TL-06-03THE SOUTH AFRICAN INSTITUTE OF CHARTED ACCOUNTANTS

 

Ref:  #119015 v1/JA/DT/EM/CW/TT/NN

Call for comment file

 

30 May 2006

 

Mr N Nene

Chairman: Portfolio Committee on Finance

Parliament

P O Box 15

CAPE TOWN

8000

 

BY E-MAIL: [email protected]

 

 

Dear Sir

 

 

CALL FOR COMMENT:  SMALL BUSINESS TAX AMNESTY AND AMENDMENT OF TAXATION LAWS BILL, 2006

 

Set out below please find SAICA’s comments on the abovementioned draft legislation:

 

Chapter I: Small Business Tax Amnesty

 

1.                   Section 5: Application of Chapter

 

1.1          The introductory sentence refers to “a person”. The definition of “person” varies in the different taxing Acts covered by the amnesty, as defined in section1. The Income Tax Act excludes a partnership as a person whereas the VAT Act defines a person to include “any body of persons (corporate or un-incorporate)”, which includes a partnership. As the VAT Act includes a partnership as a person whereas the Income Tax Act does not, it is unclear whether partnerships are eligible to apply for the amnesty. We suggest that the amnesty should apply to partnerships as well as to partners in a partnership.

 

1.2          Section 5(b)

 

1.2.1     The turnover limit of R5 million does not coincide with any other definitions of small business in the various taxing Acts. For example, the Income Tax Act refers to R14 million (previously R6 million) and the VAT Act refers to R1 million. How was the R5 million limit determined?

 

1.2.2     The reference to total gross income for the 2005 year of assessment not exceeding R5 million requires clarification. Prima facie the amount of R5 million includes any undisclosed amounts.  Given that the amnesty applies not only to people who are not registered taxpayers but also to people who are registered but understated their taxable income, it should be made clear whether it is intended that the amount of R5 million is inclusive or exclusive of the previously  undisclosed amounts.

 

1.2.3     In the case where a taxpayer should have charged VAT but did not do so, the amount invoiced is deemed to have been inclusive of VAT. It should be clarified whether the amount to be taken into account for the purposes of determining the R5 million turnover includes VAT in these circumstances.

 

1.2.4     If the amnesty is to apply to partnerships, it should be clarified whether in the case of a partnership the R5 million gross income limit would apply per partnership or per partner.

 

1.2.5     If it is correct to assume that the R5 million limit will apply to the gross income of each individual partner, this may discourage partnerships from applying for the amnesty where some partners qualify for amnesty and others do not, depending on the percentage interest held. This may result in some small businesses not taking part in the amnesty as a result of the implications to the other partners.

 

1.2.6     A person who did carry on business prior to 31 March 2005 but has ceased to carry on business would, under the current wording, be able to claim the amnesty. It is not clear whether this is the intention and it should be clarified. We suggest that a taxpayer who ceased carrying on an undeclared business before March 2005 and who now desires to legalize the assets and liabilities accumulated from the business should be permitted to apply for the amnesty.

 

 

1.3          Section 5(c)

 

1.3.1     Regrettably, the extremely limited way in which subsection (c) has been drafted is going to give rise to similar problems as those experienced for applicants under the previous Exchange Control Amnesty.  It is possible that certain individuals, for example, may own the shares in a company, which may or may not trade, and that company has a wholly-owned subsidiary which does trade and where the understatement took place.  This latter company would not be eligible for amnesty in terms of the current wording of this provision.

 

1.3.2     We would suggest that the amnesty should be available to a group of companies (as defined in section 1 of the Income Tax Act) if the aggregate gross income of all companies in the group does not exceed R5 million, and each company in the group is eligible for amnesty.

 

1.3.3     The current restriction to direct holdings by individuals could have the unintended result that a taxpayer with ten businesses that are conducted through ten different companies, all with gross income below R5 million and all held directly by him could benefit from the amnesty as each company would be eligible. On the other hand a single business indirectly held through a company with turnover below R5 million will not qualify for the amnesty. This result is unfair and is surely unintended.

