1. Introduction
The Banking Association South Africa appreciates the opportunity to address the Portfolio Committee on Finance on the Bill.

We have formally commented to National Treasury and SARS when the original draft was published for public comment, and that commentary is attached as Annexure 1. In a number of respects National Treasury and SARS have accommodated our concerns in the Bill now before the Portfolio Committee, and we are grateful to them for doing so.

This submission to the Portfolio Committee elaborates on certain of the issues raised in our earlier commentary, and raises related issues that the banking industry considers important. Should you require any further explanation or clarification, we will be glad to assist in any way we can.

The comments are in the order of proposed amendments contained in the Draft Bill and our letter dated 30 March 2005.

In our earlier commentary, we expressed our appreciation that the Transfer Duty thresholds had been raised. This change is welcomed, particularly in respect of lower priced properties. We did observe however, that the proportionate increase in the upper limits of the 5% category is relatively low, leading to the proportionately higher absorption of duty on properties with values in excess of R330 000. Current property prices indicate that this value no longer represents the high range of residential property prices.

While this point may not be critical, we believe that a culture of home ownership should be encouraged, particularly where residential property normally represents wealth accumulation, often for retirement. We therefore suggest that consideration be given to increasing the ceiling on the lower rate.

The increase in both primary and secondary rebates by material amounts is welcomed, particularly as the tax burden on low-income earners will be reduced.

The Banking Association would like to request that the taxation on income derived from individual policyholder funds of long-term insurers be reviewed. The rate of 30% will now be higher than the company tax rate and substantially higher than the average rate applicable to individual taxpayers.

The harmonisation of tax rates between institutions and individuals in the current environment is believed to be a prerequisite in the deliberations of National Treasury's discussion paper on Retirement Fund Reform. This paper was issued for public comment in December last year. The Banking Association submitted recommendations to National Treasury, which essentially endorse the introduction of a National Savings Fund to bridge the gap between conventional pension and retirement funds and the Old Age, or State Pensions. South African banks have both the capacity and technology to make the National Savings Fund a reality. The outstanding success of the Low-Cost Mzansi account is evidence of this capacity.

The downward trend in company tax rates is welcomed, as is the support given to small businesses. It is believed that many small businesses and start-up operations are intended to benefit, but these benefits may well be lost if the intended beneficiaries are unable to make use of the allowances, because they have no taxable income at the time that the allowance is available. It often takes a number of years before small businesses and start-up operations are in a taxpaying position and therefore in a position to utilise tax benefits. (This observation is linked to comments under Section 11 and Section 12 of the Income Tax Act., which follow below and also refer to the role of banks in passing the benefits to small businesses.)

The Banking Association welcomes the proposal to enhance capital allowances for small businesses and believes that this could facilitate growth in this sector. However, we would like to express two concerns:

Firstly, many small businesses, particularly in their start-up phase, avail themselves of leasing facilities from banks. This alternative to cash outlays and other forms of credit often provides these small businesses with the means to survive the early years of operation. Enhancing allowances will certainly stimulate growth, but access to leasing finance is limited through the effects of Section 23A and the wording of section 12E.

The essence of Section 23A is that income tax allowances are limited to the rental income from leasing. This ring-fencing of leases has the effect of limiting banks' capacity to expand leasing business to the income from existing leases. It does appear to us that much of the desired stimulus of enhanced capital allowances will be lost through the limitations of Section 23A. This is particularly true where small businesses finance productive plant and equipment through leasing.

These restrictions will therefore have the effect of negating the benefits sought by the proposed amendments.

Secondly, we appreciate that allowances should only be claimed by the owner of the assets, and banks, as lessors of productive assets have always been granted such allowances. As a normal part of their business, banks will lease productive assets to their clients. The bank, as owner and lessor or such assets, will earn leasing or rental income and will claim depreciation allowances in respect of these assets. Ownership of the assets normally vests with the bank for the duration of the lease.

Clearly, in most instances, the bank is the owner, but not the operator of the asset. An aircraft under a lease agreement will be operated by the airline but owned by the bank for the duration of the lease. If an interpretation is made that the bank, as owner, but not the operator, may not claim allowances, the consequences would be very severe.

We therefore suggested, in our commentary to National Treasury and SARS, that the words "acquired by the taxpayer" be followed by "or a lessor, as envisaged under section 12B and 12C..."

Section 24J is proposed to be amended to recognise, in the determination of "yield to maturity", any payments made to connected parties as part of the yield inherent in the transaction or scheme. The use of the wording that such amounts must be taken into account as amounts "receivable by that issuer" is cumbersome. The issuer is normally the payer of interest, and not the receiver. For clarification, and consistency, we would suggest that any payments to connected parties be taken into account as amounts in "reduction of amounts payable" by that issuer. This should have the same desired effect, but could be clearer to the reader.

The introduction of reporting requirements under the new section 76A brought with it the consequence that wilful or reckless failure to report under the requirements of section 76A would subject the company or trust to penalties, which the Commissioner could remit if he is satisfied that there were extenuating circumstances. However, where a company or trust inadvertently fails to report, there is an automatic process by which the arrangement is deemed to be entered into by means contemplated in section 103(1)(b)(i) and (ii), with the commissioner having no authority to consider extenuating circumstances.

It was proposed that the current Draft Taxation Laws Amendment Bill be enhanced to include, under section 76A (4) (a), a proviso that the Commissioner's discretion is extended to recognise extenuating circumstances in unintentional failure to report. It is believed that this proposal will create greater balance in the sanction options for failure to report and more certainty in the reporting process.

Reportable Arrangements, as provided for in Section 76A, came into effect on 1 March 2005. While it will take some time to assess the impact and effects of such reporting, we would suggest that Section 76A be reviewed and amended as soon as possible.

The introduction of a two-year prescription period for the assessment of Levies is welcomed and we appreciate the intervention to establish certainty in this matter.

The abolition of duties in respect of debit entries and Instalment Credit Agreements is welcomed and Banking Association shares the Minister's view that these charges have had a disproportionately large impact on low-income individuals and small businesses.