Adjustments Appropriation Bill, Securities Services Bill, Financial Services Ombud Schemes & Revenue Laws Amendment Bills: adopt

Meeting report

FINANCE SELECT COMMITTEE
12 November 2004
ADJUSTMENTS APPROPRIATION BILL, SECURITIES SERVICES BILL, FINANCIAL SERVICES OMBUD SCHEMES AND REVENUE LAWS AMENDMENT BILLS: ADOPTION

Chairperson: Mr T Ralane (ANC; Free State)

Documents handed out
Adjustments Appropriation Bill [B21-2004]
Securities Services Bill [B19-04]
Financial Services Ombud Schemes Bill [B20B - 2004]
Revenue Laws Amendment Bill [B24 - 2004]
Second Revenue Laws Amendment Bill [B25 - 2004]
Table of Equivalent Clauses from Revenue Laws Amendment Bill
PowerPoint presentation on Adjustments Appropriation Bill
PowerPoint presentation on Financial Services Ombud Schemes Bill (document awaited)
PowerPoint presentation on Securities Services Bill

SUMMARY
Representatives of the National Treasury briefed the Committee on the Adjustments Appropriation Bill. The criteria used when assessing unforeseen and unavoidable expenditure was detailed, and the items on this list were discussed. Other adjustments, including emergency drought relief, and the 2004/05 adjustments for the provinces were detailed. Self-financing expenditure and underspending and declared savings offset the additional expenditure. The Committee expressed particular concern at the possibility of rollovers, and the continued high indebtedness of Government Departments in respect of municipal fees. The Bill was adopted.

Representatives of the Financial Services Board briefed the Committee on the Securities Services Bill. The Bill would consolidate the Stock Exchange Control Act, 1985, the Financial Markets Control Act, 1989, the Custody and Administration of Securities Act, 1992 and the Insider Trading Act, 1998 repealing these Acts and adding new provisions. It was expected that the Bill would bring South Africa on par with international best practice. The Bill strove to maintain a healthy balance between investor protection and the enhancement of international competitiveness of securities services in the Republic and aimed to promote confidence and the maintenance of a stable securities market environment. The Bill was adopted.

Representatives of the Financial Services Board briefed the Committee on the Financial Services Ombud Schemes Bill. The history of the Bill was outlined with the characteristics of an ombud scheme, the objectives of the Bill, operational and institutional issues in the Bill and an overview of important sections of the Bill. The Bill was adopted.

SARS briefed the Committee on the Revenue Laws Amendment Bill and the Second Revenue Laws Amendment Bill. Proposed income tax amendments involved the broad-based employee share initiative, the executive equity scheme, hybrid financial instruments, taxation on sales based on contingent income as well as contingent share sales. There was also a proposal to allow Common Monetary Area (CMA) residents to fully participate in South African interest-bearing investments. Two sections addressed enhanced tax administration, providing for the registrations of tax practitioners and the introduction of advance rulings. The Bills were adopted.

MINUTES

Adjustments Appropriation Bill briefing
Mr Jaz Chaponda (Treasury Chief Director: Expenditure Planning) and Mr Neil Cole, Director of Budget Reform, presented the adjusted estimates of national expenditure on behalf of the National Treasury. The Adjustments Budget allowed for adjustments owing to significant economic and financial events affecting fiscal targets; unforeseeable and unavoidable expenditure; emergency situations (in terms of the Public Finance Management Act (PFMA) Section 16); expenditure already announced in the Budget Speech; shifting of funds between and within votes (in terms of Section 42); virement between main divisions within votes (in terms of Section 43) and rollover of unspent funds from the preceding financial year. The revised National Budget was shown.

The criteria used when assessing unforeseen and unavoidable expenditure was that the expenditure should not have been known at the time of budget preparation and that could not be financed from savings or reprioritisation. It did not include expenditure that, although known when finalising the estimates of expenditure, could not be accommodated within allocations, tariff adjustments and price increases or extensions of existing services and the creation of new services that were not unforeseen and unavoidable. These items included adjustments for municipal services and rates backlog, the pebble bed modular reactor (PBMR), land restitution, Correctional Services retention / rural allowances, integrity of the social grants system, restructuring of State forestry assets, ICASA VAT payment and Department of Public Works (DPW) prestige accommodation.

South Africa was ahead of other countries in terms of the technology for nuclear energy generation, and the Government was keenly aware of the energy deficit looming in the next ten to fifteen years. A PBMR company had been set up but had run into cash flow constraints. The company was in advanced discussions with external strategic partners, but funding had not yet been secured. The amount set aside for land restitution was unforeseen and unavoidable, since some claims were very complex and the actual payout time was uncertain. The adjustments in terms of Correctional Services addressed the changes around the social cluster, and were primarily for health professionals within Correctional Services. As Minister Manuel had indicated, the take-up of social grants had been very fast, and there was an adjustment to allow Social Development the opportunity to study the reason for this rapid growth.

