SUMMARY OF RECOMMENDATIONS
Ratio of Tax to GDP
18.1 The commitment of the Government to avoiding increases in the present ratio of national and provincial tax revenue to Gross Domestic Product of about 25 per cent is supported. [para. 2.3.9]
Reform of the VAT
18.2 The question of Value Added Tax reform should be further investigated, both with respect to an increase in the standard rate and a narrowing of the set of zero rated items. The scope for appropriate poverty relief to accompany VAT reform should be evaluated. [para. 2.4.6]
Income Tax Reform and Income Distribution
18.3 The relationship between income tax reform and income distribution should be examined further, including attention to the issues identified below:
Incremental Approach to Tax Reform
18.4 A stepwise, or incremental, approach to tax reform is recommended, rather than a comprehensive tax reform introduced in one package. The development of an explicit transition strategy, including improvements in tax administration, should be undertaken as an important foundation for this incremental approach. [paras. 2.7.1; 2.7.3-4]
Earmarking of General Tax Revenues
18.5 The earmarking of general tax revenues, including income taxes, the value added tax and customs duties, should be avoided. With regard to those excise taxes which can advantageously be assigned, caution should be exercised, taking account of the following issues:
18.6 Apart from other considerations, further earmarking of specific taxes should not be considered until a satisfactory system of intergovernmental financial transfers is in place and provinces have developed sound revenue bases. [para. 3.5.5]
Statement of Estimated Consolidated Revenue and Expenditure
18.7 The Department of Finance should submit to Parliament at the time of the annual budget a statement of estimated consolidated revenue and expenditure of the entire general government sector, including extra-budgetary funds and agencies. [para. 3.4.2]
Review of the Financing of the MVA Fund
18.8 The financing of the Multilateral Motor Vehicle Accident Fund by means of an earmarked fuel levy should be reviewed. [para. 3.7.3]
Assignment of Percentage of the Fuel Levy to Roads
18.9 Consideration should be given to the assignment of a percentage of the fuel levy to road construction and maintenance within the broader budget process. [para. 3.7.5]
Graduate Tax
18.10 The introduction of a graduate tax is not supported. [para. 3.7.17]
User Charges and Taxation
18.11 In determining policies regarding user charges for publicly provided services, explicit assessment should be undertaken of the interaction of fee schedules with the structure and incidence of taxation. [para. 3.8.4]
Assignment of User Charges
18.12 The assignment of user charges to the institutions responsible for providing associated public services is favoured, where such charges represent cost recovery, fully or in part, rather than their appropriation as general national or provincial revenue. [para. 3.8.6]
Further Investigation of a Local Land Tax
18.13 Further investigation should be undertaken to ascertain the merits of a local level land tax and to ensure that, if introduced, the implementation of such a tax should not have undesirable distorting effects. The issues which, in particular, require further investigation include the following:
Investigation of RSC Levies
18.14 Regional Services Council levies should be investigated as a matter of priority by the Financial and Fiscal Commission who should liaise with the Commission in this matter, particularly with a view to ensuring that any continuation of such levies fits within the holistic framework for taxation as recommended by the Commission. [paras. 5.2.3; 5.5.1]
Capital Gains Tax
18.15 There should not be a capital gains tax in South Africa at this stage. [para. 6.6.2]
18.16 When the restructuring of the tax administration has been completed in line with the Commission's recommendations in its first Report, the contentions for and against the possible introduction of this tax and its suitability for South Africa should be revisited and cognisance should be taken of the considerations set out in Chapter 6 of this Report. [para. 6.6.4]
Benchmark Date
18.17 If at any time in the future it is decided that a capital gains tax should be implemented in South Africa, then the date on which the tax is introduced should be designated as the "benchmark date" and all assets owned by taxpayers at that date should have a value assigned, being the market value on that date. [paras. 6.3.11-12; 6.7.2]
Capital Transfer Tax
18.18 The principle of a capital transfer tax, which would encompass the present estate duty and donations tax, is supported. [para. 7.1.12]
Limitations on Deductible Contributions
18.19 The idea of "capping" rand values of deductible contributions should not be pursued. [para. 8.7.1]
18.20 Deductible contributions should be limited to 15 per cent of aggregate remuneration in respect of employers and 72 per cent of taxable income in respect of employees. [para. 8.7.6]