 

1.3.4     It is also somewhat illogical and limiting, that a trust which carries on business is eligible for the amnesty, but not a company all of whose shares are held by a trust. This means that unlisted companies whose shares are held by family trusts are precluded from the amnesty.  We cannot see the reason for this exclusion if the intention is to broaden the tax base and increase and improve the tax compliance culture.  We suggest that the wording be amended to include a company, some or all of whose shares are held by a trust.

 

 

2.                   Section 7: Information required in application

 

2.1          Section 7(1)(a) requires the applicant to declare all “taxable income …”. We suggest that this be changed to require the applicant to declare all gross income to avoid any issue of what is “taxable income” as taxable income is a defined term derived after deducting allowable expenses.

 

2.2          Section 7(1)(a) specifically refers to amounts “received by or accrued or deemed to have been received by or accrued” to the taxpayer. If this wording is retained then section 7(1)(c) should similarly refer to both taxable supplies and deemed taxable supplies.

 

2.3          The wording of clause 7(1)(b) appears to be capable of being interpreted such that if a taxpayer had previously declared employees’ tax to SARS but had not paid such amount, the applicant can apply for amnesty.  This interpretation is due to the use of the additional words “failed to declare or pay over” (emphasis added).  Should the “or” not be “and” to prevent the above interpretation?

 

2.4          Section 7(1)(b) refers to employees’ tax that the applicant as “an employer” failed to withhold.  It is not clear whether this applies where the applicant is a “deemed employer”, for example in the case of personal service companies and trusts.

 

2.5          Subsection (2) requires an applicant to furnish “returns in respect of each of the taxes, levies or contributions disclosed in terms of subsection (1) for the 2005 year of assessment or tax periods ending, dividends declared or deemed to be declared, payments made or payable during that year…”.  What happens if, say, the taxable income in an income tax return was understated in a return for 2005 that was submitted (albeit incorrectly) before 15 February 2006?  Must another tax return be submitted?  Or must the tax return already submitted be returned and resubmitted?  Or will there be a special return to submit? This is an important practical aspect that needs to be clarified.

 

2.6          Subsection (2) requires that a statement of assets and liabilities be submitted, reflecting assets at cost. There may be instances where assets were acquired at no cost (e.g. by way of a donation), in which case the implication is that a nil value will be submitted for that asset, or details of that asset will not be shown at all. Guidance is needed as to how such assets must be reflected.

 

 

3.                   Section 8: Evaluation and approval

 

3.1          In terms of section 8(2), the amnesty will not be granted if the Commissioner has “at any time before the submission of the application, delivered a notice to that applicant or that applicant’s representative informing that applicant of an audit, investigation or other enforcement action relating to any failure by that applicant to comply with any Act in respect of which the amnesty application relates”.

 

3.2          The term “delivered” could have a wide interpretation, with onerous consequences that may result in many applications being rejected in cases where the Commissioner has sent a notice of audit or investigation to the person’s last know address. If the taxpayer can prove to the Commissioner that he or she did not receive the notice prior to the cut-off date or had notified SARS of a change of address, the Commissioner should take such factors into account.

 

3.3          The reference to “other enforcement action” is too vague.  For example, will a reminder that some of the applicant’s returns are outstanding, that has been issued by the Commissioner prior to a cut-off date be regarded as an enforcement action? Does “other enforcement action” mean when litigation commences or merely a query?

 

3.4          We suggest that it should be specified which specific enforcement action would prevent the applicant from benefiting from the amnesty. This need for clarity in the legislation is particularly important following the SARS press release dated 25 May 2006 which stated the following:

 

“The South African Revenue Service (SARS) today held its first Small Business Imbizo and publicly gave the assurance that SARS will disregard all official letters that were sent to businesses after 15 February 2006 informing them SARS is investigating their tax affairs … The letters SARS will disregard in order to further encourage applications for amnesty do not include instances where assessments for outstanding taxes have been raised against a business.”