The adjustment for the ICASA VAT payment would to go the Department of Communications to address an anomaly in the way in which grant transfers to public entities were handled. This anomaly had been addressed in the 2005 budget. The Department of Water Affairs and Forestry had expected the process of the restructuring of State forestry assets to have been more advanced, and had closed down its trading account. The revenue from the assets was no longer going to the Department but directly to the National Revenue Fund. This adjustment returned the funds to the Department.

Other adjustments included emergency drought relief of R430 million. This amount was not unforeseen, but the Minister of Finance had indicated that the Treasury was engaging with Departments in respect of actual need. The funds for the Department of Agriculture were primarily for fodder and watering holes, the funds for the Department of Local and Provincial Government were to be transferred to the affected municipalities, and the funds for the Department of Water Affairs and Forestry were for capital works projects in response to the drought. Further adjustments were an allocation of R92 million to the Department of Foreign Affairs in support of the Government's African agenda. This had been taken care of through savings on foreign exchange. An allocation of R150 million was made to the national Empowerment Fund subject to approval of plans by the respective Minister(s).

The 2004/05 adjustments for provinces showed provincial adjustments of R4.11 billion for unforeseen and unavoidable expenditure. This comprised R3.27 billion for shortfalls in social grants, mainly the disability grant, and R847 million for increased personnel costs. Seven Departments had indicated a total amount of R165.4 million in self-financing expenditure. These Departments were Foreign Affairs, Public Service Administration, Education, Correctional Services, Defence, Water Affairs and Forestry and Arts and Culture. These were instances where Departments attracted their own sources of revenue, such as the sale of munitions by the Department of Defence.

Four Departments, Defence, National Treasury, Statistics South Africa and Housing, had declared savings totalling R11 287 million. The savings by the Department of Defence arose largely from the stronger exchange rate. The Department of Housing had had a debt to a third party which it had been deemed suitable to transfer to National Treasury, so that allocated amount had been declared as a saving. The saving by Statistics South Africa related to the postponement of the 2006 census. The projected underspending and savings offset some of the increases, but the adjustments contributed to a slightly higher deficit of 3.2 per cent up from 3.1 per cent expected in February.

Discussion
Mr Z Kolweni (ANC, North West) asked for more information on own revenue and asked whether any targets were in place or whether each Department just came forward.

Mr Chikonda replied that there were no targets, as the amounts reflected good accounting practice and the revenue was very ad hoc.

Mr Cole said that the amounts given as self-financing represented the total of revenues less revenue charges. Departmental targets were reflected under Departmental Receipts in the Expenditure breakdown.

Mr Kolweni referred to the arrears backlog and suggested the reason was a lack of controls. He asked why Transnet had not been mentioned in the document.

Mr Chikonda replied that the budgeting process for public entities was slightly different, and Transnet fell under the Department of Transport. The Department of Transport had not come forward. Transnet was self-financing, and raised its own funds in the market.

Mr Kolweni asked if there was any timeframe for spending the allocations, as he was concerned at the high number of rollovers.

Mr Chikonda replied that last year, amounts had been allocated to the Departments of Social Development and Water Affairs and Forestry for drought relief, but owing to planning delays, the amount had been partly rolled over. In almost all instances this year, Departments had requested a large amount, and a lower amount had been recommended and approved for spending this year. There might be some rollover and, when this was assessed, the Treasury looked at the legitimacy of the request. If it was deemed unsuitable or due to mismanagement, the rollover would not be approved.

Mr B Mkhaliphi (ANC, Mpumalanga) asked whether better communication and co-operation between Departments could have avoided the unforeseen and unavoidable adjustments, specifically those for ICASA and the Department of Water Affairs and Forestry.

Mr Chikonda agreed that in some instances, better planning could have avoided some adjustments, but it was a Treasury judgement call. A lot of requests had been deemed not unforeseen and unavoidable.

Mr E Sogoni (ANC, Gauteng) expressed appreciation of the R815 million savings in state debt costs. He said that he would like to understand the backlog by the DPW on paying for services and rates, as this was a problem. The members had been visiting the country and municipalities were struggling to generate income while their own Departments were the culprits. To what extent would the R599 million allocated cover the debts to the municipalities and when would the DPW ensure that it paid for services. This was an issue of weakness in asset management.

Mr Chikonda replied that this was recognised as a challenge and various Departments were trying to resolve it. The 599 million was to abate the situation in the current financial year and this was why the adjustment fell under unforeseen and unavoidable expenditure. The slate could not be cleared through this process. The adjustment referred to those invoices that had fallen due and were unexpected at the time. There was still a large outstanding debt, but there was a lack of clarity on the actual figure. The Treasury was trying to mediate in this and this would probably become clear within the next six to eight months. The 2005 budget would put some money aside over the next three years, and the problem would be around for another two to three years, given its magnitude. He accepted that the municipalities were under pressure.