18.21 Separate deductibility limits should be set for benefit funds and Medical Aid arrangements. [para. 8.7.10]
Limitations on Benefit Funds
18.22 A basis should be established for limiting the scale of benefits that can be offered by defined benefit funds. [para. 8.7.7]
Information Required
18.23 As part of an employer's tax return, a schedule should be required in support of any claim for retirement fund contributions and in which details are disclosed of:
Multiple Membership
18.24 Simultaneous membership by an employee of more than one approved fund offered by his or her employer should be disallowed. [para. 8.7.9(c)]
Balance of Cost Schemes
18.25 The feasibility of allowing "balance of cost" schemes to be recognized should be investigated. [para. 8.7.9(d)]
Taxation of Fund Income
18.26 Approved funds should be taxed on interest, rental and other "trading" income ("fund taxable income") at a flat rate of 30 per cent. [para. 8.8.4]
18.27 Existing "pensioner funds" should be given the option to convert from the "old" to the "new" tax regime. [para. 8.8.7]
18.28 The taxation of income accruing to Medical Aids and other benefit funds should be further investigated. [para. 8.8.8]
Taxation of Benefits
18.29 Within each retirement fund that pays pension annuities to retired members, it is proposed that a "pensioner fund" be formed to hold assets backing the liabilities in respect of pensioners. [para. 8.9.3]
18.30 A value should be determined of all benefits deemed to accrue on death or retirement, whether lump sum or in the form of an annuity, and tax should be determined on this "capital sum" and paid at this stage. [para. 8.9.4]
Deductions from the Capital Sum
18.31 In arriving at the taxable amount of the "capital sum", the following deductions should be allowed:
subject to the overall limit of the capital sum. [para. 8.9.10]
Review of Monetary Amounts
18.32 The monetary amounts and schedules to be used in determining the taxable amount and tax due should be regularly reviewed. [para. 8.9.8]
Qualifying Criteria for Pension Annuities
18.33 Consideration should be given to establishing minimum criteria in terms of which pension annuities will qualify for the deduction. [para. 8.9.11]
Proposed Tax Schedule
18.34 The taxable amount arising from the net "capital sum" should be taxed according to the following schedules, the rates to be applied to that part of the taxable amount that falls within each band, without any offset against any other tax losses of the taxpayer:
|
Tax Rate |
Withdrawal |
Death and Retirement |
|
15% |
Less than R25 000 | Less than R150 000 |
|
25% |
R25 000 to R75 000 | R150 000 to R450 000 |
|
35% |
R75 000 to R125 000 | R450 000 to R750 000 |
|
45% |
More than R125 000 | More than R750 000 |
[para. 8.9.15]
Allocation of the Tax Liability
18.35 There should be a convention for the sequence to be used to allocate the tax liability to different parts of the "capital sum", as follows:
Tax Status of Pension Annuities
18.36 Pension annuities should be payable free of tax in the hands of the pensioner once tax is paid on the "capital sum" and income of the fund has been subject to tax. To the extent that it is impractical to move existing pensioners onto the new basis, old funds should be closed to further contributions and would retain their "untaxed" status and pensions paid would remain taxable in the hands of recipients. [paras. 8.9.19; 8.9.21]
Lump Sum Payments on Termination of Service
18.37 Lump sum payments on termination of service, including payments in respect of "deferred compensation" arrangements, should be treated as if they were retirement benefits, and included in the "capital sum" for the purposes of determining tax liability. [para. 8.9.23]
Retrenchment Benefits
18.38 The minimum age at which benefits paid on retrenchment are treated as retirement benefits for tax purposes should be reduced from 55 to 50. [para. 8.9.24]
Equality between Private and Public Sector
18.39 Exemptions from tax of lump sum benefits payable from "funds established by law" should be withdrawn. [para 8.11.4]
18.40 Accrued rights to exempt lump sum benefits should be recognised and determined by reference to the service of members up to the date of the change. Withdrawal benefits, unless transferred to another approved fund, should be subject to the normal tax scales. [paras. 8.11.4; 8.11.6]
18.41 The Commission favours the same tax treatment of the income of public sector retirement funds as it recommends for the private sector. If, on consideration, it is decided that certain public sector funds should be exempted, such exemption should apply only to funds which by their nature have extensive restrictions on their investment policies. Exemptions should be subject to appropriate principles, explicit application for exemption and publication by the Commissioner for Inland Revenue of the names of exempt schemes. [paras. 8.11.7-8]
