Small Business Tax Amnesty

1
Small Business Tax Amnesty Amendment of
Taxation Laws Bills

• Select Committee on Finance
• 21 June 2006

2
Major Themes

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

3
Continued economic growth and effective SARS
administration allow for yet another year of
broad-based tax relief . . .
4
Individual Income Tax Rates

• Marginal Brackets Clause 18 and Schedule 1)
• 18 rate tops out at R100 000 (versus the former
  R80 000)
• 25 rate tops out at R160 000 (versus the former
  R130 000)
• 30 rate tops out at R220 000 (versus the former
  R180 000)
• 35 rate tops out at R300 000 (versus the former
  R230 000)
• 38 rate tops out at R400 000 (versus the former
  R300 000)
• 40 rate kicks-in at R400 000 (versus the former
  R300 000)
• Thresholds (Rebates)
• The general tax threshold (for ages below 65)
  kicks-in at R40 000 (versus the former R35
  000) Clause 20
• The threshold for ages 65 and above kicks-in at
  R65 000 (versus the former R60 000)

5
Individual Thresholds

• Interest (Dividend) Exemption Clause 23
• Ages Below 65 Domestic interest (dividends) is
  exempt up to R16 500 (versus the former R15 000)
• Ages 65 and Above Domestic interest (dividends)
  is exempt up to R24 500 (versus the former R22
  000)
• Foreign interest and dividends are exempt up to
  R2 500 (versus the former R2 000)
• Capital Gains
• Annual capital gain/loss exemption increases to
  R12 500 (versus the former R10 000) Clause 32
• Exclusion on death increases to R60 000 (versus
  the former R50 000) Clause 32
• Primary residence (i.e. home) sale exemption
  increases to R1,5 million (versus the former R1
  million) Clause 33

6
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 R2,5
  million (versus the former R1,5 million) Clause
  17
• The Donations Tax threshold increases to R50 000
  (versus the former R30 000) Clause 27

7
Real Estate Purchasesand Rentals

• Transfer Duty Relief (Purchases) Clause 14
• The zero rate tops out at R500 000 (versus the
  former R190 000)
• The 5 duty kicks-in at R500 001 (versus the
  former R190 001)
• The 8 duty kick-in at above R1 million (versus
  the former R330 001)
• Company/trusts rates drops to 8 (versus the
  former 10)
• Stamp Duty Relief (Rentals) Clause 38
• Exemption kicks-in at R500 per agreement (versus
  the former R200) stated differently, rental
  agreements with aggregate rent up to R100 000 are
  now exempt

8
Prior-Year Individual HoldoversBase-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 under-withholding due the change
  in deemed private distance
• Clause 28
• Medical Clause 31
• New monetary cap system (versus the former 2/3rds
  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 medically-insured employees as long as the
  medical scheme reimburses the employer (i.e. no
  double-dipping)

9
Tax Incentive for LearnershipWages 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 R20 000 (versus the former R17 500)
• Starting maximum cap for new employees will be
  R30 000 (versus the former R25 000)
• Completion maximum cap for all employees will be
  R30 000 (versus the former R25 000)
• Disabled person category added
• 150 additional starting allowance for existing
  employees with a R40 000 maximum cap
• 175 additional starting allowance for new
  employees with a R50 000 maximum cap
• 175 additional completion allowance for all
  employees with a R50 000 maximum cap

10
Small Business Relief

• Small Business Corporations
• Definitional limit increases to R14 million
  (versus the former R6 million) Clause 24
• The 10 rate upper limit tops out at R300 000
  (versus the former R250 000) Schedule 1
• Exemption threshold tops out at R40 000 (versus
  the former R35 000 similar to individuals)
  Schedule 1
• One-Time CGT Exemption for Small Business Sales
• Exemption increases to R750 000 (versus the
  former R500 000) Clause 34
• 100 Depreciation
• Small items of all businesses eligible for 100
  depreciation operates under an increased limit of
  R5 000 (versus the former R2 000)
• VAT Thresholds Clause 50
• Definitional limit for 4-monthly filers increases
  to R1,2 million (versus the former R1 million)
• Definitional limit for 6-monthly small farmers
  increases to R1,2 million (versus the former R1
  million)

11
Small Business Amnesty . . .

• Special Relief to Assist Small Business (Informal
  and Formal)

12
Rationale

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

13
Who May ApplyClause 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
• R10 million gross business turnover limit for the
  2006 assessment year
• Pro rate R10 million for years that are shorter
  or longer than 12 months

14
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

15
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

16
Reasonable EstimatesClauses 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

17
Levy RequirementClause 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 R35 000
• 2 rate for R35 001 to R100 000
• 3 rate for R100 001 to R250 000
• 4 rate for R250 001 to R500 000
• 5 rate for R500 001 or more

18
No SARS Pre-Amnesty ContactClause 5

• The basic amnesty will generally be denied if
  SARS issues a notice to the applicant (or the
  applicants 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

19
Amnesty ReliefClauses 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 2nd Bill

20
No Carry Forward BenefitsClause 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

21
Amnesty ProcessClause 5 Clause 6 of 2nd 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

22
Not For Organised CrimeClause 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)

23
Amnesty Subsequently VoidClause 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

24
Outstanding Debt AmnestyClause 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

25
Parliamentary ReportClause 7 2nd 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

26
Municipalities . . .

• RSC Levy Repeal
• VAT Simplification

27
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
• R7 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)

28
Municipalities and VAT Objectives

• 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

29
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 (x6)
• Category B municipalities share municipal
  executive and legislative authority in an area
  with a category C municipality (x231)
• Category C municipalities have municipal
  executive and legislative authority in an area
  that includes more than one municipality (x46),
  which may include District Management Areas
  (certain Cs, such as nature reserves)

A
C
B
C
B
B
B
B
B
B
30
Zero Rating of Property RatesClauses 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

31
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

32
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

33
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

34
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

35
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)

36
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)

37
Grants TO Municipalities

• VAT treatment of grants will remain dependent on
  the ultimate use of the funds (sections 8(5A) 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)

38
Grants FROM MunicipalitiesTO 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

39
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

40
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

41
Customs Excise . . .
42
Yearly Sin Tax AdjustmentsSchedule 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

43
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

44
BiodieselClauses 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)

45
Miscellaneous Amendments Technical Corrections

• Annexure C

46
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

47
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

48
Treasury Access to PFMAand 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 2nd Bill
• PFMA entities, and
• MFMA entities

49
UST and the Sale of PartialShare 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

50
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 R40 000
  deduction (versus the former R20 000) Clause 29
• Deletion of R500 de minimis exemption for
  cross-border travel fringe benefits Clause 30
• 2005 anti-avoidance dividend-outflow errors
  Clause 35

51
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 2nd 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 2nd Bill

52
Transitional PetroleumIncentives 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)