12 October 2004

Dear Ms Malumane

The Banking Council South Africa appreciates the opportunity to comment on the proposals as presented by SARS for public comment. The amendments, as proposed, have far reaching implications for both banks and commerce in general and it is hoped that the following comments will assist SARS in evaluating the consequences of these amendments.

The Banking Council would have appreciated a longer time frame within which to consult with its members and respond more comprehensively than we have done in the paragraphs below. The seven business days allowed for comment on a draft bill of 166 pages is prohibitive and we repeat our request for a longer commentary period and refer to our letter of 2 June 2004 "The opportunity to broadly consult may evidence difficulties of interpretation, which can be addressed without taxpayers having to request rulings from the South African Revenue Services ("SARS") or obtain legal opinion".

Before addressing the proposed amendments, The Banking Council, referring to various discussions between SARS and The Banking Council, concerning the practical application of Section 76A, anticipated that the current amendments would contain provision for a textual amendment to Section 76A(4)(a) to provide taxpayers the same relief as contained in the proviso to (4)(b). This textual amendment was discussed, particularly as relief from penalties is available where the company willfully or recklessly fails to report a reportable arrangement, while unintentional failure to report contains no relief provisions.

The suggested change is as follows:

(4)(a) Where a company or trust fails to report a reportable arrangement as contemplated in subsections (2) and (3), that company or trust shall be deemed to have entered into that arrangement in a manner or by means as contemplated in section 103(1)(b)(i) or to have created rights or obligations as contemplated in section 103(1)(b)(ii). Provided that the Commissioner may waive such deemed intention where he or she is satisfied that there were extenuating circumstances.


Comments below will address the proposals in the order of Annexure numbers:

  1. Annexure 1: Broad-Based Employee Share Initiative.

While The Banking Council South Africa supports the principle of encouraging employee share participation and ownership, there are two fundamental concerns that we would express as regards the way in which the end objective is proposed to be achieved.

Firstly, SARS have made the assumption that the employer costs of share incentive schemes, under the current application of the Act, are not allowable as deductions from taxable income. This assumption may have been valid where the employer did not incur the cost of such payments and these costs were borne by the shareholders. However, international practice is moving towards the recognition of share payments as expenses actually incurred by the company and not the shareholder. (A Banking Council Position Paper "Accounting for Share Incentive Schemes" previously sent to SARS office, is attached for reference.)

A consequence of this recognition, supported by SARS argument that employee share incentive schemes arise as a direct result of employment, is that any costs, including employment costs, borne by employers in respect of such schemes are allowable, under current legislation, as expenses incurred in the production of income.

It is therefore superfluous to provide separately for the costs incurred by employers to be allowed as a deduction, as proposed in the additional clause to Section 11.

Secondly, the distinction between "rank and file" employees and "executives or management" creates a platform from which differential taxation policies are proposed to be applied. The essence of the draft amendment is the application of preferential taxation rules for broad-based schemes as opposed to those schemes that companies may wish to adopt as a reward structure for those employees that they may wish to incentivise or reward for excellent performance.

The restriction of allowances to those schemes which include 90% of employees is nothing less that a general salary restructure which will lose its effect of being an incentive or reward for high performers. In fact, the five-year retention, or restriction period, even if reduced to three years, can be interpreted as unfair to those employees that feel bound to remain in the service of the company in order to receive the maximum benefit of the award. If the scheme is broad-based, and is viewed by the participating employees as part of remuneration, the withholding of part of this remuneration can be perceived to be unfair.

Furthermore, the creation of differential taxation platforms for the "rank and file" and "management" is a counterproductive interference in the processes by which employees and management are being rewarded and incentivised. International practice does not support this differential treatment.

In many cases, the limit of R3 000 per employee per annum will fail to allow for differentiation in performance awards. This coupled with the requirement that 90% of employees should participate, negates the intended reward and incentive objective that most companies will use share incentive schemes for. In the light of this fact, the proposed scheme could be used by employers to defer remuneration of their "rank and file", causing further hardship in lower take-home pay for these workers.

The administrative requirements are onerous, particularly when it is considered that these schemes are not performing the function of reward or incentivisation. In fact, if the majority of "rank and file" considers these awards as part of remuneration, there becomes an added payroll administration process for no recognisable benefit.