Small Business Tax Amnesty Amendment of Taxation Laws

Small Business Tax Amnesty & Amendment of Taxation Laws Bills Select Committee on Finance 21 June 2006

Major Themes • • • Rate and Threshold Relief Small Business Tax Amnesty Municipalities Customs & Excise Miscellaneous Amendments & Technical Corrections 2

Continued economic growth and effective SARS administration allow for yet another year of broad -based tax relief. . .

Individual Income Tax Rates • Marginal Brackets [Clause 18 and Schedule 1): – 18% rate tops out at R 100 000 (versus the former R 80 000) – 25% rate tops out at R 160 000 (versus the former R 130 000) – 30% rate tops out at R 220 000 (versus the former R 180 000) – 35% rate tops out at R 300 000 (versus the former R 230 000) – 38% rate tops out at R 400 000 (versus the former R 300 000) – 40% rate kicks-in at R 400 000 (versus the former R 300 000) • Thresholds (Rebates): – The general tax threshold (for ages below 65) kicks-in at R 40 000 (versus the former R 35 000) [Clause 20] – The threshold for ages 65 and above kicks-in at R 65 000 (versus the former R 60 000) 4

Individual Thresholds • Interest (Dividend) Exemption [Clause 23]: – Ages Below 65: Domestic interest (dividends) is exempt up to R 16 500 (versus the former R 15 000) – Ages 65 and Above: Domestic interest (dividends) is exempt up to R 24 500 (versus the former R 22 000) – Foreign interest and dividends are exempt up to R 2 500 (versus the former R 2 000) • Capital Gains: – Annual capital gain/loss exemption increases to R 12 500 (versus the former R 10 000) [Clause 32] – Exclusion on death increases to R 60 000 (versus the former R 50 000) [Clause 32] – Primary residence (i. e. home) sale exemption increases to R 1, 5 million (versus the former R 1 million) [Clause 33] 5

Retirement and Inter-Generational Transfers • Retirement: – Retirement fund taxation drops to 9% (versus the former 18%) [Clause 54] – Corresponding regulatory reform will occur to ensure tax savings translate into individual savings • Estate Duty/Donations Tax: – The Estate Duty threshold increases to R 2, 5 million (versus the former R 1, 5 million) [Clause 17] – The Donations Tax threshold increases to R 50 000 (versus the former R 30 000) [Clause 27] 6

Real Estate Purchases and Rentals • Transfer Duty Relief (Purchases) [Clause 14]: – The zero rate tops out at R 500 000 (versus the former R 190 000) – The 5% duty kicks-in at R 500 001 (versus the former R 190 001) – The 8% duty kick-in at above R 1 million (versus the former R 330 001) – Company/trusts rates drops to 8% (versus the former 10%) • Stamp Duty Relief (Rentals) [Clause 38]: – Exemption kicks-in at R 500 per agreement (versus the former R 200); stated differently, rental agreements with aggregate rent up to R 100 000 are now exempt 7

Prior-Year Individual Holdovers: Base-Broadening • Car Allowance: – Deemed private distance travelled will be 18 000 km (versus the former 16 000 km) in terms of the overall 32 000 km deemed amount) [Clause 21] – Monthly PAYE withholding for the motor vehicle allowance will be 60% (versus the former 50%) in order to prevent underwithholding due the change in deemed private distance [Clause 28] • Medical [Clause 31]: – New monetary cap system (versus the former 2/3 rds formula) takes effect – Employer-provided medical assistance on-site and off-site is now excluded from income in terms of uninsured employees – Employer-assistance will now also be available for medicallyinsured employees as long as the medical scheme reimburses the employer (i. e. no double-dipping) 8

Tax Incentive for Learnership Wages [Clause 25] • • • Initial sunset date: Extended from 2006 to 2011 (in line with the 2010 extension for the National Skills Development Strategy) An additional allowance (i. e. deduction) for salary will be available within increased maximum caps: – Starting maximum cap for existing employees will be R 20 000 (versus the former R 17 500) – Starting maximum cap for new employees will be R 30 000 (versus the former R 25 000) – Completion maximum cap for all employees will be R 30 000 (versus the former R 25 000) Disabled person category added: – 150% additional starting allowance for existing employees with a R 40 000 maximum cap – 175% additional starting allowance for new employees with a R 50 000 maximum cap – 175% additional completion allowance for all employees with a R 50 000 maximum cap 9