Mr Cole said that a meeting had been planned between the Department of Public Works and the affected municipalities in the next two weeks, to get an indication of the amounts owing. A plan would then be drafted to address the problem over the next Medium Term Expenditure Framework (MTEF) period.

Mr Sogoni said that the PFMA provided for rollovers and adjustments, but one province had had serious problems in funding and had indicated that it would be unable to provide certain services because of over expenditure. This really disadvantaged the people of that province. He asked whether the provinces or Departments that had overspent would be dealt with.

Mr Cole replied that rollovers were considered on the basis that funds could not be spent in the previous financial year. The funds would still be used for the original purpose. Where the Department no longer required the funds, it had to declare them as a saving, and they could then be used for other purposes as part of the adjustment process.

The Chair emphasised the importance of working jointly with other Committees and said that this should not be a once-off engagement.

Mr K Sinclair (NNP, Northern Cape) said that the R430 million allocated for drought relief was a countrywide package and asked for a provincial breakdown. The Northern Cape only received 2% of the budget, and 2% of this relief would not be sufficient.

Mr Chikonda replied that he was not able to give this breakdown as the Departments concerned had only recently got their allocations. They would now have to match the pressures in the provinces with the allocations. Information would be available through the individual line departments, especially in the Departments of Agriculture and Provincial and Local Government.

Mr Sinclair said that road infrastructure was deteriorating and there had been no real principle decision to address the problem.

Mr Chikonda replied that the pressure on roads and the maintenance backlog was part of Government's ongoing priorities and as such was not unforeseen and unavoidable. A substantial allocation for road infrastructure was planned for the 2005 budget.

Mr Sinclair asked about the National Treasury saving and said that if this was a pension fund saving, it was a serious problem for current members of the fund and should not be reflected as a saving.

Mr Cole replied that the savings from National Treasury reflected fewer claims received from medical aid and less spent on goods and services, and were not related to pensions.

The Chairperson read the report of the Committee adopting the Bill. The Bill was adopted.

Securities Services Bill briefing
Mr R Barrow and Mr N Muller of the Financial Services Board (FSB) presented the Bill. The Policy Board had reviewed the regulatory framework in 1998 and concluded that various elements were outdated and not compliant with international best practice. The FSB had established a drafting team in 1998 to look into the Securities Services.

The Bill would consolidate the Stock Exchange Control Act, 1985, the Financial Markets Control Act, 1989, the Custody and Administration of Securities Act, 1992 and the Insider Trading Act, 1998. The Bill repealed these Acts and added new provisions. South Africa was a member of the international body that set benchmarks for securities legislation. South Africa had gone through this process, and the standard of South African regulations was extremely high and essentially met the benchmarks, which was very good news. The Bill would apply to exchanges and their members, the Central Securities Depository (CSD) and its participants, clearing houses, persons trading in unlisted securities, and dealt with market abuse. It conferred the status of a self-regulatory organisation (SRO) on exchanges and CSDs.

Chapter 1: Preliminary Provisions
This chapter defined concepts common to the whole Bill, and included the objects of the Bill. These objects were to increase confidence in the South African financial markets, to promote protection of regulated persons and clients, to reduce systemic risk and to promote the international competitiveness of securities services in the Republic. It was particularly important that the objects of the Bill were included as these were referred to throughout the Bill. Chapter 1 also included the application of the Bill and prohibited activities.

Chapter 2: Regulation and Supervision of Securities Services
The functions of the Registrar and Deputy Registrar of Securities Services were defined, as well as the Financial Markets Advisory Board. The Board would advise the Minister or Registrar on matters relating to regulated persons and securities services.

Chapter 3: Exchanges
This Chapter included licensing and functions of an exchange, rules of the exchange, off market transactions in listed securities and their reporting within a period of 24 hours and the trading of unlisted securities. This was currently not within the jurisdiction of the FSB and there was a lot of fraud. There was now a provision for the Registrar to intervene and close down the business or prescribe conditions for trading, if a problem was reported.

Chapter 4: Custody and Administration of Securities
This Chapter provided for the licensing of CSDs and the renewal of that license, the acceptance of participants, the functions of a CSD and its participants, depository rules, the approval of nominees and uncertificated securities. At present, the only CSD in South Africa was STRATE Ltd.

Chapter 5: General Provisions Applicable to Self-Regulatory Organisations
An SRO was defined as an exchange or a CSD. The Chapter provided for the renewal of license, the amalgamation or demutualisation of SROs and the limitation on control of SROs. This provision was to prevent disreputable people from controlling an SRO thereby introducing systemic risks into the markets.

