2022 Draft Tax Bills: public hearings

Meeting report

The Chairperson explained that the core of the meeting was public hearings on the Draft Rates and Monetary Amounts and the Revenue Laws Amendment Bill with four stakeholders: Congress of South African Trade Unions (COSATU), British American Tobacco South Africa (BATSA), South African Institute of Chartered Accountants (SAICA) and Association for Savings and Investment South Africa (ASISA).

COSATU submission on Draft Rates and Monetary Amounts Bills
Mr Mathew Parks, COSATU Parliamentary Coordinator, said COSATU welcomed the Draft Rates and Monetary Amounts Bill. The key issues covered in the Bill included the postponement of the increase in the Health Promotion Levy as well as the fuel price relief given to commuters and the economy between April and August 2022. He said the Revenue Laws Amendment Bill responded to COSATU’s call for financially distressed workers to be allowed access to limited portions of their pension funds without having to resign from their jobs. COSATU also welcomed the one-year delay in increasing the Health Promotion Levy (Sugar Sweetened Beverages Tax). This was in line with the time frames set out and agreed to by the government, business and labour in the Sugar Master Plan. It was going to provide badly needed relief to the sugar industry and its 72 000 plus workers who battled with cheap subsidised imports, an economic recession and a need to shift consumers to healthier diets.

COSATU acknowledged and appreciated the R1.50 intervention in fuel prices by the Minister of Mineral Resources and Energy, Mr Gwede Mantashe, and Minister of Finance, Mr Enoch Godongwana, between April and July 2022. It provided significant relief to workers and commuters in the economy. However, it cautioned that fuel prices resulting from the Russia-Ukraine War could have spillover effects on transport, food and inflation. As a result, it recommended the government to go beyond the relief it had offered because the economy was still struggling. This was evidenced by the fact that the Consumer Price Index (CPI) had been pushed to its highest in many years and increased repossession rates were noted by the Reserve Bank of South Africa.

COSATU pointed out that it was waiting for the proposed review on fuel prices. It recommended that the Road Accident Benefit Scheme (RABS) Bill be re-tabled in Parliament. The objective was to overhaul the Road Accident Fund (RAF) which due to its inefficiency, had accumulated liabilities up to R400 billion. At present, lawyers seemed to be profiteering from the RAF instead of road accident victims.

COSATU called for more action towards expanding public transport to reduce the number of cars on the roads. It recommended the deployment of the South African National Defence Force (SANDF) and South African Police Service (SAPS) to secure railway networks. The Department of Trade Industry and Competition (DTIC) was already in the process of tightening regulations on the scrap copper trade which was a contributing factor to the collapse of public infrastructure. Long term plans to solve challenges with fuel prices included moving towards electric vehicles.

COSATU submissions on Amendment of the Revenue Laws Amendment Bill
COSATU welcomed the Revenue Laws Amendment Bill in response to its call for financially distressed workers to be allowed limited access to their pension funds. The Bill provided a positive two pot framework which enabled workers in the future, once a year, to access their savings pot where a third of their pensions was to be placed. This allowed workers to access a limited portion of their pension funds when in need without having to resign, and cash out their entire pension fund. This kept workers employed, avoided the depletion of their pension fund, and incentivised them to save more.

However, notwithstanding these positive implications, the Amendment Bill had its weaknesses. COSATU recommended further amendments in the Bill to allow workers to transfer their existing savings to the new savings. This was going to provide them with immediate relief. COSATU pointed out that workers could not afford to wait to accumulate further savings when they were in severe debt. About 44% workers lost their jobs and 2.2 million were retrenched in the past two years. Even those fortunate to have retained their jobs were struggling because they did not receive wage increases. Those who received increases often received them below the inflation rate. In addition, many such workers were supporting their relatives who had lost their jobs.

COSATU suggested that the Bill guarantee workers continued access to their full pension minus tax when they were retrenched, dismissed or forced to resign. If this was not addressed, workers who lost their jobs would not be able to provide for their family or pay their home loan. This would result in workers losing their home and other prized possessions. Finally, it recommended that the Bill had to ensure that workers were not denied access to their savings pot by pension fund boards.

BATSA submission
Mr Anelisa Mzinyathi, BATSA Anti-Illicit Trade Manager, commended Treasury for the 5.5% increase in the excise tax. This offered relief to the industry and awarded it the opportunity to compete against illicit trade. However, despite the relief this had offered, it was anticipated that only a third of the industry was going to be taxed. As a result, a large portion of the market was still going to remain untaxed. BATSA acknowledged SARS efforts to deal with non-compliance with excise taxes and encouraged it to continue doing so as this significantly helped with illicit trade.