Small Business Relief • • Small Business Corporations: – Definitional limit increases to R 14 million (versus the former R 6 million) [Clause 24] – The 10% rate upper limit tops out at R 300 000 (versus the former R 250 000) [Schedule 1] – Exemption threshold tops out at R 40 000 (versus the former R 35 000 – similar to individuals) [Schedule 1] One-Time CGT Exemption for Small Business Sales: – Exemption increases to R 750 000 (versus the former R 500 000) [Clause 34] 100% Depreciation: – Small items of all businesses eligible for 100% depreciation operates under an increased limit of R 5 000 (versus the former R 2 000) VAT Thresholds [Clause 50]: – Definitional limit for 4 -monthly filers increases to R 1, 2 million (versus the former R 1 million) – Definitional limit for 6 -monthly small farmers increases to R 1, 2 million (versus the former R 1 million) 10

Small Business Amnesty. . . Special Relief to Assist Small Business (Informal and Formal)

Rationale • • Broaden the tax base Normalisation of tax affairs Improve tax compliance culture Facilitate the taxi recapitalisation 12

Who May Apply [Clause 2] • Types of parties: – Individuals (i. e. natural persons) – Trusts and estates – Unlisted companies (completely owned by individuals and/or estates) • Activity level: – The party must carry on business – R 10 million gross business turnover limit for the 2006 assessment year – Pro rate R 10 million for years that are shorter or longer than 12 months 13

Core Requirements • Time Period [Clause 3]: – Starting 1 August 2006 – Ending 31 May 2007 (Two phase amnesty process dropped) • 2006 Assessment Year Information • 5% Maximum Levy • No SARS Notice 14

2006 Information Requirement (Clause 4) • One: Full disclosure of all business taxable income for the 2006 assessment year: – Only for a single year (no 2005 Income Tax assessment year requirements) – No PAYE, Unemployment Insurance, Skills Development Levy, VAT or Royalty Withholding information • Two: Income Tax return for the 2006 assessment year • Three: An asset/liability balance sheet at cost at the close of the 2006 assessment year 15

Reasonable Estimates [Clauses 4 & 12] • The amnesty permits “reasonable estimates” in lieu of actual amounts if actual disclosure is impractical (due to concerns about informal businesses) • Amnesty relief will be withdrawn if these reasonable estimates if not materially correct • Moving the year forward to 2006 should reduce the need for reasonable estimates as well as the reasonable estimate procedure 16

Levy Requirement [Clause 6] • Maximum 5%: – Maximum 5% of the total taxable business income for the 2006 assessment year – For this purpose, unused pre-2006 losses cannot be set off against 2006 taxable income • Schedule of Rates: – – – 0% rate for 0 – R 35 000 2% rate for R 35 001 to R 100 000 3% rate for R 100 001 to R 250 000 4% rate for R 250 001 to R 500 000 5% rate for R 500 001 or more 17

No SARS Pre-Amnesty Contact [Clause 5] • The basic amnesty will generally be denied if SARS issues a notice to the applicant (or the applicant’s representative) before the amnesty submission of an: – Audit, – Investigation; or – Other enforcement action Relating to a period otherwise covered by the amnesty • The term “enforcement action” will be clarified by the Commissioner via Gazette • Note: SARS notice will be ignored if withdrawn or finalised before submitting the amnesty application 18

Amnesty Relief [Clauses 8 & 9] • One: The amnesty covers improperly undeclared or unpaid business income (including incidental investment income): – Income Tax and STC amounts arising before the 2006 assessment year; and – VAT, PAYE, UIC, SDL and Royalty Withholding before 1 March 2006 • Two: The amnesty similarly covers: – Additional tax, penalties and interest – Criminal prosecution for failure to disclose [Clause 5 of 2 nd Bill] 19