Chapter 6: Clearing House
Clearing houses were to be licensed, and the license renewed annually, if this function was not performed in-house by an exchange. Chapter 6 further provided for the amalgamation or transfer of a clearing house, where two or more clearing houses might amalgamate or merge with another house or a CSD.

Chapter 7: Code of Conduct
The Bill required the Registrar to prescribe a code of conduct, and prescribed basic principles for the Code. The Code was binding on authorised users, officers, employees and clients.

Chapter 8: Market Abuse
Chapter 8 dealt with insider trading and other market abuse practices. The scope had now been clarified for instances where trading was done through a trust. Defences in the current Act were clarified and limited, and defences were those available over and above common law defences. The onus was now on the defendant to prove them on a balance of probabilities. As in the case of insider trading, abuses would fall under the supervision of the Directorate of Market Abuse, formerly the Insider Trading Directorate. Criminal sanction and penalties had been substantially increased. Both civil and criminal sanctions could be imposed.

Chapter 9: General Provisions
The provisions relating to auditing and the powers of the registrar and the court were very similar to those previously in force. Chapter 9 included the establishment of an enforcement committee, which was an independent tribunal to consider various aspects of non-compliance with the legislation and able to impose administrative sanctions. It was anticipated that the enforcement committee would give the FSB more effective and expeditious enforcement powers. The remainder of the Chapter contained no change in principle.

Schedule
The Schedule detailed consequential amendments.

The FSB believed that the Bill would bring South African legislation on par with acceptable international practice, and believed that the Bill took cognisance of important developments in the local and foreign securities markets industry. The Bill would promote confidence, further encourage foreign investment and provide a healthy balance between protection and competition.

Discussion
The Chairperson remarked that it was very encouraging to see a law with teeth and that joint work had again been critical.

Mr M Robertson (ANC, Eastern Cape) asked for clarity on insider trading. How effective were the counter-measures and what monitoring was taking place?

Mr Barrow replied that the monitoring of insider trading was conducted essentially by the Exchanges, as it related primarily to shares on the JSE Securities Exchange. Monitoring was very thorough, and highly sophisticated stock watch programmes were used. The surveillance department had information on every account of every stockbroker. The FSB was essentially interested in the party giving the instructions. There had been a dramatic drop off in instances of insider trading, and South Africa's monitoring and follow-up were believed to be more thorough than those of the United Kingdom, United States of America and Tokyo.

Mr Robertson asked for clarity on price manipulation as opposed to price fixing.

Mr Barrow explained that price manipulation was a collusive practice between companies, and that fell under competition commission legislation.

Mr Sogoni referred to the provision that SROs could amalgamate and asked whether this was a requirement.

Mr Sinclair asked if the Bill also applied to derivatives.

Mr Barrow replied that the Bill did apply to derivatives, and that amalgamation was a question of choice. SAFEX had traded purely in derivatives and had been purchased by the JSE in a commercial transaction. The FSB did not seek to intervene or regulate amalgamations.

Mr Sogoni asked how many exchanges there were in South Africa, as one only ever heard about the Johannesburg Stock Exchange (JSE).

Mr Barrow replied that the other market was the Bond Market, and this had a significantly higher turnover than the JSE Securities Exchange. SAFEX was currently also separately licensed. The policy of the FSB was not to limit the number of exchanges, and licenses would be granted.

Mr Sogoni suggested that it would be tidier if all definitions were in one area of the Bill.

Mr Barrow replied that the definitions in Clause 72 were specific to that element and it had been considered appropriate to limit them.

Mr J Aulsebrook (KwaZulu-Natal) asked whether, when the Bill was passed, there would be a single stage commencement, and whether any timeframes were envisaged once the Bill had been passed.

Mr Barrow replied that the intent was that all provisions of the Bill would come into effect on the same day, hopefully next year. Subordinate legislation had already been prepared and hopefully the two dates would match.

Mr Sogoni asked what the Bill offered people who had previously had no access to the industry.

Mr Barrow replied that this was a difficult question to answer. The Bill would not change anything very dramatically. It had to be appreciated that capital requirements were set on the basis of the element of risk not on affordability. There had to be some buy-in. The base-line amount was R400 000, but if risk was taken, that risk was measured at the close of trade daily and there was a need for capital to cover the risk.

The Chairperson read the report of the Committee adopting the Bill. The Bill was adopted.

Financial Services Ombud Schemes Bill briefing
Mr G Anderson and Mr E Phiyege represented the FSB. Mr S Bautista represented the National Treasury.

