CAPITAL GAINS TAX: SARS IMPLEMENTATION PLAN
1. INTRODUCTION
A Tax Symposium was held in South Africa in July 1999, which was attended by International Tax Experts, National specialists and South African Government representatives. Participants in this symposium came to the conclusion that there was a void in the South African tax system, being the fact that it did not include Capital Gains Tax (CGT).
2. POLICY AND LEGAL PROCESS
Once the Minister approved that research be conducted on CGT, a feasibility study, which included extensive research into CGT, was conducted. Even at that stage International assistance was received from countries such as Australia, United kingdom and the United States.
During the research different policy options for implementation were identified and considered. A final decision to go ahead with CGT was made in February 2000.
WhiIe many CGT systems may be complex, one of the design goals for the South African CGT system is that it is to be kept as simple and practical as possible. An example of this approach in the current proposals is the decision not to index the base cost of assets for inflation. In this regard South Africa is in good company, as the United Kingdom has scaled down its use of indexation and Australia abandoned it altogether in September 1999. Another example is the introduction of an annual exclusion to reduce the number of taxpayers paying CGT on small gains. A similar concept has proven successful in the United Kingdom, which has a smaller number of CGT taxpayers than Australia, although Australia has a smaller population.
The Minister announced the implementation of Capital Gains Tax in last year's Budget and a guide on CGT was issued.
Public comment was requested by the end of March 2000. More than 300 submissions were received from interested parties. Extensive discussions with different industries and taxpayer representatives took place. Examples are the Unit Trust, Retirement and Insurance industries.
The comments on the guide, the discussions and further analysis led to the publication of the first draft Bill on 12 December 2000 for comment by 10 January 2001.
Approximately 100 organisations and individuals commented on the draft legislation, some of which have submitted very detailed and comprehensive submissions.
The various comments and submissions will be considered further and a response released publicly. Appropriate adjustments to the draft legislation will be incorporated to accommodate any possible changes and refinements.
A flow diagram depicting the methodology applied for the policy and legal process, is attached as ANNEXURE A.
3.SUMMARY OF ADMINISTRATIVE ISSUES
As in the case of the design of any new system, the following were considered during the design of the system for Capital Gains Tax:
· Legal framework
· Fit with organisational Business and Architecture
· Impact on external environment:
-Service to taxpayers
-Simplicity
-Compliance cost
· Impact on internal environment
-Organisational structures
–Capacity/ resource requirements
· Impact on systems
-Business processes
-Procedures, Guidelines, Policies
-Reports
-Screens
-Notices
· Training Requirements
· Communication Requirements
· Implementation
-Implementation strategy
-Office readiness
-Implementation options
-User acceptance testing and final implementation
3.1 IMPLEMENTATION APPROACH
Based on the above methodology, SARS went through a structured process to identify, analyse and plan all activities and requirements for the successful implementation and administration of CGT.
[ED NOTE: diagram omitted]
The broad business policy for CGT is the following:
· Valuations
-two-year submission period
-selection between methods
-form to be submitted
· Assessment process
· Audit process
The following are the main areas of focus in the implementation approach:
3.1.1 RETURNS AND VALUATIONS
INCOME TAX RETURNS
The annual Income Tax Returns have been changed mainly in two areas to make provision for CGT. These two areas are the inclusion of a section dealing with valuations and a section dealing with the declaration of CGT events. The majority of taxpayers will submit valuations and particulars in respect of CGT events as part of their annual tax returns. The submission of valuations and returns will be dealt with as follows for the different categories of taxpayers:
Companies The company returns for the 2001 tax year have already been adjusted to make provision for CGT as companies with tax years ending after 1 April 2001 may already submit valuations and declare CGT events from the middle of 2001.
These company returns will be printed during March 2001 for the 2001 tax year.
The proposed changes to company returns are attached as ANNEXURE C.
Individuals and Trusts
The tax year for individuals and trusts ends on 28 February and they will therefore only commence submitting valuations or declare CGT events in the tax returns for 2002.
These returns will be finalised during December and will be printed during February 2002 There are a limited number of individuals and trusts with tax years ending on other dates than 28 February and in the case of Estates, provision must be made for period assessments. A separate solution whereby these cases will submit a separate form for purposes of declaring CGT events, has now been developed and will be implemented during September 2001.
SITE taxpayers, non-residents and non-taxpayers.