Despite the commendable work done by Treasury and SARS, the economy still faced a market that was dealing with problems of illicit trade. BATSA pointed out that there was a product selling for as low as R70 which was below the minimum collectable tax rate. Consequently, enterprises that paid duty continued to struggle with this competition against low prices. The market was also sitting on a structural change between formal and informal markets as the formal market was passing on the excise rate to the consumer whilst the informal market was not. The Peter Stuyvesant brand which was used to structure the excise policy, was no longer a relevant brand. Whilst it had accounted for a quarter of the products consumed in the market, recent research showed that it accounted for only 13%. Using the Peter Stuyvesant brand price point as an anchor to set policy was misleading because it was significantly higher than the most consumed brand. A pack of Peter Stuyvesant cigarettes cost R44 compared to cigarettes selling for R20 which was the bulk of consumption.

Given that a brand-centric approach was not ideal, BATSA recommended Treasury start looking at reviewing the current anchor points of how excise policy were set. It encouraged Treasury to move towards a weighted average price point calculation which was in line with global standards on setting excise policy. It also encouraged a minimum retail price. It was hoped that this would give consumers the ability to assess if the product they were consuming was legal or not. Further, a minimum retail price provided a reference price that could be used when enforcing law against illicit activity in the market. BATSA recommended the introduction of a ‘track and trace’ system which further monitored the production and distribution processes of products within the Customs Union.

SAICA submission
Dr Sharon Smulders SAICA Project Director for Tax Advoccy, accompanied by Mr Pieter Faber, SAICA Senior Executive for Tax, expressed concern about policy issues. It was interesting that Treasury called it a two pot system yet in actual fact it was a three pot system. There was the vested pot, the retirement pot and the savings pot. SAICA was also concerned about the implementation date scheduled for 1 March 2023. This date was not feasible especially considering that the Defined Benefits Fund did not seem to fit in with the current legislation.

Another concern was how the investments were going to be allocated. In the existing system, there was an amount that they could invest. However, with the introduction of a three pot system, how were these investments going to be allocated? There were similar concerns with the gross allocations on those particular investments. Were they going to be allocated to the different pots at 1%? These uncertainties had to be resolved because they affected how the underlying assets were invested by the funds.

SAICA pointed out that the law was silent on the housing loans and divorce policy. Treasury indicated that this was catered for in the Pension Fund Act. However, if these loans were provided, how were they going to be split between the different pots? If these funds were split, did individuals have the choice on which pots to allocate the payment? The other concern was how instances of default were going to be handled. For example, if an individuals could no longer pay the amount they owed to the bank, how was the bank going to reclaim its money? If the money was from the retirement pot, was it possible to withdraw it considering that the retirement pot actually had to be paid out as an annuity and not in a full lump sum? This was a potential loophole that individuals could take advantage of. A similar concern was about the divorce policy if money was allowed to be withdrawn before retirement. Further, how were divorce payments going to be allocated to different pots. Did individuals have a choice on which pot to be allocated funds?

SAICA asked for more clarity on the costs that were going to come with the changes in policy. Industry anticipated that these changes were going to increase costs. It asked how much of these costs were going to be passed on to the consumers. Were these costs going to erode the actual potential savings? Finally, how were retirement withdrawals going to be taxed? To resolve some of these issues, its recommendations included changing the effective implementation date. SAICA suggested that the date had to be left for the industry, Treasury and the SARS to decide. On the investments, there was a need for clarity on investment portions when returned, how this was going to be allocated between the different pots. On the housing and divorce policy, more clarity was needed on how a spouse was to be taxed on the actual amount they received.

SAICA also suggested that the Committee and Treasury had to monitor how much of the costs incurred through these changes were transferred onto the consumers. There was a need to ensure that these costs were not excessive in relation to what was actually being charged for. Although it was anticipated that these changes were going to increase costs, the benefits to society and members of pension funds were immense.

ASISA submission
Ms Rosemary Lightbody, ASISA Senior Policy Advisor, said ASISA and its members welcomed the two pot system. One of its large members carried out research that found that if a new member were to enter the two pot system, they would accumulate, by the time of their retirement, more than double the amount for their retirement than they would have under the current system.