Mr Anderson highlighted the main features of the Bill. At present, there were three voluntary schemes, the Long Term Insurance Ombud, the Short Term Insurance Ombud and the Banking Ombud. These would not be recognised under the Constitution as courts of law. The Bill aimed to create a mechanism for statutory recognition of the voluntary schemes and the determination of minimum standards required for recognition as an ombud. Provision was made for the requirement of an independent controlling body for each scheme (Clause 10(1)9b)) and the recognition of voluntary schemes (Clause 11). Provision was made for recourse by way of holistic, standardised mechanisms for client complaints with regard to the financial institutions or services in a procedurally fair, informal, economical, equitable and expeditious manner.

A statutory ombud was established in terms of Clause 14. This ombud dealt with all matters falling between the gaps where no ombud scheme was in place, whether statutory or voluntary (Clause 13(1)(c)) and might determine which scheme might exercise jurisdiction in respect of a client complaint (Clause 13(3)(b)). The Bill further provided for the establishment of Financial Services Ombud Schemes Council. This Council would be independent and directly accountable to the Minister of Finance (Clause 2). Members of the Council would be appointed by the Minister of Finance and might not be involved in the business of a financial institution or the provision of a financial service or product to clients (Clause 3(2)). Assistance for and the administrative work of the Council would be provided by the FSB (Clause 8(3)). The Council would approve applications for recognition of voluntary schemes and might suspend or withdraw such recognition (Clause 12). The Council should develop ad promote best practices for complaint resolution by recognised schemes and ensure independence and impartiality. The Council would further monitor the functioning of the scheme (Clause 8).

A demarcation of jurisdictions was provided for, with clarity on the jurisdictions of the two existing statutory ombud schemes, namely the Ombud for Financial Services Providers (FAIS Ombud) and the Pension Fund Adjudicator (Clause 13). The statutory ombud would be accommodated in the existing offices established for the FAIS ombud (Clause 14). The role of the statutory ombud was seen to be incremental. The FAIS Ombud would perform the functions of the statutory ombud under a different hat, as this would be both expedient and cost-effective. Existing voluntary schemes were required to obtain recognition within eighteen months, or to apply for exemption from recognition by the Council under certain conditions (Clause 18). The Council was obligated to promote co-operation and co-ordination of the activities of an ombud of a recognised scheme, the Adjudicator, the FAIS Ombud and the statutory ombud including in relation to informing and educating clients with regard to available resolution forums (Clause 8(1)(c)). Recognised schemes were required to provide for ways in which they would co-operate with the Council's functions of promoting the education of clients and co-ordinating the activities contemplated in section 8(1)(c) (Clause 10(1)(h)). In addition, the FSB's comprehensive consumer education initiative was aimed at promoting consumer awareness of available recourse mechanisms.

Discussion
Mr Kolweni remarked that the Bill was long overdue, and asked whether the ombud was a single person at the top of a structure, as the client base was very wide.

Mr Phiyege replied that the Bill dealt with ombud schemes. There were already voluntary schemes available and it was not the intention of the FSB to interfere. Where there was no voluntary scheme, a statutory ombud was proposed to fill the gaps. All of the other ombuds were able to look at other aspects, and if all else failed, the statutory ombud would be there. This was a complementary way of protecting the public.

Mr Kolweni asked what happened to those institutions that did not come forward voluntarily.

Mr Phiyege replied that, because it was of a voluntary nature, they would not be compelled to join, but if they did not join, they would fall under the jurisdiction of the statutory ombud and would thus still be accountable.

Mr Sinclair referred to the composition of the Council and asked who the other members would be. He asked for guidelines on who would be appointed to the Council. Expertise was needed but there was also a need to look at the interests of the fraternity. How would this be dealt with?

Mr Phiyege replied that there would be a Chairperson and a Deputy Chairperson and three to five other persons appointed by the Minister. It was essential to avoid a conflict of interests. The FSB was very aware of the requirement to ensure that every community should have a fair chance to participate, hence the requirement in the legislation for demographics and gender.

Mr Anderson said that this had been the subject of long debate in the Portfolio Committee on Finance. The Chairperson or Deputy Chairperson should always be present with at least three other members. The Council would typically be appointed for three years, and it was important that the duties of the members should not be too onerous.

Mr Sogoni said that the Bill did not appear to give existing voluntary schemes more power and asked whether institutions were obliged to join.

Mr Phiyege replied that the voluntary schemes were not given more power, but statutory recognition. He believed that this would assist consumers.

Mr Anderson said that the FSB believed that the voluntary schemes were doing very good work and the Bill recognised that. All indications were that these schemes would come forward and apply, so there was no dispute from the existing voluntary schemes. The Bill sought to standardise minimum standards applicable and to create a situation where an issue could be adjudicated by the statutory ombud.

The Chairperson read the report of the Committee adopting the Bill. The Bill was adopted.