18.42 Public sector funds should comply with similar limitations on deductible member contributions, multiple membership and employer contribution rates as private sector funds. A framework should be established for the control and monitoring of defined benefit funds in the public sector. [para. 8.11.9]
Retirement Annuities
18.43 The maximum contribution rate to retirement annuities should be increased to 222 per cent of taxable income. [para. 8.12.2]
18.44 Employed persons should be permitted to contribute the sum of 222 per cent of "non-retirement funding" income (as defined) and the difference between 72 per cent of "retirement funding" income and allowable contributions to an occupational fund to retirement annuities. [para. 8.12.3]
18.45 The rules determining acceptable benefits from retirement annuities should be amended to allow for lump sum benefits, or equivalently, the full commutation of pension benefits. [para. 8.12.4]
Review of Tax Legislation
18.46 As part of a general review of the legislation applicable to pension and provident funds, the relevant tax legislation should be revised. The distinction between pension and provident funds in the Income Tax Act should be abandoned in favour of reference to "approved retirement funds". [para. 8.12.5]
Tax Treatment of Non-retirement Benefit Funds
18.47 The tax treatment of non-retirement benefit funds should be reviewed to ensure consistency with the proposed treatment of retirement funds. [para. 8.12.6]
Registration of Retirement Funds
18.48 The registration and approval process for retirement funds should be rationalized. [para. 8.12.7]
Retention of the STC
18.49 The Secondary Tax on Companies should be retained at this time. [para. 9.11.4]
Further Investigation of the Imputation System
18.50 Movement towards some form of imputation system is favoured in principle. While the administrative restructuring is in progress that will remove the practical inhibitions to the kind of comprehensive reform required for an imputation system, further research into alternatives should continue and empirical evidence should be gathered as to how foreign systems are progressing with removing some of the difficulties currently experienced with similar systems. [paras. 9.2.9; 9.11.3; 9.12.3]
Reduction in the STC Rate
18.51 The Commission favours a substantial reduction in the STC rate from its present level, in order to reduce the burden of the combined corporate tax rates and minimise the distorting effects of the STC. [para. 9.8.3]
STC on Foreign Branches
18.52 No branch tax should be introduced, but the current law should be amended formally to remove the STC obligation on foreign branches which is simply not being enforced. [para. 9.5.10]
Assessed Losses, Capital Gains and Exempt Recipients
18.53 No amendments in respect of assessed losses, capital gains and exempt recipients should be made at this time. Adjustments might be considered at a later stage if fiscal and administrative circumstances allow. [para. 9.9.4]
Reinvestment within Groups
18.54 Exemptions or a credit refund system to cater for reinvestment within the group context should be investigated, including their impact on administration. [paras. 9.10.2-4]
18.55 The current exemption from STC in terms of section 64B(5)(f) of the Act should be extended to comprehend situations where a group subsidiary's shares are held by more than one shareholder within the group of companies which are themselves wholly owned subsidiaries. [para. 9.10.5(a)]
18.56 The requirement for a section 64B(5)(f) exemption that the holding company should derive its profits solely from sources within the Republic should be revised to refer to "substantially all" so as to allow for a legitimate application of the de minimis principle, and the period over which there may be no non-RSA profits should not encompass more than one year of assessment prior to the year in which the dividend is declared. [para. 9.10.5(b)]
Intra-Group Loans
18.57 The provision for the exemption of intra-group loans for STC purposes should be extended to encompass loans between wholly owned companies and subsidiaries whether the holding is direct or indirect. For this purpose, "wholly owned" should be defined to allow for equity share holdings by full-time employees in terms of share incentive schemes, not exceeding 10 per cent of the company's equity share capital. [paras. 9.10.8-9]
Deemed Distributions
18.58 The present ambiguity regarding the scope of the exclusion from a deemed distribution (in terms of section 64C of the Income Tax Act) of amounts distributed to part shareholders in excess of profits and reserves available for distribution by way of a dividend, should be clarified by way of legislation or an appropriate practice note. [paras. 9.10.10-12]
Prescription
18.59 The final proviso to section 79(1) as regards Undistributed Profits Tax should be extended to STC. [para. 9.10.14]
Exemption of Interest Received
