.

Due to time constraints the Chair asked the National Treasury if they wanted to make their presentation or would they prefer it to be postponed until Friday, 16 February 2001. Mr Engel (National Treasury) agreed to the postponement, as the issues to be dealt with would be complex.

The meeting was adjourned.