2022 Draft Rates, Revenue & Tax Bills: National Treasury & SARS briefing

Meeting report

National Treasury briefing

Mr Ismail Momoniat, Acting Deputy Director-General, National Treasury, said that the Rates Bill is published on Budget Day after the Minister of Finance’s announcements, and then again on 29 July to solicit comments. What had happened concerning the Rates Bill between these two dates was that global affairs had impacted oil and fuel prices, and a fuel levy was announced that led to changes in the Bill. Due to constitutional requirements, the draft tax bills were split into two separate bills. One was the money bills in section 77 of the Constitution dealing with national taxes, levies, duties and surcharges -- the draft Rates Bill, the draft Revenue Laws Amendment Bill and the draft Taxation Laws Amendment Bill (TLAB). The other was an ordinary bill in section 75 of the Constitution, dealing with tax administration issues -- the draft Tax Administration Laws Amendment Bill (TALAB). The draft tax bills had all been published for public comment on 29 July 2022

Mr Chris Axelson, Chief Director: Economic Tax Analysis, National Treasury, said that due to high fuel prices, temporary reductions in the general fuel levy had been introduced on 31 March, which included a two-month reduction in the general fuel levy of R1.50 per litre from 6 April, reducing the levy by 40 per cent, at a fiscal cost of around R6 billion. Additional measures included the removal of the demand side management levy (DSML) of 10 c/l for 95 unleaded petrol (ULP) for the inland market, a reduction in the basic fuel price (BFP) of 3 c/l, and the introduction of a price cap (maximum price) for 93 ULP. The increase in the health promotion levy was delayed for one year. Consultations would begin after the release of a discussion paper on extending the levy to 100% fruit juices and lowering the 4g per 100ml threshold.

Two-pot retirement system

Ms Alvina Thela, Director: Retirement Savings, National Treasury, spoke on the two-pot retirement system. She said the South African retirement fund regime had been undergoing fundamental reform since 2012. Significant progress had been made. This included the harmonisation of the tax treatment of contributions to funds, which was implemented with effect from 1 March 2016, and the preservation of provident funds at retirement through annuitisation, effective from 1 March 2021.

A new retirement fund regime was proposed that aimed to address concerns regarding the current design of the retirement system -- a “two-pot” retirement system that includes a “savings pot” and a “retirement pot”. The two-pot retirement system would retain the current principle of EET, i.e., exempting contributions, growth, taxing withdrawals and benefits. Members of retirement funds would still receive a deduction on contributions up to the lower of 27.5% of gross remuneration, or R350 000 per tax year. There was no seeding finance available in the “savings pot”. Amounts contributed to the “savings pot” could be accessed, but individuals could have only one withdrawal during any 12-month period from the “savings pot”. The minimum withdrawal amount from the “savings pot” was R2 000.

She also explained that not less than 2/3 of the total contribution could go to the “retirement pot”. All contributions not allocated to the “savings pot” would go to the “retirement pot”. Amounts contributed to the “retirement pot” could not be accessed before retirement date. At retirement date, the total amount from the “retirement pot” must be paid as an annuity (including a living annuity).

There was also a “vested pot,” where all contributions and growth (i.e. retirement interest) prior to the implementation date of the two-pot retirement system would have to be valued at the date immediately prior to the implementation to enable vesting of the right. This amount would be housed in the “vested pot”. As such, this implied that the ‘vested pot” would consist of the total retirement interest in the fund that existed immediately prior to the implementation of the two-pot retirement system.

Mr Momoniat added a few points to the discussion on the two-pot system. There was a lot of media focus on this. What they were trying to achieve was more preservation. South Africans do not save much currently. There was a gap in the system, wherein people had access to all their savings when they retired. Treasury was trying to build asset wealth for people who were working. It is understood that sometimes people encountered emergencies, hence the creation of the savings pot, though it encouraged them to save the money in the savings pot. The retirement system was so linked to the tax system that they had to create different pots through the tax system, and certain incentives were there through the system tax to get people to continue to preserve.  Once this basic architecture was finalised, it would be through normal pension legislation, looking at how they could improve the incentive structure to encourage people to save for longer periods. They had seen a lot of harmony between provident and pension funds, but what they wanted to do was to get a system of mandatory contribution. They would make some of the statements they put out available to Members. They had to make many judgment calls on issues relating to the savings systems.

Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, explained that the Act makes a special dispensation for variable remuneration and makes provision for the deferral of the taxation of variable remuneration to the date when the amount is received by the employee, as opposed to when it accrues to the employee. This was limited to variable remuneration as defined in the tax legislation.

Ms Nomvula Masehla, Director: Personal Income Tax (PIT) and Savings, National Treasury, spoke on reviewing the transfer of total interest in a retirement fund. She explained that currently, as the legislation stands, the Act makes provisions for members of retirement funds to transfer their retirement interest from one retirement fund to another. These transfers were subject to the following conditions -- if the individual was transferring to a similar type of retirement fund, or from a less restrictive to a more restrictive retirement fund; or, in the case of retirement annuity funds, if the total interest in the transferor fund was transferred.

General business taxes

Ms Mputa stepped in to discuss general business taxes concerning the draft TLAB. She explained the reason for clarifying the definition of ‘contributed tax capital’ under clause 41 of the draft TLAB: section 1 of the Income Tax Act. In the 2021 Budget Review, government announced proposed changes to the definition of Contributed Tax Capital (CTC) aimed at limiting possible exploitation of the provisions dealing with CTC. As such, in the 2022 Draft TLAB, it was proposed that changes be made in the proviso to the definition of “contributed tax capital” in section 1 of the Act, to allow for targeted transactions to certain holders of shares within the same class of shares to which the transfer was actually made, instead of a specific list of corporate actions that were exempt from the proposed provisions. She stressed that this proposal was made after consultation with the affected stakeholders.

On refining the reversal of the nil base cost rules applicable to intra-group transactions (clause 16 of the draft TLAB: section 45 of the Income Tax Act), she said that South Africa currently did not have intra-group transaction rules, but there were sections dealing with intra-group transfers whereby there was deferral of tax, and this followed an amendment made in 2021. In 2021, amendments were made to the intra-group transactions rules in the corporate reorganisation provisions, to clarify the application of the reversal of the nil base cost rules in instances where a group company acquires an asset in terms of a tax-deferred intra-group transaction, and within 18 months the acquirer of an asset disposes of that asset, and that triggers the tax deferral benefit in respect of the asset disposed of. Seeing that South Africa did not have intra-group taxation rules, there were normally anti-avoidance measures aimed to limit this provision's expectation.

She handed over to Ms Lerato Ralekwa, Director: Business Tax, National Treasury, who was a specialist in this regard.

Ms Ralekwa said there had been changes to the nil base cost rule. This rule essentially sought to lock a person who had benefited from the section 45 deferral rules into the rules by removing the tax attributes from the asset, being the preference shares or the debt that they had used to acquire an asset. They were saying that one was going to have to retain that debt or the preference shares, because if one got rid of them, it was going to be expensive to do so.

Another amendment was a follow up from last year’s one. When one ceased to form part of the same group of companies, there was a claw back penalty that served as another lock-in mechanism that they could use to ensure that the 45 rules were not abused. What they did last year was that when one ceased to form part of a group, one got one's base cost again, so they reversed the nil base cost rule if one suffered that penalty should one cease to be part of the same group of companies, and one was the transfer and the transferee. They were now adding the relationship of transferee and the controlling company in relation of transferor. This involved a shareholder that was being put in the mix, because that also triggered a de-grouping provision.

Ms Ralekwa also spoke about the rule that triggered recoupment under the debt forgiveness rules. She explained that a set of debt forgiveness rules aimed at laying out the tax treatment for debt forgiveness. These rules came into play when debts were waived or forgiven. Under the rules, they had recoupment that was triggered when a debt was forgiven subsequent to one having been advanced that debt and used it to acquire an asset. It was not written in a way that covered all instances in the subsequent transactions of the forgiveness where it could have a recoupment. There were instances where one could sell an asset and did not get a recoupment, and actually suffer a loss, and that instance was not covered. It was intended that when one's debt was forgiven, one also needed to look at whether there was an element of recoupment in that forgiven debt, and then one would also include it in one's income. This in essence tidied up the debt forgiveness rules in respect of recoupments.

She spoke on the debtor’s allowance provisions to limit the impact on lay-by arrangements under section 24 of the Income Tax Act. In terms of this provision, the whole of the amount due in terms of the agreement was deemed to have accrued to the taxpayer on the day on which the agreement was entered into and included in the taxpayer’s income upfront.  The provision aimed to correct itself, in that one would then be taxed on a cash basis and that deduction would be reversed in the next year of assessment.