Revenue Laws Amendment Bill
Mr F Tomasek (Assistant General Manager: Legislation) highlighted the main points in the Bill.

Insertion of sections 8B and 8C in Act 58 of 1962
Section 8B related to the broad-based employee share plan, and had clearly been inserted to assist lower-income employees. An incentive was provided for share ownership at the lower end of the market.

Section 8C related to executive share options. The current rules hinged on when the options were exercised. The new provisions used as a trigger the day the employer lifted the restrictions on disposal.

Amendment of section 8E of Act 58 of 1962, as inserted by section 6 of Act 70 of 1989 and amended by section 19 of Act 45 of 2003
Insertion of section 8F in Act 58 of 1962
Sections 8E and 8F dealt with hybrid instruments. These instruments were called debt but acted as shares, or vice versa. They were now effectively discouraged and were dealt with in the worst of both worlds.

Amendment of section 10 of Act 58 of 1962, as amended by section 8 of Act 90 of 1962, section 7 of Act 72 of 1963, section 8 of Act 90 of 1964, section 10 of Act 88 of 1985, section 11 of Act 55 of 1966, section 10 of Act 95 of 1967, section 8 of Act 76 of 1968, section 13 of Act 89 of 1969, section 9 of Act 52 of 1970, section 9 of Act 88 of 1971, section 7 of Act 90 of 1972, section 7 of Act 65 of 1973, section 10 of Act 85 of 1974, section 8 of Act 69 of 1975, section 9 of Act 103 of 1976, section 8 of At 113 of 1977, section 4 of Act 101 of 1978, section 7 of Act 104 of 1979, section 7 of Act 104 of 1980, section 8 of Act 96 of 1981, section 6 of Act 91 of 1982, section 9 of Act 94 of 1983, section 10 of Act 121 of 1984, section 6 of Act 96 of 1985, section 7 of Act 65 of 1986, section 3 of Act 108 of 1986, section 9 of Act 85 of 1987, section 7 of Act 90 of 1988, section 36 of Act 9 of 1989, section 7 of Act 70 of 1989, section 10 of Act 101 of 1990, section 12 of Act 129 of 1991, section 10 of Act 141 of 1992, section 7 of Act 113 of 1993, section 4 of Act 140 of 1993, section 9 of Act 21 of 1994, section 10 of Act 21 of 1995, section 8 of Act 36 of 1996, section 9 of Act 46 of 1996, section 10 of Act 28 of 1997, section 29 of Act 30 of 1998, section 18 of Act 53 of 1999, section 21 of Act 30 of 2000, section 13 of Act 59 of 2000, sections 9 and 78 of Act 19 of 2001, section 26 of Act 60 of 2001, section 13 of Act 30 of 2002, section 18 of Act 74 of 2002, section 36 of Act 12 of 2003, section 26 of Act 45 of 2003 and section 8 of Act 16 of 2004
This section provided for exemptions for persons investing in South Africa. Citizens of Swaziland and the Common Monetary Area had previously been excluded, and this provision removed that exclusion.

Insertion of section 20B in Act 58 of 1962
A very complex set of provisions was inserted. If a company was sold on an instalment basis, tax problems were created. A system had essentially been created whereby profits and costs would be recognised as and when they occurred.

Insertion of section 24B in Act 58 of 1962
This provision would now permit a company to pay for the purchase of an asset by issuing shares.

Amendment of section 24J of Act 58 of 1962, as inserted by section 21 of Act 21 of 1995 and amended by section 14 of Act 36 of 1996, section 19 of Act 28 of 1997 and section 27 of Act 53 of 1999
Section 24J had been amended to deal with circular cash flows. Where a circular cash flow occurred, it would be netted out.

Substitution of section 25B of Act 58 of 1962, as inserted by section 26 of Act 129 of 1991 and amended by section 22 of Act 141 of 1992, section 36 of Act 30 of 1998, section 32 of Act 59 of 2000 and section 14 of Act 19 of 2001
Many changes had been made in this Section, as anti-avoidance measures had been tightened up. In terms of the law, "income" was defined as the net of gross less exempt income. "Amount" was now used instead of "income", as people had been using offshore trusts to avoid taxation.

Insertion of section 35A in Act 58 of 1962
This Section had excited a fair amount of comment, and provided for the withholding of amounts from payments to non-resident sellers of immovable property. South Africa was permitted to tax the profits on the disposal of immovable property in South Africa, but if a non-resident left the country, the tax was lost. Provision had now been made for this money to be withheld. This applied only to properties in excess of R2 million, and an obligation had been imposed on the estate agent and conveyancer involved to assist the purchaser.