18.60 Section 10(1)(hA) of the Income Tax Act should be amended so as to prevent the exemption of interest received which this section provides to foreign companies which are managed and controlled outside South Africa from applying in respect of business conducted in the Republic. [paras. 9.5.11-13]
Introduction of a System of Group Taxation
18.61 A gradual approach to the introduction of a system of group taxation is proposed, beginning with a simplified consolidation method. [paras. 10.2.11; 10.3.2 10.4.1]
The Definition of a Group
18.62 Group members, including the holding company, should be limited to South African companies, excluding close corporations. [paras. 10.5.7; 10.5.9]
18.63 Companies which are subject to a special tax regime, such as those engaged in long term insurance or mining activities, should not be permitted to take advantage of a group tax system applicable to ordinary companies. The group tax system should, in principle, apply to a group comprising companies engaged in a common specialised activity. [para. 10.5.10]
18.64 For the purpose of qualifying for group tax relief, a group should comprise a holding company and all its wholly-owned subsidiaries. The term "wholly-owned" should be defined to refer to both direct and indirect interests held by the holding company, determined on the equity share capital of the companies concerned. [para. 10.5.11]
18.65 The term "wholly-owned" should allow for equity shares to be held by full time employees, including executive directors, in terms of share incentives schemes. The shares held by or on behalf of employees and directors should not exceed 10 per cent of the equity share capital. Once a consolidation system has been implemented successfully, it may be possible to drop the percentage ownership requirement to, say, 75 per cent of equity share capital. [paras. 10.5.12-13]
Entrance and Exit Provisions
18.66 Once application has been made by a holding company for group tax relief, all companies which at the time of application or at a later stage qualify as part of the group should be obliged to be taxed in terms of the group tax system. Companies which fail to qualify should cease to be part of the group. [para. 10.5.16]
18.67 A holding company should be entitled to apply for the group to cease being taxed as a group with effect from the next year of assessment. Thereafter, it should be entitled to apply to go on to the group tax system again only after a period of three years has lapsed. [para. 10.5.17]
18.68 To form part of a group, a subsidiary should, in principle, have been wholly-owned throughout the year of assessment in question by the holding company. [para. 10.5.18]
18.69 Upon entry into the group, the consolidation of results should only start from the commencement of the first full tax year following entry, unless a subsidiary is incorporated or a dormant subsidiary purchased with the intention of acquiring a business in its own right whilst being owned by the group. [para. 10.5.19]
18.70 In the event of the exit of a group member, group filing should exclude the results of the departing company entirely during the tax year in which the exit occurs. The departing company should file separately for the full tax year during which it departs from the group. [para. 10.5.20]
18.71 If a group member is liquidated, the member's group results should be taken into account for tax consolidation purposes until the finalisation of the liquidation process. [para. 10.5.21]
Sub-Return Required
18.72 A "sub-return" should be required for each company within the group that should provide the information required in the standard corporate tax return and in addition certain information on group-related transactions, including:
Consolidation Mechanism
18.73 The taxable income (or assessed loss) for each sub-return will be determined on the basis of the current tax regime, save for certain adjustments proposed in paragraphs 18.77 and 18.78 below. [para. 10.5.30]
18.74 The consolidation results for group tax purposes should be based upon the taxable income or assessed loss for each sub-return, after eliminating all unearned intra-group profits and losses on stock and adding back the assessed loss brought forward from the previous year in the case of each sub-return. [paras. 10.5.30-31]
18.75 The simplified consolidation results for each year of assessment should be determined is as follows:
Protection for the Fiscus
18.76 A group member should be required to deal on an arm's length basis with other group companies (in respect of rentals, interest recoveries, cost sharing, administrative recoveries, discounts and salary apportionments, for example). [para. 10.5.37]
Consolidation Adjustments
18.77 The following adjustments in respect of intra-group transactions should be made:
18.78 Further adjustments which might either be introduced initially or at a later stage after due consideration and once the consolidation method allows for a consolidated tax loss to be carried forward, include the following:
Other Tax Liabilities
18.79 The introduction of group consolidated taxation should be limited to the income tax at this stage. Each group member should be jointly and severally liable for income tax, but should remain separately responsible for other tax liabilities. [paras. 10.5.44; 10.5.46]
Provisional Tax
18.80 Each group company should be liable for its first and second provisional tax payments until the first consolidated return has been assessed. Thereafter, the provisional tax should be lodged on a consolidated basis. [para. 10.5.47]
Acquisition of a Group
18.81 In the event of acquisition by one group of another, each company in the acquired group would retain its balance of assessed loss and the consolidation of this sub-group should take place separately in the year of assessment in which it is acquired. [paras. 10.5.48-50]
Anti-Avoidance Legislation
18.82 Specific anti-avoidance legislation should be considered, together with application of the existing general anti-avoidance measures in sections 103(1) and 103(2) of the Income Tax Act. [para. 10.5.15]
Deferral of Implementation of a Full Consolidation System
18.83 Progress towards a full consolidation system should be deferred until the impact of the shift to group taxation on the fiscus can be evaluated and problems of administration have been identified and addressed. [paras. 10.1.2; 10.5.26]
18.84 When a full consolidation system is introduced in South Africa, the following principle which is widely followed internationally should apply. Upon the entry of a company into a group, any assessed loss of the acquired company is ring-fenced and may only be set off against the income from that specific company (to the extent that it is not utilised in the consolidation process). However, any unutilised losses in any year of assessment may be carried forward as a consolidated loss and is available to be set off against the consolidated taxable income of the group in future years. The same practice is followed on the commencement of consolidated filing by a group. [para. 10.5.24]
Introduction of a Business Purpose Test in Section 103(1) of the Income Tax Act
18.85 Section 103(1) of the Income Tax Act should be amended so as to incorporate the principles which are reflected in the draft hereunder:
(a) section 103(b)(i) be amended to read as follows:
"(b)(i) was entered into or carried out:
(aa) in the case of a transaction in a business context, by means or in a manner which would not normally be employed for bona fide business purposes, other than the obtaining of a tax benefit; and
(bb) in the case of any other transaction, being a transaction not falling within (aa), by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; or";
(b) the following proviso be inserted at the end of section 103(1):
"provided that the provisions of this section shall not apply where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act, read as a whole." [para. 11.5.8]
18.86 This new provision should only apply to transactions entered into after the implementation of the new section. [para. 11.5.9]
Additional Assessments in terms of Provisions Against Trafficking in Assessed Losses
18.87 Section 103 should be amended to embody the principle contained in Practice Note No. 20 dated 25 June 1995; that is, that the raising of additional assessments in terms of section 103 is subject to the restrictions imposed by the first proviso to section 79 of the Act, so that additional assessments may not be raised after the expiry of three years from the date of assessment unless the Commissioner is satisfied that the amount which should have been assessed to tax was not so assessed or the fact that the full amount of tax chargeable was not assessed, was due to fraud, misrepresentation or non-disclosure of material facts. [paras. 11.7.3-4]
Principles to be Encoded in a Statement of Taxpayer Rights
18.88 The basic rights of taxpayers should be articulated in a clear public Statement of Taxpayer Rights. The principles to be encoded in this statement should include:
Appointment of a Tax Ombudsman
18.89 In addition to recognising the role of the Public Protector in this regard, an independent Tax Ombudsman should be appointed to protect taxpayers' rights and mediate between taxpayers and the revenue authorities. [para. 12.3.6-8]
Criteria for Qualifying as Small Business Undertakings
18.90 The following criteria are proposed for the taxation of natural persons as small business undertakings (SBUs):
18.91 In the event of a business shrinking in size to such an extent that it complies with the definition of a SBU, the taxpayer should not be afforded the benefit of the cash basis of taxation. [para. 13.3.4]
Period of Qualification for the Cash Basis of Taxation