No Carry Forward Benefits [Clause 11] • Taxpayers may not carryover tax benefits from a pre-2006 year • Hence, – Loss carryovers, – STC credits, and – VAT input credits Cannot be utilised if stemming from a pre 2006 year receiving amnesty relief 20

Amnesty Process [Clause 5; Clause 6 of 2 nd Bill] • Amnesty approval is non-discretionary • Amnesty applications will be reviewed by a separate SARS unit with regional presence • SARS notice of amnesty approval or denial is required • All SARS decisions are subject to objection and appeal 21

Not For Organised Crime [Clause 10, FICA Regulations] • The Amnesty does not apply to fraudulent VAT schemes: – VAT not paid due to the submission of fictitious purchase invoices – VAT not paid due to fictitious zero-rated exports for sales actually occurring locally • The Financial Intelligence Centre Act will not prevent advisors from providing tax advice, but they must disclose applicants involved in other offences (e. g. drug dealing / money laundering) 22

Amnesty Subsequently Void [Clause 12] • Despite initial SARS approval, amnesty approval will later become void if: – The applicant subsequently fails to pay the full amnesty levy within 12 months; – The taxpayer failed to make full disclosure of required information for 2006; or – Estimates (if any) are materially incorrect 23

Outstanding Debt Amnesty [Clause 13] • Taxpayers will receive an outstanding debt amnesty if they have not yet paid, but have: – Submitted a return or information indicating payment due; or – SARS indicates payment is due via SARS assessment • Coverage: Penalty, additional tax and interest • Process: Ministerial regulation for public comment and Parliamentary scrutiny 24

Parliamentary Report [Clause 7 – 2 nd Bill] • The success of the amnesty must be reported to Parliament • These details include: – Number of applications received – Number of applications approved and denied – Number of new taxpayer registrations (per tax type) – All amnesty levies payable – Retention of new taxpayers on the register for 2008 and 2009 25

Municipalities. . . RSC Levy Repeal & VAT Simplification

Regional Services Levy Repeal [Clause 59] • The RSC Levies (both the turnover and employee elements) will be repealed with effect from 1 July 2006 • This repeal provides: – R 7 billion of tax relief; and – Simplifies taxpayer compliance (especially for small business) • Repeal technically requires: – Repeal of section 93(6) of the Local Government: Municipal Structures Act; and – Replacement legislation: Municipal Fiscal Powers and Functions Bill (the latter of which will be presented to Parliament shortly) 27

Municipalities and VAT: Objectives 1. Revenue Shifting: Zero-rating of property rates is designed to shift revenue from the National Government to Municipalities due to RSC Levies repeal (the rest is financed via national grants). 2. Administrative Ease: The proposal also simplifies VAT administration by eliminating allocation issues for input credits 28

Note: Municipal As, Bs & Cs • South Africa has 283 municipalities consisting of: – Category A municipalities have exclusive municipal executive and legislative authority in their areas (x 6) – – Category B municipalities share municipal executive and legislative authority in an area with a category C municipality (x 231) Category C municipalities have municipal executive and legislative authority in an area that includes more than one municipality (x 46), which may include “District Management Areas” (certain Cs, such as nature reserves) A C B B B B 29

Zero Rating of Property Rates [Clauses 40 to 52] • As of July, property rates will go from “out of scope” status to zero rating status • As a result, VAT input tax relating to property rates will be unlocked • The proportion of municipal exempt/out of scope revenues will decrease, thereby reducing input allocation issues 30

Property Rates as Cross-Subsidies • Zero rating for property rates will apply even if those rates act as a hidden subsidy for standard rated services (e. g. sewage, refuse) • Potential misuse is limited because of municipal rate guidelines and external pressures • However [Clauses 40 & 42] — – “flat fee” rate funding covering all services will be viewed as a standard rated service (historic relic in certain townships) (old section 8(6)(a) continued) – Rates levied for electricity, gas, water, drainage, sewage and garbage removal to be standard rated 31