 

3.5          In terms of the current wording, if the Commissioner had served notice of an intention to audit or queried only income tax, the taxpayer is precluded from applying for amnesty for VAT, UIF, SDL or PAYE.  Whilst SARS may take the view that the query would result in the non-compliance of any other taxes being discovered by SARS, it must be accepted that this is not guaranteed in every case. We suggest that the exclusion from amnesty should only apply to the tax or levy that is being or is to be queried or audited by SARS so that these taxpayers may also take advantage of the amnesty process to regularise their tax affairs is so far as other non compliance.  This will no doubt be an incentive to regularise their misdemeanours, which must be the intention of the amnesty.  This will also result in greater compliance as opposed to taxpayers “playing Russian roulette” with SARS in gambling whether SARS would detect non-compliance or not.  We can understand, although we do not agree with the merits, why SARS wants to exclude those matters which are already under investigation but cannot see the logic for excluding those taxes, levies or duties that are not under investigation.  For example, a taxpayer may have not paid PAYE on a particular amount for one month for one or a few taxpayers and this may well go undetected by SARS even in an audit.  The taxpayer may well wish to apply for amnesty for this non-compliance but is now precluded from doing so.

 

3.6          In light of our comments above, we urge SARS to temporarily halt carrying out any new investigations of categories of taxpayers who would qualify for amnesty, during the duration of the amnesty so as not to prejudice these taxpayers from qualifying for the amnesty.  We would support SARS in imposing the maximum penalty and interest and possible criminal sanction on those persons who do not take advantage of the amnesty when they are subsequently detected by SARS.

 

3.7          Alternatively, if a qualifying person wishes to apply for tax amnesty and wishes to remove the risk of disqualification through the fact that SARS may approach him or her and commence an audit or investigation up to the date that the application is furnished, there should be some mechanism available to enable the person to advise their intent to apply which would then prevent SARS from approaching them in the interim, for example, by way of a prescribed letter addressed to SARS, a copy of which (stamped by SARS as received) is retained by the taxpayer.

 

 

4.                   Section 9: Imposition of tax amnesty levy

 

4.1.        Subsection (2) determines the amnesty levy as being 10% of taxable income “to the extent that the amount of the taxable income was not declared to the Commissioner prior to 15 February 2006”. 

 

4.1.1.   What happens if the taxable income was fully declared by the required date, but there was under- or non-disclosure of other taxes, for example, PAYE, STC, or SDL?  Will the mere disclosure of these shortfalls and a comprehensive application be sufficient to provide amnesty even though no levy is payable?

 

4.1.2.   Does this mean that there would not be any amnesty levy where the 2005 taxable income was fully declared prior to 15 February 2006? Presumably, if an applicant’s tax returns for the 2005 and prior years of assessment were submitted before 15 February 2006, but the taxable income declared therein was understated and the additional taxable income for the 2005 year of assessment was subsequently declared as part of the amnesty process, the 10% levy would be calculated only on that additional taxable income declared for the 2005 year of assessment? There is some confusion as to the amount of taxable income on which the levy would be calculated and we suggest that the Explanatory Memorandum should include an example to clarify this.

 

4.2.        Once again, as with the Exchange Control Amnesty, because the amnesty does not extend beyond the applicant itself, such as a company, CC or trust, the shareholders or members or beneficiaries may be loath to put forward their company, CC or trust for amnesty as it could lead to problems for themselves personally.

 

4.3.        For example, if the taxable income is understated because cash sales were not disclosed or fictitious expenses were listed, clearly it is the shareholders or trustees who will have taken that money.  This could be seen as income in their hands, which has not been declared.  Yet they are not eligible for amnesty personally on such income they received.

 

4.4.        Accordingly, either the amnesty should extend to shareholders and members or the amounts paid to them should be deemed to be a dividend for STC purposes (and for which the company will claim amnesty) so that the receipt would be exempt in their hands.  In the case of a trust it would have to be deemed that the amounts paid to the beneficiaries were paid out of income deemed to have already been taxed in the trust’s hands, and that section 7 of the Income Tax Act and Part X of the Eighth Schedule to the Act will not apply.