Financial institutions and products

Ms Mputa spoke about the draft TLAB concerning financial institutions and products. She said National Treasury was notified that the international financial reporting standards were changing from International Financial Reporting Standard 4 (IFRS 4) to IFRS 17. The change in these standards would have an impact on the manner in which insurers were reporting their taxable income. To minimise this impact, National Treasury had to make some transitional measures in the legislation. This was one of the proposals where they had technical discussions with the affected stakeholders immediately after the budget. They had included only insurers because historically, when there was a change in reporting standards, it mostly affected insurers. They had seen that after they had released the draft bill for public comment, some taxpayers had complained and stated that they wanted these transitional measures to apply to them too. Such comments were to be expected during public hearings. They had meetings with short-term and long-term insurers after the budget. During public consultations, they had been told that the impact would be minimal for short-term insurers, but would be sizeable for long-term insurers. However, this depended on individual insurers, and as such, they had made changes to the legislation. They had taken their comments and gone back to make broader changes that applied to everyone. Therefore, the following changes were proposed to be made to the Act: aligning the current definitions and terminology of IFRS 4 to IFRS 17, and introducing transitional tax measures, with a phasing-in period and a phasing-in amount.

Referring to the draft TLAB international tax issues and the treatment of amounts from hybrid equity instruments deemed to be income under Controlled Foreign Company (CFC) rules, she said the rules contained an exclusion applicable to a payer and payee for intra-CFC interest, royalties, rental income, insurance premiums or income of a similar nature, provided that both the payer and payee were part of the same group of companies. An important part of the CFC legislation was tainted income, which was more like passive income. The passive income was taxed because, in terms of the international tax principles, they saw no reason to go and establish a foreign subsidiary, where one would be investing in passive income. The rationale was that one could be investing in passive income while one was in South Africa, so the passive income of the CFC was regarded as tainted income and was taxed immediately. However, there was an exclusion if the income was paid by both the payer and payee who were part of the same group of companies.

Tax incentives

Ms Hayley Erasmus, Director: Corporate Income Taxes, National Treasury, described the tax incentives part of the draft TLAB, and said that these were consequential amendments. They had an assessed loss restriction rule that had a weird interaction with their current mining legislation, so they proposed to restrict the use of assessed losses carried forward as part of the corporate income tax package to broaden the tax base and reduce the corporate income tax rate. Similar difficulties were experienced with interest limitation rules. These rules were strengthened regarding persons not subject to tax as part of the corporate income tax packet. It had come to the government’s attention that there was an anomaly in the interaction between the application of the interest limitation rules in section 23M of the Act and the current capital expenditure regime applicable to mining operations in section 36 of the Act. To address this anomaly, it was proposed that clarification be made in section 23M of the Act, by inserting a provision stating that the interest limitation rules would not be applied to limit the interest expense of non-producing mining operations that formed part of capital expenditure of such mining operations, in terms of section 36 of the Act.

Carbon tax

Ms Sharlin Hemraj, Director: Economic Tax Analysis, National Treasury, spoke on the carbon tax. She broadly explained that the carbon tax proposals that had been in the 2022 budget were framed in the context of the outcomes of the recent 26th meeting of the Conference of Parties (COP26) under the United Nations Framework Convention on Climate Change (UNFCCC).  They had put forward their second and third nationally determined contributions (NDCs) at the meeting, which required a peaking of their greenhouse gas emissions in 2025 in the range of 398 to 510 megatons (Mt), and a sharp decline in emissions from 2026 onwards in the range of 350 to 420Mt.

One of the climate policies to help achieve the NDC commitments included the National Climate Change Bill, which National Treasury was in the process of enacting. This bill was introduced in the National Assembly in February 2022 and was published for public consultation. The Department of Environmental Affairs (DEA) provides sector targets, carbon budgets to companies, and requirements for companies to develop mitigation plans and set out how they plan to reduce their emissions.

She also said that the electricity price neutrality and energy efficiency savings tax incentive had been extended. Under this commitment, electricity generators as taxpayers could basically offset the payment of their electricity generation levy against their carbon tax liability, and could offset the cost of any additional purchases of renewable electricity against their tax liability up to December 2025. The energy efficiency savings tax incentive was introduced in November 2013, and was extended by three years to align with the first phase of the carbon tax, but had been further extended by another three years to assist companies with the transition

Customs and Excise Tax

Mr Mpho Legote, Director: VAT, Excise Duties and Subnational Taxes, National Treasury, spoke on the Customs and Excise Act regarding vaping. The government intended to tax electronic nicotine and non-nicotine delivery systems (i.e. vaping). This intention had been made in the 2019 budget, and subsequently in the 2020budget due to the growing evidence that these products were not harmless. The World Health Organisation (WHO) has urged countries to ensure that tobacco control laws and regulations are comprehensive enough to regulate all forms of novel and emerging nicotine and tobacco products.