Modernising the “Local Authority” Definition [Clause 40] • The current VAT local authority definition predates recent changes to the Municipality acts • Local authority currently means: – (a) any divisional council, rural council, municipal council, – (b) any other body, council, board, committee or institution established or deemed to be established by or under any law which has functions similar to those of the councils, boards and committees in paragraph (a) and which may levy rates on the value of immovable property within its jurisdiction or receive payments for services rendered or to be rendered; and – ( c ) any water board or regional water services corporation or any other institution which has powers similar to those of any such boards or corporations • Proposals: – Point #1: Parts (a) and (b) part of the definition will be modernised into the Category A, B and C municipal definitions – Point #2: The water boards will fall under the “designated entity” (PFMA) definition; pre-effective date status of water boards will also be clarified due to previous overlap 32

Removing the Special “Enterprise” Definition [Clause 40] • • VAT only applies to an enterprise. A special “enterprise” definition exists for local authority activities (other local authority activities are simply out of scope) The following supplies by local authorities will always be part of an enterprise: – Electricity, gas or water; – Drainage, removal or disposal of sewage or garbage; – Incidental goods or services However, when it comes to any other types of supplies, the following activities trigger the enterprise definition only if all of the following conditions are met – The supplies must be of the same kind or similar to taxable supplies made by any private vendor (i. e. the competition clause); – The income derived from the activity (including amounts received as a grant) should be sufficient to cover all the costs of conducting that activity (i. e. cost coverage clause); and – The business activity must fall within the Ministerial list - see Government Notice No. 2570 Proposal: – Delete the special local authority definition; – All local authorities will fall under the general enterprise definition 33

Simplified Municipal Revenue Streams • By mainstreaming the enterprise definition, municipal supplies will generally be standard rated (not just listed items) • Areas to be clarified by way of SARS interpretation: – Licenses and fees will be standard rated – Penalties and fines will be exempt 34

Housing (Basic Principle Retained) • Municipal rental housing will remain exempt • The sale of housing by municipalities will remain subject to VAT • Housing grants: – National grants for subsidised rentals remain exempt – National grants for subsidised sales remain zero rated (special rule for housing) 35

Transport (Basic Principle Retained) • Public transport will remain outside the VAT net • This result matches the private sector (e. g taxis and other passenger transport) 36

Grants TO Municipalities • VAT treatment of grants will remain dependent on the ultimate use of the funds (sections 8(5 A) and 11(2)(t)): – Grants are zero rated if the municipality uses the funds to offer standard rated or zero rated supplies – Grants are out of scope if the municipality uses the funds to offer exempt/out of scope supplies • However, grants are not to be confused with services (the latter of which is subject to VAT) 37

Grants FROM Municipalities TO Municipal Entities • Grants from municipalities to municipal entities will: – Generally be standard rated; unless – The Minister views the entity as being regulatory • Standard rated treatment will not have any adverse impact because the municipalities can claim VAT input credits • Note: Issues involving the REDS are deferred until the October 2006 Tax Bill 38

Effective Date Issues • Municipalities may have difficulty changing their systems by 1 July 2006; therefore, a 6 -Month Penalty/Interest waiver will be added as a transitional measure [By regulation] • Input credits for pre-1 July 2006 municipal purchases will be blocked even if the purchase subsequently relates to a VATable output due to the proposed change [Clauses 47 & 49] 39

Effective Date Changes (Cont. ) • Under old law, confusion existed as to whether a grant to a municipality was subject to VAT • This confusion lead to legislative clarification in 2005 • While the 2005 change solved the problem on a going forward basis, the same confusion still exists for pre 2005 years • Hence, a retroactive amendment cures the problems arising for the pre-2005 years by [Clause 51]: – Reducing assessments issued to correct incorrect application of the Act to the extent of outstanding tax on 31 March 2005; and – Foreclosing municipalities from claiming refunds on overpaid amounts relating to the same issue 40

Customs & Excise. . .