 

 

5.                   Section 11: Relief from payment of tax, contributions or levies

 

5.1.      Subsection (a) provides amnesty only from income derived from carrying on any business.  It may well be that the same entity has other, non-business income such as interest, rentals, etc.  It is accepted that it is not intended that the amnesty be extended to investment companies.  But it is suggested that as long as an applicant does have business income to which the amnesty can relate, all other income and capital gains of that applicant should also qualify for amnesty.

 

5.2.      It is not clear whether the amnesty applies to remuneration, as it was originally stated that remuneration would be excluded from the amnesty but there is no specific exclusion in the draft Bill. If the intention is to exclude remuneration, the amnesty should apply to all income whether from carrying on business or not, except for remuneration as defined.

 

5.3.      Section 11(b) again refers to “failed to pay” as opposed to “failed to declare”. See our comments in 2.3 above dealing with clause 7(1)(b).

 

5.4.      Reference is made in subsection (e) to a dividend deemed in terms of section 64B to have been declared.  It is true that section 64C applies for the purposes of section 64B, but most of the deeming takes place in section 64C, and the subsection should therefore refer to section 64C.

 

5.5.      The list of taxes covered by the amnesty does not include Regional Service Council Levies (or Joint Service Board Levies), which seems to be an oversight. RSC/ JSB levies are a form of an indirect tax and should be included in the scope of the amnesty, especially considering the fact that they are in the process of being phased out.

 

5.6.      The amnesty relief relates to periods up to and including taxes payable for the 2005 year. This, therefore, excludes periods ending after 31 March 2005 for companies or the February 2006 year for individuals and trusts. This poses a substantial cash flow problem when it comes to employees’ tax and UIF for the period from, say, 1 March 2005 to 28 February 2006, insofar as such amounts may not have been deducted from employees’ remuneration.  In order to make the amnesty attractive, it should surely apply to periods up to and including February 2006 as far as these two taxes are concerned.

 

 

6.      Section 12: Relief from payment of additional tax, penalties and interest

 

The relief afforded by the amnesty should also extend to shareholders, members, beneficiaries and trustees as well.

 

 

7.      Section 13: No prosecution for related offences

 

It is not only taxable entities themselves that can be liable for prosecution.  It is also directors, public officer, trustees, representative taxpayers, and so on.  They, too, should be given indemnity against prosecution.

 

 

8.      Section 14: Circumstances where tax amnesty relief does not apply

 

As is clear from the legislation and Explanatory Memorandum, the amnesty applies not only to those who have not submitted a return but also to those who have submitted a return which reflects understated amounts.  It is probably correct that when section 14 states that the amnesty does not apply in respect of tax, etc, “to the extent that it … is payable or becomes payable in consequence of any return etc”, it is intended to mean what is contained in the return, and not the return itself.  In other words, the mere fact that a return has been submitted is not sufficient to disqualify the applicant from amnesty on understated income. Nevertheless, to make this absolutely clear, it is suggested that, in subsection (b), before the words “any return” there be inserted the words “the contents of”.

 

 

9.      Section 15: Disallowance of deductions, allowances and losses

 

9.1.      It is not entirely clear what the expression “any deduction, allowance” in subsection (a) means in the context.  For example, if a fixed asset was purchased in the 2004 year and an allowance claimed under section 11(e), does this mean that allowances under this section in future years cannot be claimed? This is not clear from the legislation or the Explanatory Memorandum and should be clarified.

 

9.2.      In the case of allowances that are normally granted in one year and added back to taxable income in the subsequent year, will these be taken into account in subsequent years of assessment where an amnesty has been granted? For example, section 24C or section 11(j) allowances that were taken into account in the 2005 year of assessment?

 

9.3.      While we can certainly understand that, to the extent that amnesty is received on undeclared income, any assessed loss should be reduced, it is nevertheless unfair to eliminate it altogether.  For example, assume that the undeclared income amounted to R100 at a time when the entity had an assessed loss carried forward from 2005 of R400.  Certainly the assessed loss should be reduced to R300, but for the taxpayer to have to forfeit the entire assessed loss is unfair and, in fact, effectively costs the taxpayer more than 10%.

