1. Introduction


BUSA Business Unity South Africa (BUSA) is a confederation of Chambers of Commerce and Industry, employers’ organisations, professional associations and corporate organisations that represents the views of its members on matters of economic, social and transformation policy at the national and international levels. A list of the BUSA member organisations is attached.


BUSA aims to ensure that organised business plays a constructive role, within the context of the country’s economic growth, development and transformation goals, in achieving an environment in which businesses of all sizes and in all sectors can thrive, expand and be competitive both nationally and internationally.


BUSA thanks the Department for the opportunity to comment on the Revenue Laws Amendment Bill. The commentary set out below is structured according to a draft set of proposals provided by SARS in the form of 15 Annexures. The commentary refers to Annexures 1,2, 3 and 11.


2. Annexure 1. Broad Based Employee Share Initiative


Clarity is required that an exemption under the provisions of section 8B will not be negated by the provisions of section 8A. There is a need to integrate the consequences of both sections.


The proposals only make provision for a situation where shares are issued to employees individually. Consideration should be given to those circumstances under which the shares are issued to a Trust for the benefit of employees. In such a scenario, the qualifying conditions can be exactly the same as where shares are issued directly to individuals. This arrangement will, in particular, benefit non-listed groupings. There could be a provision requiring that the Trust be unwound should the entity be listed.


3. Annexure 2. Full Taxation of Executive Equity Schemes


3.1 The legislation appears to fail to address a situation where an employee resigns or is dismissed and in terms of the rules of a share incentive scheme is required to sell the shares back to his employer at cost price.

Nevertheless section 8A (2)(a) (i) will in effect tax the employee on any excess between cost and market value of the share on vesting of such share which in terms of sub section (3) (b) (ii) occurs immediately before the employee disposes of the share. It appears the section applies even where there is a forced sale of the share at below market value (e.g. on dismissal).


3.2 The definition of ‘restricted equity instrument", includes an instrument that is subject to any restriction that prevents the taxpayer from freely disposing of that equity instrument at market value.


This section (a) of the definition appears too broad. For example, all shares in private companies would ipso facto be restricted due to the fact that the Companies Act imposes restrictions on the free transfer of such shares. Another example would be where shares are purchased by the employee and pledged to the employer or the employer’s share incentive trust as security for a loan raised to acquire the shares. This would mean that most shares purchased in terms of a share incentive scheme would be regarded as restricted as it is normally the case that the purchase of such shares is financed directly or indirectly by the employer and such shares would be pledged to the employer.


4. Annexure 3. Hybrid Financial Instruments


As announced by the Minister the proposed legislation remedies the tax advantages obtained in schemes where for example a loan for an amount of R1,5 million is secured on the basis that it will be converted into equity on maturity. A related company in the group then purchases the shares to be issued for their current value – assumed to be R0,5 million. The net result is that the group has borrowed R1,0 million. The tax mischief takes the form of interest claims by the borrower on debt with a face value of R1,5 million, thereby securing excessive interest deduction. The problem is not with remedying this mischief but the legislation proposes two remedies each of which would suffice.


The first is that the borrower in the example would be restricted to claiming interest on the R1 million (i.e. the net amount borrowed). This would seem sufficient to combat the avoidance. However the legislation proposes a second remedy whereby the connected party that purchases the shares for R0,5 million will be taxed in terms of the 24J on the increment of the value of that holding from R0,5 to R1,5 million. This would appear to place the taxpayer in double jeopardy.

 5. Annexure 11. Measures to Enhance Tax Administration


5.1 Tax Practitioners


Proposals are set out for the regulation of ‘tax practitioners’. Prior to the introduction of such regulation an interim measure will require all tax practitioners to register with SARS. An amendment to Section 75 is proposed that will impose a penalty on tax practitioners who fail to comply with that registration requirement. The penalty provides for a fine or imprisonment not exceeding 24 months. BUSA submits that it is unwise to provide prison sentences for procedural misdemeanors. Fines should suffice as the penalties for such misdemeanors.


5.2 Advance Rulings


Taking a cue from the tax jurisdictions of Canada, New Zealand and the USA, the legislation proposes to introduce ‘appropriate fees’ (application and cost recovery fees) that will attach to private and binding class rulings. While such fees are intended to both defray costs and discourage frivolous requests, BUSA submits that such costs should at least be capped.




12 OCTOBER 2004




Business Unity South Africa (BUSA) Member Organisations