Madam Speaker, hon members, it gives me great pleasure to introduce this Small Business Tax Amnesty and Amendment of Taxation Laws Bill of 2006. The purpose of this Bill is to begin fulfilling the tax promises televised to the public in my Budget Speech on 15 February 2006.
The Bill is designed firstly to enact the full range of changes to rates brackets and monetary thresholds all of which provide substantial tax relief for middle-and lower-income taxpayers; secondly, to introduce a comprehensive tax amnesty for small businesses in both the formal and the informal sectors; and thirdly, to simplify municipal tax administration.
The most notable aspect of the Bill involves the small business tax amnesty. But before turning to the amnesty in detail, it bears repeating that the 2005 economic growth and enhanced revenue administration have once again exceeded expectations. The net result is additional revenue, a line for continued across-the-board tax cuts, infrastructure development and social upliftment programmes.
In accordance with the February 2006 announcements, the Bill enacts the promised tax cuts including upward adjustment of the six personal income tax brackets for the benefit of individuals at every level, for instance, the 18% bracket now ends at R100 000, up from the previous R80 000 and the top 40% now begins at R400 000, up from the previous R300 000. With regard to upward adjustment of the primary and secondary rebates, individuals under 65 years can now generate up to R40 000 tax-free as opposed to the previous R35 000. An individual 65 years or older can generate up to R65 000 tax-free.
In terms of saving, taxpayers strongly benefit. The tax in retirement funds is reduced from 18% to 9%, the individual exemption for investment interest increases from R16 500 for those under 65; and the annual capital gains exclusion increases from R10 000 to R12 500 for the sale of passive investments such as JSE enlisted shares.
Homeownership, another form of middle class saving, also enjoys substantial relief. The Bill drastically increased its transfer duty brackets. For instance, individuals can now purchase a home to the value of up to R500 000 wholly free from transfer duty as opposed to the previous R190 000 tax- free threshold. Meanwhile the capital gains tax exclusion for the sale of a primary residence also increases from R1 million to R1,5 million.
While the proposed small business tax amnesty contains many of the basic features outlined in the February budgetary overview, we have significantly expanded the scope of the amnesty after the public consultation. This aspect of the Bill strongly benefited from the informal hearing process undertaken by the Portfolio Committee on Finance. It provides yet another example of how the executive branch and Parliament can best work together. The public consultation also gained from visits to small businesses, izimbizo with small business owners and other interactions with small business associations organised by the SA Revenue Services. The net result is an amnesty that is fully expected to enhance the small business tax register and to provide peace of mind for both the unregistered and registered small business owners living in fear of past noncompliance.
Restated in more formal terms, the amnesty is expected to broaden the tax base, facilitate the normalisation of small business tax affairs, enhance tax compliance and also facilitate participation in the tax recapitalisation.
It should be noted that the initial amnesty was designed as a two-phased process. The initial pilot phase concentrated solely on the taxi industry in order to facilitate the taxi recapitalisation and was followed by a general small business amnesty. The two-phased system was ultimately dropped after it was determined that the two-phased process actually complicated rather than simplified applications and the administration.
Before turning to the details, we would do well to remember that the amnesty was provided for wealthy owners of foreign assets in 2003. It's only fitting that comparable relief is afforded to those of lesser means, especially given their critical role in generating further economic growth. As for the 2003 amnesty, the Bill contains provisions for a full accounting to Parliament. So, the amnesty process is fully measured.
Who can apply? The amnesty covers a full spectrum of small businesses including sole proprietors, partnerships, unlisted companies and trusts. The key limit is size. A business will be viewed as small only if growth of business income does not exceed R10 million. The only other restriction pertains to unlisted companies and trusts, where only ownership or interest must be limited wholly to individuals. This requirement is designed to exclude complex-entity structures such as consolidated financial groups, all of which typically involve sophisticated businesses falling outside the typical small business sector.
When to apply? Applicants must act quickly to enjoy this once-off opportunity. Specifically, applicants must submit their applications to the SA Revenue Services between 1 August this year and 31 May next year.