 

 

10. Section 16: Circumstances where approval is void

 

Subsection (c) provides that one of the circumstances that will render the amnesty void is if the estimates provided are “materially incorrect”. Guidelines need to be proved as to what constitutes “material” and whether this applies regardless of whether the incorrectness of the estimates is intentional or not.

 

 

11. Section 17: Objection against decision of the Commissioner

 

Subsection (2) refers to the provisions of Part III of Chapter III of the Income Tax Act. The provisions of the various Acts dealing with objection against the Commissioner’s decision are different. We suggest that it would probably be better to object and/or appeal against the Commissioner’s decision to deny approval in respect of the specific Act in respect of the application. Where there are no such provisions in the specific Act, the provisions of the Income Tax Act would then be applied.

 

 

12. General matters

 

12.1       The secrecy provisions in the various Acts, particularly the Income Tax Act and Value-Added Tax Act, should apply to this amnesty as well.

 

12.2       One of the attractive features of the Exchange Control Amnesty was the fact that if, for some reason, an applicant made application but was not eligible to be granted amnesty, there would be no retribution following because of the secrecy provisions.  There is no similar safeguard here.  Admittedly there cannot be total ring-fencing of the information as there is no separate amnesty unit.  At the same time, if the applicant does not qualify on a technicality, this should not permit the SARS to use the information it has to impose full penalties and interest, prosecute, etc.

 

12.3       No mention is made about granting advisors exemption under the Financial Intelligence Centre Act (FICA) where they advise applicants on their rights and obligations and compile the amnesty applications. We reiterate what we stated in our submission to the Portfolio Committee on Finance on the 2006 Budget:

 

“Another concern that must be addressed in the amnesty legislation is the implications in terms of the Financial Intelligence Centre Act (FICA). Since tax offences are reportable in terms of section 29(1)(b)(iv) of FICA, any client coming forward and disclosing any irregularities in the course of applying for amnesty will have to be reported. We suggest that a specific exemption from the FICA be granted. “

 

 

Chapter II: General amendments to taxation laws

 

14.        Section 32: Amendment of section 24I of Act No. 58 of 1962

 

14.1       The amendment inserts a proviso that was overlooked in the amendments made to this section in the Revenue Laws Amendment Act, 2005. There remains, however, a shortcoming in the 2005 amendment to section 24I(7A) that should be corrected now. The issue relates to the interplay of section 24I(7A) with section 24I(10) of the Income Tax Act (the Act). The Explanatory Memorandum to the Revenue Laws Amendment Bill, 2005 makes it clear that the provisions of section 24I(7A) of the Act would continue to apply to loans or advances obtained or granted during any year of assessment ending before 8 November 2005. In respect of loans or advances obtained or granted in any year of assessment ending after 8 November 2005, the provisions of section 24I(10) of the Act would apply, thereby taxing only realised gains or losses on loans or advances between connected persons.

 

14.2       The current wording of section 24I(7A) of the Act does not give effect to the stated intention per the Explanatory Memorandum, that is, that this section will continue to apply for relevant loans entered into during years of assessment ending before 8 November 2005.  Due to the fact that the whole section is “subject to section 24I(10)” and that section applies to “exchange differences determined on the translation of an exchange item to which that and any company are parties, where that company is (i) a connected party in relation to that resident”, all translations occurring in years of assessment ending on or after 8 November 2005 which would previously have fallen into section 24I(7A), fall into s24I(10), including existing capital connected party loans.  This also renders the reference to 8 November 2005 in section 24I(7A), which demonstrates SARS’ intention, redundant.

 

14.3       We recommend that the wording be amended to demonstrate the intention. The words “Subject to subsection 10…..” should be therefore be deleted from the provisions of section 24I(7A) of the Act.

 

 

 

Yours faithfully

 

J Arendse                                              N Nalliah

PROJECT DIRECTOR:  TAX      CHAIRMAN:  NATIONAL TAX COMMITTEE

The South African Institute of Chartered Accountants