Withholding tax

Mr Franz Tomasek, Head: Legislative Policy Tax, Customs and Excise, South African Revenue Service (SARS), spoke on the Administrative Act and the refunds of dividends tax by SARS to regulated intermediaries (Clause 4 of the draft TALAB; section 64M of the Income Tax Act). This related to the refund of withholding tax under circumstances where the person who received the withholding tax did not provide a certificate that indicated that they were either exempt from the withholding tax, or they were subject to reduced withholding rates. The current situation saw them needing a refund because they were late, and the tax was withheld from them. The way that worked was that one would put the certificate in and claim the tax from the person who withheld it. The idea was originally that a regulated intermediary may have a large client base, so they would be able to refund this amount from other withholdings that they had collected quickly. Unfortunately, a situation had come to light where they may be a large shareholder, and other shareholders were relatively small, which made it difficult to refund this tax within a reasonable period, so what was being proposed here was that they switch to a model that was used when it was a company that did the withholding. The regulated intermediary would be permitted to recover refundable dividends tax from SARS in instances where the refundable amount exceeded the dividends tax withheld during a period of at least one year after the amount became refundable.

There had been debate about what details were required in an invoice for purposes of the customs phase, particularly when dealing with goods where there were valuation challenges. Amendments were proposed to clarify the requirements for invoices concerning goods imported or exported. An invoice supporting an entry of goods must always reflect the information that was required to be able to make a valid entry of the relevant goods, but the Commissioner may prescribe additional particulars, depending on the circumstances.

Certain statutory recognised controlling bodies were being removed (clause 27 of the draft TALAB: section 240A of the Tax Administration Act). He explained that there was the concept of a registered tax practitioner who was registered with SARS and a recognised controlling body. Two kinds of controlling bodies by statute were the Independent Regulatory Board for Auditors (IRBA) and the Legal Practice Council.  The IRBA had requested that it be removed as a legislatively recognised controlling body in the Tax Administration Act. This request was mainly due to the recent amendments to the Auditing Profession Act, which requires that individuals registered with IRBA now also have to be registered with a professional body accredited by the IRBA.

Proposals in Budget review

Ms Mputa wrapped up the briefing by discussing the proposals included in the 2022 budget review but not in the 2022 draft TLAB. Amendments were proposed in the TLAB in 2021 to clarify that the use of collateral arrangements for purposes other than subsequent collateral arrangements or proposed limited regulated transactions was against the policy rationale for the introduction of these provisions, and could result in the avoidance of securities transfer tax and capital gains tax. The effective date for the proposed amendments had been 1 January 2022. However, after reviewing the public comments on the bill, the government decided to postpone the effective date for these amendments to 1 January 2023 to give both National Treasury and the affected stakeholders more time to consider the impact of the proposed amendments.

Discussion

Dr D George (DA) referred to retirement reform, and said that if one looked at the vested pot aspect, the system looked as if it was a three-pot system, and not a two-pot system. The retirement reform made provision for withdrawing a portion of the savings pot. What happened when one drew money from a pension fund was that one paid tax on that money, it was removed from the fund, and one could not enjoy any growth on it in the future because it had been withdrawn. Why could there not be a provision of a loan facility on a fund? He had raised this matter before through a private member’s bill, but that bill was fundamentally misunderstood -- it was somehow thought that it would be a withdrawal from the fund, but it was not. He did not understand why there could not be a provision for a loan facility in the fund that permits the member to utilise a portion of the fund as a surety for a loan. It was not a withdrawal. The loan was then given to the member, which would be determined by affordability, the National Credit Act, the rules of the fund, etc. The member could then pay it back. The money would remain invested in the fund, and the member would benefit from this investment. The member would pay the loan back on soft terms because it was 100% backed by the surety on the fund. There was no reason why that facility could not be there. It would not mean that everyone would default or be put into unaffordable debt, as the National Credit Act would still apply. It would mean that members would be able to utilise their own assets as surety for a loan that they paid back. He could not see why a facility like that could not be included in the current reform package on the table. Other than that, it was good to see progress on this matter.

