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