Yearly “Sin Tax” Adjustments [Schedule 2] • Increase charges on alcohol: – Sparkling wine: +20% – Unfortified wine: +12, 5% – Fortified wine: +9, 4% – Malt beer: +9% – Alcoholic fruit beverages: +9% – Spirits: +9, 5% – Traditional beer: 0% change • Increased charges on tobacco: – – Cigarettes: +10, 2% Cigarette tobacco: +4, 7% Pipe tobacco: +8, 3% Cigars: +4, 8% 42

Deletion of De Minimis Items • Certain de minimis items need to be deleted from ad valorem excise duty list because the cost of administration largely outweighs the revenue raised • These de minimis items presently include: – Aqueous distillates and aqueous solutions of essential oils – Automatic goods vending machines – Fax machines (and certain transmission parts) – Road tractors 43

Biodiesel [Clauses 37(2) & 53] • General fuel levy concession of 30% announced in the 2002 Budget Review • Enabling legislation enacted that same year • Industry and standard setters subsequently engaged • The 2006 Budget review announced an increase to 40% (which was implemented as of 1 April 2006) 44

Miscellaneous Amendments & Technical Corrections “Annexure C”

Transfer Duty & Divorce • Transfer Duty currently does not apply to: – Transfers between spouses upon death regardless of whether the marriage is “in or out of” community of property; or – Transfers between spouses upon divorce only if the marriage was “in” community of property • Proposal [Clause 16]: – Extend the Transfer Duty to all divorce transfers regardless of community of property 46

Stamp Duty Exemption for Interests in Collective Investment Schemes • Collective Investment Schemes interests are currently exempt from Stamp Duty if in the form of an unlisted Unit Trust • In order to provide equal exemption for Collective Investment Schemes [Clauses 39 & 58]: – All interests in these schemes will be exempt from Stamp Duty/UST regardless of whether: • The scheme is in the form of a trust or company; and • The scheme invests in shares, bonds or land – Interests in all listed schemes will be exempt from UST regardless of trust of company form (provides relief for listed Index Funds) • Exemption limits the Stamp Duty/UST charges to one level: – No charge for participatory interests in a scheme; but – The Scheme is subject to a charge for its shareholdings 47

Treasury Access to PFMA and MFMA Data • Treasury generally has only limited access to SARS taxpayer data (i. e. retrievable only at an aggregate level) • Given its role in appropriating funds, Treasury will obtain full access to SARS taxpayer data for [Clauses 9 & 13 of the 2 nd Bill]: – PFMA entities, and – MFMA entities 48

UST and the Sale of Partial Share Rights [Clauses 56 &57] • In 2005, Government took steps to ensure that taxpayers could not avoid UST by selling listed shares off-market • These rules treated all off-market sales as occurring at a market value at least equal to the full listed share value • This deeming rule inadvertently applied to the sale of partial rights (dividend and voting cessions), triggering a tax on value equal to the full share value • Proposal: All sales of partial rights by participants will be subject to UST based only on the value of the partial right transferred 49

Minor Items: Income Tax • Liquidating dividend terminology alignment [Clause 19] • Deemed disposal for listed shares inadvertently limited to company holders [Clause 22] • Deletion of exemption for defunct RIDP and SRIDP programmes [Clause 23] • 2005 currency printing error [Clause 26] • Fringe benefit formula for employer-subsidised employee accommodation will utilise a R 40 000 deduction (versus the former R 20 000) [Clause 29] • Deletion of R 500 de minimis exemption for cross-border travel fringe benefits [Clause 30] • 2005 anti-avoidance dividend-outflow errors [Clause 35] 50

Minor Items: Other Taxes • VAT: Clarifying that premiums for option are an exempt financial service [Clause 41] • VAT: References to leaded fuel deleted as obsolete [Clause 53] • Customs: Empowering SARS to detain ships, vehicles and containers [Clauses 10 & 11 of 2 nd Bill] • UST: Clarifying that UST applies to redemptions [Clause 55] • Stamp Duty: Phasing-out of adhesive stamps and franking machines for Stamp Duty [Clause 12 of the 2 nd Bill] 51

Transitional Petroleum Incentives [Schedule 3] • OP 26 oil and gas leases and subleases operating along the SA coast have been eligible for tax incentives since 1977 • Conversion to “new order” rights and wholly new applications technically fall outside these incentives • The Bill carries over these incentives until the earlier of 1 May 2009 or revised legislation (due in October) 52