What gets paid? The amnesty comes at a minimal cost. The amnesty level is tiered based on taxable business income, with a levy never exceeding 5%. In particular, applicants will pay nothing if their 2006 taxable business income ranges from zero to R35 000; 2% between R35 000 and R100 000; 3% between R100 000 and R250 000; 4% on a taxable income between R250 000 and R500 000 and they will pay the top 5% on income exceeding R500 000. Successful applicants obtained a leave for all violations relating to full range of direct national taxes on business as well as the value added tax, including income taxes and secondary tax on companies rising before the 2006 tax year, that pay as you earn UIF skills development levy for tax periods ending before 1 March 2006 and withholding tax in royalties for payments to nonresidents before 1 March this year.
The amnesty not only covers successful applicants but also the authorised representatives. This amnesty further includes leave from all interest penalties and additional taxes as well as freedom from criminal prosecution in terms of tax offences.
However, it should be noted that the amnesty cannot be used to undermine the tax system, hence, taxpayers cannot utilise the amnesty as a means for obtaining refunds neither can they claim assessed losses arising from amnesty years as an offset against future income.
The amnesty contains measures to ensure that no relief is afforded for organised crime, whilst regulations will be issued to ensure that the Financial Intelligence Centre Act does not bar advisors from offering amnesty tax advice, despite the possible criminal nature of these violations. This prohibition does not extend to the knowledge of other criminal offences. Hence, tax advisors cannot freely offer advice to parties engaged in drug dealing, smuggling and other aspects of organised crime.
The amnesty also does not apply to fictitious schemes that deliberately use the VAT refund system as a method of stealing cash from the fiscus. The amnesty accordingly does not apply to schemes involving the submission of only fictitious invoices for artificial VAT refund claims, nor does the amnesty apply to schemes involving fictitious claims of zero-rated exports for items that actually involve fictitious exports or standard-rated local sales.
One difficult issue is the treatment of parties who have already come forward to disclose their noncompliance before the amnesty or are already liable for tax as a result of a Sars audit, investigation or other enforcement. This group of taxpayers typically falls outside the amnesty process because the amnesty acts as a quid pro quo for coming forward. In other words, parties are rewarded for disclosing their tax noncompliance during the amnesty window period before being detected by SA Revenue Services - that is, they have come forward before they can be found out.
That said, those parties with outstanding debts following their voluntary disclosure of previous noncompliance or Sars enforcement action undoubtedly feel unfairly treated given the complete amnesty granted to others engaged in similar violations. Given these concerns, the amnesty will be extended by regulation to cover this set of taxpayers. Although they will not receive full amnesty the regulations will allow for relief from interest, penalties and other additional charges while maintaining Sars claims against underlying capital. This aspect of the amnesty is being set aside for regulations due to the unique issues involved, but will be tabled for parliamentary review.
The final aspect of the Bill concerns municipalities. Firstly, the Bill sets in motion the removal of the Regional Services Council Levies with effect from 1 July 2006. Secondly, the VAT treatment of property rates will be shifted from out of scope to a zero-rating. This shift will mean that all VAT-bearing municipal costs relating to these rates will now be fully claimable by municipalities as creditable VAT inputs. This new level of claimable VAT input credits would indirectly shift substantial revenues to the municipalities as a further means of compensation for the loss of the Regional Services Council Levy.
The final set of changes again relates to VAT. Due to the historical treatment of property rates and municipal supplies, much of the municipal VAT calculation has turned out to be far more complicated than necessary. Many of these issues relate to whether municipal charges fall within or outside of the VAT net. The Bill accordingly brings the charges into the VAT system. This clarifies much of the confusion, simplifies compliance and generates further VAT input credits for municipalities. Again, I would like to thank the chairman, Nhlanhla Nene, for his leadership and the members of the portfolio committee for their constructive role in the process. I can proudly say that the end product will take South Africa one step forward in terms of further growth.
I hereby table the Small Business Tax Amnesty and the Amendment of Taxation Laws Bill of 2006 as well as its companion, the Second Small Business Tax Amnesty and Amendment of Taxation Laws Bill of 2006. I thank you, Madam Speaker. [Applause.]
Bill referred to the Portfolio Committee on Finance for consideration and report.