Valuations by this category of taxpayer cannot be submitted with ordinary tax returns, as these taxpayers do not file such returns annually. Valuations will be submitted separately and existing functionality on the New Income Tax system will be used to record the fact that these entities submitted valuation certificates. When a CGT event occurred for these taxpayers, it must be declared in an appropriate return.
Extensive publicity will be given to the valuation process during April 2001 to reach these entities which are not registered for tax purposes.
VALUATIONS
Legal requirement
Taxpayers must choose between valuing their assets or a time-based apportionment per asset.
If the taxpayer wants to retain the option to use the valuation method , such valuation must be done within a two year period, commencing on 1 April 2001.
Form
The valuation form is kept as simple as possible with only the minimum information required. The valuation form will be incorporated into the annual income tax returns.
A draft valuation form is attached as ANNEXURE B.
Procedure
In an effort to ease the burden on taxpayers and to simplify administration, valuations will be submitted with the normal annual tax returns and the fact that a valuation certificate was received with the return will be recorded. Furthermore, the valuation document was kept as simple as possible with only the minimum information requested.
As valuations are only required to be made within 2 years, the last tax year for submission of the valuation will be 2004.
Companies with a year end after 1/4/2001 may commence submitting valuations with their returns as from the middle of 2001.
Individuals and Trusts may commence valuations with their 2002 tax returns.
SITE taxpayers, non-residents, non-taxpayers and dormant companies are also obliged to submit valuation certificates. These valuations cannot be submitted with returns as these taxpayers do not file ordinary tax returns annually. These entities will submit valuations on separate forms and CGT events will be declared in the appropriate returns.
3.1.2 SYSTEMS
Using the CGT guide as basis, an in depth analysis of new requirements and changes to the existing functionality was done and functional specifications drawn up.
As a result of the principle accepted for CGT in South Africa, namely that CGT will be an integral part of taxable income, only limited changes are required to the Income Tax return and the income tax computer systems. Processing of CGT transactions on assessment is also incorporated into the existing assessment and audit processes. This also reduces the additional burden on taxpayers.
The following changes are currently being made to computer systems to accommodate specific CGT requirements:
Income Tax Returns
The 1T14 tax return for companies for the 2001 tax year was changed to provide for the following information with regard to CGT transactions:
· Proceeds
· Base cost
· Rollover of base cost
· Exclusions
· Capital Gain/Loss
The above information is required per main asset type namely:
· Fixed/Immovable assets
· Financial Instruments
· Intangible assets
· Plant and equipment
· Other
Notices and Reports
The notices, screens and reports were revised to accommodate the changes to the tax returns and to supply management information on CGT valuations and events.
Development and Implementation
At the end of December 2000 the technical design of new functions and revision to
existing functions were completed. The construction of the technical designs will
be completed at the end of February 2001. All aspects of new and existing systems relating to CGT will be tested during the period February 2001 to April 2001.
All system functions required for the implementation of CGT will be functional in April 2001.
The above system changes were based on the CGT Guide that was issued in February 2000. Changes to this basis, namely the difference its principles and the final Act, will be developed from March 2001.
The flow diagram depicting the methodology applied the Systems Development process, is attached as ANNEXURE D.
3.1.3 HUMAN INFRASTRUCTURE
HR REQUIREMENTS
Due to the intricacy of CGT and the fact that it is a new tax, capacity planning in terms of administration of CGT took preference.
The capacity planning included various phases ranging from short term to long term. The short to medium term phase include addressing the immediate taxpayer service needs as well as addressing the present structure of SARS in terms of deployment of staff at the existing 42 offices. The medium to long term planning includes the total restructuring of SARS by means of the SIYAKHA initiative. The objectives of the SIYAKHA program are to restructure SARS through concentration of scarce resources into Compliance, Processing and SARS Service Centres. In this regard, cognisance has been taken as to who will deal with CGT and what level of competency is required at the processing centres, the compliance centres and a centre of excellence. The concept of concentration is to have a pool of the most qualified staff to deal with the more complex tax matters, be it CGT or other aspects of Income Tax, VAT, PAYE Customs or Excise. This concept will be addressed as part of the SIYAKHA program with the establishment of Compliance Centres in respect of the compliance arm.
A CGT support unit, to assist with taxpayer service, is required and the following resources will be deployed as support to this unit:
46 unit staff comprising of
- 40 Operational and Compliance staff members
- 6 Law Administration staff members
5 Corporate Tax Centre staff members
1 dedicated resource per office
SARS currently employs approximately 1100 auditors. The audit capacity is being increased by 50 auditors to cater for more complex audits involving CGT valuations and events. The appointment of more auditors is an integral part of the SIYAKHA initiative and a further 250 appointments should be seen as a medium term phase of the capacity planning.
