THE BANKING COUNCIL SOUTH AFRICA
PORTFOLIO COMMITTEE ON FINANCE
DRAFT REVENUE LAWS BILL 2004
19 October 2004
COMMENT ON PROPOSED AMENDMENTS TO THE INCOME TAX ACT
The Banking Council South Africa expresses its appreciation for the opportunity to present its views on the Proposed Amendments to the Income Tax Act.
There is general support for the objectives as set out in the explanatory memoranda. Equitable tax treatment of taxpayers and transactions and clarification of areas subject to different interpretations are necessary.
- Annexure 1: Broad-Based Employee Share Initiative.
- Principle of encouragement of employee share ownership is welcomed
- Most share schemes are currently structured as cost to shareholder schemes.
- With effect from 1 Jan 2005, International Accounting Standards will require the costs of such employee schemes to be reflected through the income statement of the employing company.
- This will result in a conversion of schemes from shareholder cost to company cost.
- The effect of this will be costs of such schemes will now be borne and actually incurred by the employing company.
- This, in turn, will have the effect that incentive schemes will now be deductible under general deduction provisions of ITA.
- This then makes the need for special provision for deductibility un-necessary.
- Broad-based schemes including 90% of employees have three disadvantages.
- The scheme can become a deferred remuneration tool that will have the effect of reducing employees’ take home pay. Also locks employees in to current employer.
- Limitation of R3 000 creates administrative hardship
- Broad-based participation reduces the generally accepted benefit of acting as a reward. Therefore little opportunity of awarding on differential performance.
- If the intention of the legislation is to encourage broad-based participation, this can be achieved by creating an allowance in Section 8B (as proposed), but to have these allowances, under the conditions proposed as well as recognizing the deduction under 11a. A double deduction will have the effect of advancing the objective of employee participation, but not productivity or remuneration methods.
- Annexure 2: Full Taxation of Executive Equity Schemes.
- This amendment is supported and it is believed that the amendments will further the objective of equitable tax treatment amongst schemes.
- Bear in mind the accounting and taxation of structuring schemes as cost-to-company schemes will result in equitable tax treatment of receipts of these benefits and payments of these benefits.
- Annexure 3: Hybrid Financial Instruments.
- Generally viewed as substance over form. Most common instruments are debentures paying interest and then convertible into shares.
- Differential tax treatment arises where the conversion rights are not taxable because of the acquisition of a capital instrument at some future date.
- By disallowing interest on the debentures, equilibrium is restored, but the substance and form of the transaction are ignored.
- Resolution can be obtained by the classification of the instrument as a Financial Instrument under Section 24J, thereby causing the increase in capital value to be taxed as income, without disallowing the interest on a real debt instrument.
- Related parties have little relevance as transactions can be structured at market rates.
- 3 year cut-off also little relevance as most convertibles are for long-term capital formation.
- Members of Banking Council would prefer the question of Hybrids and Derivatives to be dealt with comprehensively under a separate section.
- Annexure 4: Deferred Instalment Sales.
- If the future purchase price is undeterminable, there is, in substance no sale.
- Economic benefits are not disposed of and the seller should retain the asset until all economic benefits pass.
- Members of Banking Council would prefer this section to be deferred until such time as all the implications have been considered.
- Annexure 5: Relief for Interest Bearing Investments for Residents of CMA.
- CMA residents are proposed to be treated as any other non-residents. This is supported.
- Annexure 11: Tax Administration.
- Proposal to establish a separate board to regulate Tax practitioners is supported.
- The principles should not, at this stage be placed in the ITA as the definitions of practitioners and the provision of advice has not been unambiguously defined.
- The powers and duties and the independence of the proposed board should be clearly agreed before enabling legislation is passed.
- Advance Rulings
- Fully supported, but requires a degree of independence and representation by taxpayers.
- Annexure 12: Share for Property Transfers.
- Supported as this reinforces the fact that a company can effect payment for property by the issue of shares.
- Supports the principle that funding cost borne by the company.
- Annexure 16: Withholding tax Non-Resident Sellers
- Difficulties of SARS understood.
- Onus should be on conveyancer and/or the agent and not seller.
- Penalties on seller who relies on agent and conveyancer is inequitable and unprofessional
- Other matter omission: Reportable Arrangements Section 76A
- Current Section 76A under discussion with SARS to introduce workable process of identifying reportable arrangements.
- Currently, where a company willfully or recklessly fails to report an arrangement, penalties apply but the Commissioner has the power to waive such penalties
- However the same discretion is unavailable to the Commissioner if a company unintentionally fails to report a reportable arrangement. And the taxpayer is deemed to have entered into the transaction for the main or sole purpose of avoiding tax.
- The need for cooperation between industry and SARS can better be fostered by allowing some discretion.
- This is new legislation and needs time to find practical legs.
- Banking Council are proposing the introduction of discretion in the imposition of penalties and sanction by the Commissioner in the unintentional failure to report.
The Banking Council South Africa appreciates the opportunity to make these points and trusts that they will contribute to a more effective taxation system.