Amendment of section 64B of Act 58 of 1962, as inserted by section 34 of Act 113 of 1993 and amended by section 12 of Act 140 of 1993, section 24 of Act 21 of 1994, section 29 of Act 21 of 1995, section 21 of Act 36 of 1996, section 13 of Act 46 of 1996, section 25 of Act 28 of 1997, section 35 of Act 53 of 1999, section 39 of Act 30 of 2000, section 42 of Act 59 of 2000, section 18 of Act 5 of 2001, section 48 of Act 60 of 2001, section 25 of Act 30 of 2002, section 36 of Act 74 of 2002 and section 58 of Act 45 of 2003
Some large companies had tried to use the double taxation agreement provision that did not allow for taxation of companies with offshore members. The distinction had been clarified on the basis of whether or not the money had been taxed. If it had not been taxed, it would be subject to secondary tax on companies.

Amendment of section 103 of Act 58 of 1962, as amended by section 14 of Act 101 of 1978, section 37 of Act 121 of 1984, section 19 of Act 70 of 1989, section 29 of Act 36 of 1996, section 45 of Act 30 of 1998, section 52 of Act 59 of 2000 and section 33 of Act 5 of 2001
This provision related again to circular cash flows, and the swapping of dividends and interest.

Amendment of section 1 of Act 91 of 1964, as amended by section 1 of Act 95 of 1965, section 1 of Act 57 of 1996, section 1 of Act 195 of 1969, section 1 of Act 98 of 1970, section 1 of Act 71 of 1975, section 1 of Act 112 of 1977, section 1 of Act 110 of 1979, sections 1 and 15 of Act 98 of 1980, section 1 of Act 89 of 1984, section 1 of Act 84 of 1987, section 1 of Act 68 of 1989, section 1 of Act 59 of 1990, section 1 of Act 19 of 1994, section 57 of Act 30 of 1998, section 46 of Act 53 of 1999, section 58 of Act 30 of 2000, section 60 of Act 59 of 2000, section 113 of Act 60 of 2001 and section 131 of Act 45 of 2003
This amendment sought to recognise the new Southern African Customs Union (SACU) agreement and alight it with the prescription requirements.

Amendment of section 1 of Act 77 of 1968, as amended by section 16 of Act 103 of 1979, section 5 of Act 66 of 1973, section 7 of Act 88 of 1974, section 19 of Act 106 of 1980, section 3 of Act 118 of 1984, section 17 of Act 87 of 1988, section 36 of Act 9 of 1989, section 3 of Act 69 of 1989, section 5 of Act 136 of 1991, section 4 of Act 20 of 1994, section 16 of Act 27 of 1997, section 34 of Act 34 of 1997, section 77 of Act 30 of 1998, section 74 of Act 53 of 1999, section 40 of Act 5 of 2001, section 54 of Act 19 of 2001, section 141 of Act 60 of 2001, section 42 of Act 12 of 2003 and section 37 of Act 16 of 2004
Changes made to stamp duties were essentially to simplify and align them, and to create the concept of an e-stamp.

Amendment of section 9 of Act 77 of 1968, as amended by section 21 of Act 87 of 1988, section 5 of Act 20 of 1994 and section 142 of Act 60 of 2001
Insertion of section 9A in Act 77 of 1968
Insertion of section 9B in Act 77 of 1968
Interest, penalty and duty on evasion were aligned with other provisions in the legislation.

Amendment of Item 14 of Schedule 1 to Act 77 of 1968, as amended by section 19 of Act 114 of 1977 and section 7 of Act 95 of 1978
This amendment simplified the rate structure on lease agreements.

Amendment of section 1 of Act 89 of 1991, as amended by section 21 of Act 136 of 1991, paragraph 1 of Government notice 2695 of 8 November 1991, section 12 of Act 136 of 1992, section 1 of Act 61 of 1993, section 22 of Act 97 of 1993, section 9 of Act 20 of 1994, section 18 of Act 37 of 1996, section 23 of Act 27 of 1997, section 34 of Act 34 of 1997, section 81 of Act 53 of 1999, section 76 of Act 30 of 2000, section 64 of Act 59 of 2000, section 65 of Act 19 of 2001, section 148 of Act 60 of 2001, section 114 of Act 74 of 2002, section 47 of Act 12 of 2003, section 164 of Act 45 of 2003 and section 43 of Act 16 of 2004
In principle, a VAT credit could not be claimed on a motor vehicle for personal use. Game viewing vehicles and hearses had been added to the category of vehicle on which VAT credit could be claimed.