18.92 Taxpayers who satisfy the qualifying criteria for the cash basis of taxation, should be allowed to elect to be taxed on this basis at any time after the regulations have come into operation. It is proposed that taxpayers who so elect should be deemed to qualify from the beginning of the tax year. Upon ceasing to qualify, a taxpayer should be deemed to have qualified up to the end of the tax year. [paras. 13.3.1-3; 13.3.6]
Phasing Out of Previous Allowances
18.93 With regard to the recoupment of allowances when a taxpayer ceases to qualify as a SBU, a phasing-out period of at least two years should be granted. [para. 13.3.7]
Anti-Avoidance Measures
18.94 Consideration will have to be given to the formulation of anti-avoidance measures if a special tax dispensation is granted to small businesses. [para. 13.4.2]
Limitation of Exemptions of Financial Services from VAT
18.95 Section 2(1) of the VAT Act, 1991, should be narrowed, thereby bringing into the VAT the following:
Abolition of the Financial Services Levy
18.96 The financial services levy should be abolished. [para. 14.4.1]
Definition of Financial Services
18.97 A specialist team at the office of the Commissioner for Inland Revenue should be established to investigate the adoption of a more refined definition of financial services. A detailed practice note should be published following consultation with the Council of Southern African Bankers, the Life Offices Association and the Fund Managers' Association of South Africa and other role players. [para. 14.4.2]
Basis of Apportionment
18.98 A definition of a basis of apportionment should receive the urgent attention of the office of the Commissioner for Inland Revenue. [para. 14.4.3]
Self-supply Rules
18.99 Self-supply rules whereby specified supplies and functions are valued at market prices and are deemed to be supplied by institutions to themselves, should not be introduced. [para. 14.4.4]
VAT Grouping Provisions
18.100 Regardless of whether a system of group income taxation be introduced or not, VAT grouping provisions should not be implemented. [para. 14.4.5]
Income Tax
18.101 Operators: The normal income tax principles should be applied to all gambling and casino operations. [para. 15.6.2(a)]
18.102 Gamblers: The normal income tax principles should be applied to the winnings of gamblers. [para. 15.6.2(b)]
18.103 Lotteries: The normal income tax principles should be applicable to operators of lotteries, with the sole exception of the National Lottery which should be exempt from income tax. [para. 15.6.2(c)]
Value Added Tax
18.104 All gambling, casino and lottery activities, with the exception of the National Lottery, should be subject to VAT. [paras. 15.5.3(a); 15.6.3(a)]
18.105 The National Lottery should be treated in the same manner as Government Departments, in that the inputs be subject to VAT but no output VAT be charged. [para. 15.6.3(b)]
18.106 The normal R150 000 annual threshold should be applicable in respect of small lotteries. [para. 15.6.3(c)]
Other Taxes
18.107 The foregoing recommendations do not detract from the Constitutional right enjoyed by the provinces to impose certain taxes on the industry. [paras. 15.2.1; 15.5.3(b)]
Tax Treatment of Share Gains
18.108 In the case of employee share purchase schemes (where the employee is at risk), save where the employee is a dealer in securities (as determined by reference to ordinary income tax principles), any gain made by the employee on scheme shares should be treated as a capital gain. This principle should be confirmed in an appropriate practice note. [para. 16.3.9(a)]
Fringe Benefits Tax in respect of Loans in respect of Share Purchase Schemes
18.109 In employee share purchase schemes which have the features set out hereunder, although the fringe benefits tax provisions of the Seventh Schedule will continue to apply in respect of loans granted in terms of such schemes, the employees should be permitted to elect to pay the fringe benefits tax due either on the current basis or on the earlier of the expiration of five years as from the date of the granting of the loan or when the shares are resold. Interest should accumulate at the stipulated rate on the liability to pay fringe benefits tax from the date on which it arose in terms of the Seventh Schedule until the payment of the fringe benefits tax. As a matter of administration there should be an obligation on the employer to keep records of the amount of fringe benefits tax payable by the employee as well as the interest thereon. If the employee fails to pay such tax then the employer should be liable for such tax. [para. 16.3.9(b)]
18.110 The concession proposed above should apply to employee share purchase schemes with the following features:
Marketable Securities Tax
18.111 The recommendation in the first Interim Report that the marketable securities tax should be abolished, together with the various stamp duties on share transactions, is reiterated. [paras. 17.2.2; 17.2.5]
Taxpayer Education and Accessibility of Revenue Offices
18.112 Initiatives to provide taxpayer education and to make local revenue offices more accessible to taxpayers are urgently needed. [para. 17.3.1]