Due to increased capturing of information from returns, SARS is in the process of appointing 36 additional data capturers.
TRAINING IN RESPECT OF CGT
Specific training needs were analysed during workshops after which detailed plans were drawn up. These plans include the compilation of training manuals and timeframes for the training. Draft training manuals will be ready during February 2001.
Initial training was given to a selected group of staff per office during February and March 2000.
Specific training in respect of the following areas was planned for as follows:
Legislative training:
Law administration will conduct/assist in training of the Human Resources Development Trainers and KEY staff members from the Offices (including Compliance resources). Training activities will commence in February 2001 and these key staff members, who will be utilised for further training, will be trained by April 2001.
System training:
Human Resource Development (HRD) Trainers, will train the users on the NITS and data capturing system's. CGT functionality. Training in respect of Companies will be completed by July 2001 in order to accommodate the first possible CGT transactions in Company returns. Training in respect of Individuals will be completed by January 2002 as the first Individual returns with CGT transactions can be expected after April 2002.
Training of CGT Unit staff:
Law Administration and specialists from the Corporate Tax Centre will train staff for the CGT Unit. These staff members will be sourced from Operations, Compliance, and other available non-CGT Law Administration staff. The Call Centre and e-mail support staff will be trained during February 2001.
Audit Training:
Trainers and key Audit staff members will train all Auditors after the ‘Trainers’ have been trained. Audit training will commence during March 2001 at all SARS offices. Ongoing training, including specific refresher courses, will be given throughout the year and approximately 1100 auditors, of all levels, will be trained by December 2001.
3.1.4 OFFICE INFRASTRUCTURE
The following diagram[ed note: diagram not included] depicts the CGT Office
A dedicated CGT unit will be established in Head Office during March 2001 to handle CGT queries. This team will be managed by Law Administration.
Each Revenue Office will have at least one dedicated staff member to deal with CGT issues.
The Corporate Tax Centre will have a dedicated team to deal with complex CGT issues.
The Law Administration Division of SARS will provide overall legal assistance and legal support and will also manage the core team and e-mail support.
The following resources will be deployed as support to the CGT unit:
46 unit staff comprising of
- 40 Operational and Compliance staff members
- 6 Law Administration staff members
5 Corporate Tax Centre staff members
1 dedicated resource per office
Existing staff members with detailed tax knowledge have already been identified and they will be deployed during March 2001 in the respective areas.
Call Centre
A call centre with a dedicated 0860 number, will be operational from 1 March 2001 to assist taxpayers with all types of CGT enquiries.
Capital Gains e-mail Support
An e-mail address, [email protected], has been reserved for Capital Gains Tax queries. A dedicated e-mail team will be established during February 2001 to support the
e-mail issues/enquiries.
The diagrams depicting taxpayer service in respect of CGT, are attached as ANNEXURE E
3.1.5 COMMUNICATIONS
The first phase of the communication process started prior to the Budget speech in February 2000 with the preparation of the CGT guide.
After the Budget certain communication requirements regarding CGT were identified and documented. These requirements led to a CGT communication strategy and a plan being drawn up.
As part of the communication strategy, two main elements were identified.
The first is a CGT Awareness Campaign for external purposes, i.e. the general public and practitioners. This will include:
· media release
· press articles
· regional workshops with accountants.
The second element is the more general communication that will assist taxpayers in understanding the basic principles of CGT and the reasons as to why it is being introduced. This will include:
· press articles
· a CGT Guide
· brochures accompanying the Income Tax returns
· media releases.
A question and answer document relating to frequently raised issues, will also be made available through various mediums, one being the SARS Intranet and Internet. Posters being placed in the various offices will also indicate basic principles of CGT.
4 COST/ BENEFIT
The cost of developing the CGT infrastructure is estimated at R 16 million for the financial year ending 31 March 2001 and R16 million for the financial year ending
31 March 2002.
The estimated amount that will be collected once the system is fully in production
(+/- 5 years) is between R800 million and R2 billion while the Operational costs to administer the system is estimated at R100 million per year.
5 CONCLUSION
The issues above only highlight the main focus areas of the implementation plan. Detailed implementation plans, addressing these and other issues have been developed and are currently addressed by a dedicated team. A considerable amount of planning and consultation have been done and SARS is therefore confident that it is in a position to successfully implement and administer the system for Capital Gains Tax.