ASISA supported the legislation as it made it clear that there was going to be retention of vested rights, and that existing rights are not being removed because of this new system. It supported no transfers from existing benefits to the savings pot, and the continued tax deductibility of contributions, withdrawals being taxed at marginal rates. It supported the flexibility of contributions being made to the savings pot, but at the funds’ discretion. However, it emphasised that complexity needed to be avoided as it was going to result in confusion and distrust for the system by the members. Therefore, there was a need to keep the process as simple as possible to ensure that costs and charges remained low.

The main concern was the implementation date. ASISA felt that the date was not feasible. Before effecting a date, legislation had to be consulted on, redrafted and progressed through the parliamentary process and then promulgated. The administrative capabilities had to be assessed, systems had to be specified, and business rules developed. This could not be done on the basis of draft legislation. Retirement fund boards had to meet, rule amendments had to be drafted and approved by the Financial Sector Conduct Authority (FSCA). As a result, at least 18 months from the date of the gazetting of the final legislation were required before implementation. The current legislation had a lot of issues that needed to be resolved.

The other concern was the conceptualisation of the two pot system. There was confusion on how the system was viewed. This was potentially due to the drafting of the Bill that seemed to view the various pots as being entirely distinct. For instance, the Bill suggested that the pots could be split up. This was not true. There were also concerns about the contributions that were in excess of the tax deductible limit. ASISA pointed out that the taxable income had to be known at the time that the contributions were received to enable a proper division between savings pot and retirement pot.

ASISA pointed out that the legislation seemed not to take Defined Benefit Funds into account. It explained that the process involved in implementing the two pot system was more complex with the Defined Benefit Funds than the Defined Contribution Funds. Therefore, the Income Tax Act had to take this into consideration. The amendment of the Pension Fund Act was another issue that needed to be addressed. The Pension Fund Act had to deal with divorced spouses, maintenance orders, housing loans and other deductions that were provided for in the Act. There was a need for amendments to the Pensions Fund Act to dovetail them with the Income Tax Act. ASISA recommended that all of these legislative amendments had to be gazetted to check if the proper legal provisions had been made for the implementation of the two pot system.

Discussion
Dr D George (DA) thanked the stakeholders for their submissions. He agreed that the Defined Benefit Fund was a lot more complicated than the Defined Contribution Fund, therefore, there was still work to be done on that. He asked ASISA to clarify if the industry was not going to be ready by 1 March 2023 for implementation and that there was more work to be done.

Ms Lightbody replied that its members were not going to be ready by 1 March 2023 and if the legislation was implemented so soon, a very poor outcome was expected.

Ms P Abraham (ANC) asked COSATU to elaborate on its proposal about the fuel tax.

Mr Parks replied that there had been a significant increase in fuel prices since 2021. This inevitably affected the working class. The fuel price per litre was now within the minimum wage range. For example, petrol cost R22 per litre and diesel R25 per litre. The minimum wage on the other hand was between R23 and R19 per hour. Many sectors of the economy were struggling with the CPI, which had ascended to 7.4%, and the year had seen a rise in the rate of repossessions. Although the government could not do anything about the international oil price volatility, something could be done about the 32% fuel tax. While the R1.50 subsidy between April and August on fuel provided by the government was a positive initiative, COSATU hoped that more could be done because fuel prices remained significantly high.

He proposed that if the tax was reduced from 32% to 25%, measures could be taken to compensate for lost revenue. For instance, the tax compliance rate could be increased from 60% to 65% in the following two years. This was going to be an extra R100 billion per annum collected as revenue. This could be achieved by employing additional staff. He pointed out that the fuel levy, which helped the Road Accident Fund, was not sufficiently serving its purpose. Road accident victims had to wait for two years to receive the money that was due to them whilst a significant amount of this money was being directed to road accident lawyers who unashamedly profiteered from this. The Department of Transport proposed the RABS to overhaul the RAF Bill but it was rejected by the Committee. This Bill was going to remove the lawyers from the equation and direct the money received to the victim claimants. He recommended the re-tabling of the RABS Bill in Parliament by December 2022 to place the RAF on a sustainable trajectory.

Other medium, long and short term interventions included reopening all Metro Rail and Transnet Rail lines. These were going to help with the transportation of 10 million commuters across the country. Also many agricultural, manufacturing and mining products shipped on rail would meet their destinations on time and shield them from fuel hikes. He mentioned that Finance Minister Godongwana indicated that there was going to be a debt relief package for Eskom. If successfully implemented, it was going to help reduce inflation.

The Acting Chairperson, Ms Abraham, thanked COSATU for its response. She announced the apologies for stakeholders who had not presented in the meeting. They would appear on the 14 September. She adjourned the meeting.