Amendment of section 8 of Act 89 of 1991, as amended by section 24 of Act 136 of 1991, paragraph 4 of Government Notice 2695 of 8 November 1991, section 15 of Act 136 of 1992, section 24 of Act 97 of 1993, section 11 of Act 20 of 1994, section 20 of Act 46 of 1996, section 25 of Act 27 of 1997, section 83 of Act 53 of 1999, section 67 of Act 19 of 2001, section 151 of Act 60 of 2001 and section 166 of Act 45 of 2003
At present, Government Departments were not in the VAT system, but some Government entities were. Some of these entities, such as Telkom and Eskom, belonged in the VAT system, but others, such as SARS, did not. Going forward, entities such as SARS would also fall outside the VAT system. The National Treasury currently appropriated money in consideration of VAT and these appropriations would drop. There was thus a need to align both events.

Amendment of section 1 of Act 31 of 1998
This was an attempt to ensure that, if someone tried to manipulate the price in order to pay less securities tax, the situation could be rectified.

Amendment of section 103 of Act 74 of 2002
Further concessions were granted in respect of bio fuel.

Second Revenue Laws Amendment Bill briefing
Mr Tomasek briefed the Committee on the main points of the Second Revenue Laws Amendment Bill.

Substitution of section 20A of Act 40 of 1949, as inserted by section 12 of Act 30 of 1998
Provision was made for the publication of names of offenders.

Insertion of sections 20C and 20D in Act 40 of 1949
Section 20C made provision for the reporting of unprofessional conduct.

Section 20D provided for advance tax rulings.

Insertion of section 67A in Act 58 of 1962
Provision was made for the registration of tax practitioners, so that SARS would be in a position to make a reasoned decision on the regulation of these practitioners.

Insertion of Part 1A in Chapter III of Act 58 of 1962
At present, people entered into very big transactions and required certainty on the tax treatment of those transactions. Part 1A introduced advance tax rulings, and these would be binding on the tax authority. South Africa had approached this with a great deal of caution, and this represented a framework to ensure that the system would work. High-powered staff would be required, so applicants were required to refund costs. Room had been created for a ruling not to be given and the exclusions had been based on an international survey. Provisions were made for the binding effect of the ruling, and there was still an opportunity to give non-binding or informal opinions. Fraud or misrepresentation would void the ruling. Provision was also made for the withdrawal or modification of the ruling. Rulings could be withdrawn going forward, but there was a narrow group of occasions where rulings could be withdrawn retroactively.

It was important that rulings should not form part of private case law or be used to competitive advantage, so provision was made for the rulings to be rendered anonymous and published. Three types of rulings were provided for: binding general rulings, which incurred no fees, binding private rulings and binding class rulings. Binding product rulings had been omitted, as it was not felt that the capacity for these was in place. Capacity was a concern, and a staged effect had been provided for. Binding general rulings would be the first to be phased in.

Amendment of section 21 of Act 91 of 1964, as amended by section 9 of Act 105 of 1969 and section 44 of Act 30 of 2002
At present, if goods were imported for re-export and were dutiable products, they could be placed in a customs warehouse and duty and VAT were not levied. There was no cash flow impact when they were shipped out. This did not apply if the goods were duty free. VAT was paid on import and was claimed back later. This made South Africa less attractive as a distribution hub for Africa. This distinction had been removed, and duty free goods could now be placed in customs warehouses.

Discussion
Mr Sinclair remarked that he understood the role of SARS in closing loopholes but said that the flipside was investor confidence as the provisions were very stringent.

Mr Tomasek replied that there was an international move to lower tax rates and broaden the tax base, and this was seen in South Africa as well. He reminded the Committee of the number of concessions that had been introduced in the alignment with international practice. It was a balancing act, but all were fairly targeted regimes. In circular cash flows, for example, the economic substance was the issue, not the paper trail.

Mr Aulsebrook said that one of the prime objectives of SARS was to achieve uniformity with other countries. Did these Bills bring South Africa more in line?

Mr Tomasek replied that SARS had tried to stick to general principles but had modified them for the South African context. Legislation was not as detailed in some areas, but was on a par in others.

Mr Sogoni said that, in his State of the Nation address, the State President had said that South Africa needed to make it cheaper to conduct business in South Africa. How did these Bills contribute to that objective?

Mr Tomasek replied that SARS had a small business task team looking at making things easier. The stamp duty on leases had also been simplified, and the move to e-filing where possible should simplify transactions for small businesses.

Mr Sogoni referred to the withholding tax and asked whether the amount withheld would cover the total amount due, and whether SARS had the capacity to manage this.

Mr Tomasek replied that it was not a final withholding tax, but a return was still expected. The money would at least have been attached and there was an incentive for the seller to render the return. It had been argued that this withholding tax was low, for example it was set at 30% in Canada. Capacity had been the reason for the R2 million cut-off, as the tax was directed at high-risk areas.

The Chairperson read the report of the Committee adopting the Revenue Laws Amendment Bill. The Bill was adopted.

The Chairperson read the report of the Committee adopting the Second Revenue Laws Amendment Bill. The Bill was adopted.

The meeting was adjourned.