Ms P Abraham (ANC) said it was empowering to hear from Ms Yanga and her team from time to time. She referred to the 5% that companies could access by way of tax relief, and wanted to check whether Treasury knew that companies were accessing the 5%, and at what rate. Were companies aware that this was an advantage they could access if they complied?

The Chairperson said that more than two million people were in financial distress during Covid-19, and there had been talks of members of various pension schemes having access to their pension savings and withdrawing a certain portion. Was this catered for here? There was a statement about retirement reform and draft legislation for the two-pot system. There had been discussions since 2020 about members having direct access to their pension funds and withdrawing a certain portion -- did this retirement reform cater for that? The Minister had also mentioned this issue in his budget speech, as this was a serious issue for people in financial distress.

Treasury's response

Mr Momoniat said that with private Members' bills, National Treasury was trying to signal that there was a lot of abuse when members had been borrowing, and how the money was treated by funds had an impact. This tool may have its positives, but there was a lot of anecdotal evidence about the different funds of abuse. The percentage had been reduced under regulation 28 going forward. The mechanism was something that must be reviewed. It was felt that the mechanism to withdraw from one pot was a better option on the whole. People did withdraw, but they at least preserve two thirds of their funds. No one knew exactly, but they hoped this measure would lead to more preservation, and not less preservation. They used the withdrawal tax almost as a disincentive.

When one looked at pensions, a classic example of behavioural theory was how to nudge people but not force them. It was about providing an incentive. For all those reasons, Treasury certainly did not support expanding on the current loans for retirement funds. He was not saying that anyone was 100% right or wrong on this. It was a judgment call, but they felt this system was better. It too would have its pros and cons, but the bottom line was that one needed to push most people to save for their retirement funds, otherwise they simply would not. That judgment call that the National Treasury made was that this system should yield higher rates of preservation. More mandatory contributions and auto enrolment would get more people into the net. No one way was perfect -- there were other mechanisms. He would be happy to discuss the pros and cons with Dr George. They would need this withdrawal part, even if there was a loan system. It looked like other countries were expanding on to this two-pot system. Dr George was correct in stating that it looked as if there was a third pot, with all these vested amounts. They were not forcing people -- they were accepting their rights and then preserving them.

Regarding the 5% tax relief, he replied that he thought it was related to the carbon tax, and it had to be coordinated with the Department of Environment, Forestry & Fisheries (DEFF) going forward. Treasury was aware of it. There was a company to which the carbon tax applied.

Ms Hemraj added to this by stating that there were 370 licensed entities for purposes of the carbon tax with SARS, and 85% of the entities were tax compliant. Overall, they had collected just over R2 billion from carbon tax revenue since its introduction. That indicated that a large proportion of the tax via allowances had been claimed under the carbon tax, including the carbon budget allowance. They could say that companies were aware of the carbon budget allowance. There had been extensive engagement with the DEFF on the carbon budgeting system. There was a process between the DEFF and SARS to ensure that companies got the required documentation to claim the 5% allowance.

Mr Momoniat thanked Ms Hemraj for her response, and correcting him over the number of companies. The companies knew the tax system that applied to them quite well. He had noticed that there was an article from one of the big emitters in South Africa, saying that there was no certainty on particular disallowances. Climate change had generally brought uncertainty to the whole world. There was a need to take steps to reduce greenhouse gas emissions and achieve the maximum 1.5 degrees Celsius. The measures the world takes to limit the effects of climate change would have to be much stronger if they did not succeed. The carbon tax was going to be higher going forward, should companies delay in doing something about it. They continually engage with companies to see how they could facilitate green ambassadors. Companies were aware of the carbon tax, and most oppose it.

Referring to the pension fund access issue raised by the Chairperson, Mr Momoniat replied that this was a measure that had emerged from the 2020 discussions. It was a very complex situation, because one had to change the law to allow this withdrawal. People who resigned could access this measure, but they did not want people to quit to access those funds. This measure was a direct response to that. Many concerns had been dealt with, and a lot of engagement had taken place, leading to this measure which would help people should there be a future crisis. There were concerns about liquidity problems. Many restraints had been put in place to deal with the liquidity problems for people not to cash all their money in. He thought they had a model that could work and would tweak it as they go. They were really looking forward to the comments from the stakeholders on the proposal.

The Chairperson said that engagement would continue on the above matter.

The Chairperson thanked the Committee, the National Treasury’s delegation and everyone present at the meeting.

The meeting was adjourned.