T Manuel: Small business tax amnesty and amendment of Taxation Laws
Bill

13 June 2006

Introduction

Madame Speaker, it gives me great pleasure to introduce the “small business
tax amnesty and amendment of Taxation Laws Bill, 2006.” The purpose of this
Bill is to begin fulfilling the tax promises televised to the public in my
annual February 2006 Budget address to the nation (with the remainder to follow
later in the year). The Bill is designed:

* 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

* to introduce a comprehensive tax amnesty for small businesses within both
the informal and formal sectors

* 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 2005
economic growth and enhanced South African Revenue Services (SARS)
administration have once again exceeded expectations. The net result is
additional revenue, allowing for continued across the board tax cuts,
infrastructure development and social upliftment programmes.

Rate changes and monetary thresholds

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 bottom 18 percent bracket now
ends at R100 000 (from the previous R80 000) and the top 40 percent now begins
at R400 000 (from the previous R300 000).

* upward adjustment of the primary and secondary rebates. Individuals under
65 can now generate up to R40 000 tax free (as opposed to the previous R35 000)
and individuals 65 and older can generate up to R65 000 tax free (as opposed to
the previous R60 000).

In terms of savings, taxpayers strongly benefited. The tax on retirement
funds is reduced from 18 percent to nine percent. The individual exemption for
investment interest increases to R16 500 for those under 65 (and to R24 500 for
those 65 and older). The annual Capital Gains Tax exclusion increases from R10
000 to R12 500 for the sale of passive investments, such as Johannesburg Stock
Exchange (JSE) listed shares.

Home ownership is another form of middle class savings also enjoying
substantial relief. The Bill drastically increases the transfer duty
brackets.

For instance individuals can now purchase a home with a 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.

Small business amnesty

1. Objectives

While the proposed small business tax amnesty contains many of the basic
features outlined in the February Budget review, we significantly expanded the
scope of the amnesty after 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
SARS.

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 unregistered and
registered small business owners living in fear of past non-compliance.

Restated in more formal terms, the amnesty is expected to:
* broaden the tax base
* facilitate the normalisation of small business’s tax affairs
* enhance the tax compliance culture
* facilitate participation in the taxi recapitalisation.

It should be noted that the initial amnesty was designed as a two-phase
process: an initial pilot phase concentrating solely on the taxi industry (to
facilitate the taxi recapitalisation), followed by a general small business
amnesty. This two-phase system was ultimately dropped after it was determined
that the two-phase process actually complicated (rather than simplified)
applications process and their administration.

Before turning to the details it would do well to remember that amnesty was
provided for wealthy owners of foreign assets in 2003. It is only fitting that
comparable relief is afforded to those of lesser means, especially given their
critical role in generating further economic growth. As with the 2003 amnesty,
the Bill contains provisions for a full accounting to parliament so that the
amnesty’s success is fully measured.

2. Who can apply?

The amnesty covers the 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 gross business income does not
exceed R10 million. The only other restriction pertains to unlisted companies
and trusts where ownership or interests 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.

3. When to apply?

Applicants must act quickly to enjoy this once off opportunity. Specifically
applicants must submit their applications to SARS from 1 August to 31 May
2007.

4. What to submit?

To qualify for amnesty, applicants must submit the following three
items:

* the amnesty application (including disclosure of all net business income
for the 2006 tax year)
* the 2006 income tax return
* a 2006 statement of assets and liabilities.

In other words applicants are eligible for amnesty simply by coming forward
with an honest declaration of their business tax affairs for a single year.
They need not recreate books and records for prior years, all of which
government recognises are beyond the capacity of typical small businesses.
Moreover, even if the records for the 2006 tax year are deficient “reasonable”
estimates will suffice. This reliance on “reasonable” estimates will be
critical for informal businesses, many of whom lack proper books and
records.

5. What to pay?

The amnesty comes at minimal cost. The amnesty levy is tiered based on
taxable business income, with the levy never exceeding five percent. In
particular:

* applicants pay nothing if their 2006 taxable business income ranges from 0
to R35 000
* applicants pay two percent on their 2006 taxable business income from R35 000
to R100 000
* applicants pay three percent on their 2006 taxable business income from R100
000 to R250 000
* applicants pay four percent on their 2006 taxable business income from R250
000 to R500 000
* applicants pay the top five percent on their income exceeding R500 0000.

6. Coverage

Successful applicants obtain relief for all violations relating to the full
range of direct national taxes falling on business as well as the value-added
tax. This relief specifically includes:
* income taxes and secondary tax on companies (STC) arising before the 2006 tax
year
* value-added tax (VAT), PAYE, unemployment insurance fund (UIF) and skills
development levy for tax periods ending before 1 March 2006
* withholding tax on royalties for payments to non-residents before 1 March
2006.

The amnesty not only covers successful applicants but also their authorised
representatives (e.g. public officers). This amnesty further includes relief
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 nor can they claim assessed losses arising from amnesty years
as an offset against future income.

7. Approval process

The approval process for the small business amnesty will operate in
comparable fashion to the previous amnesty for foreign assets. As with the
previous amnesty, SARS will review applications with a view toward assisting
applicants not as a means of “victimisation.”

The amnesty process will again be fully transparent. SARS will deliver
notice of approval or denial. Any denial will include the reasons therefore,
and all denials will be subject to the full range of objection and appeal
procedures.

That said the amnesty process is not a blank cheque. Applicants must apply
in good faith. Applicants will accordingly lose the benefit of the amnesty for
core violations failure to pay the levy, failure to make full disclosure or the
provision of materially incorrect estimates.

8. Organised crime

The amnesty contains measures to ensure 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 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 wholly
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.

9. Waiver of penalties and interest

One difficult issue is the treatment of parties who have already come
forward to disclose their non-compliance before the amnesty or are already
liable for tax as a result of 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 non-compliance during the amnesty window
period before being detected by SARS, i.e. they have come forward before being
found out.

That said those parties with outstanding debts following their voluntary
disclosure of their non-compliance or SARS enforcement action undoubtedly feel
unfairly treated given the complete amnesty of 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).

10. Municipalities

The final significant aspect of the Bill concerns municipalities. Firstly,
the Bill sets in motion the removal of the Regional Services Council Levy with
effect from 1 July 2006. This removal will provide significant relief for
businesses in terms of tax and administration. This removal is especially
helpful for small businesses (who disproportionately bore the compliance
burden). As was announced in February, all revenues lost by the municipalities
will be replaced (mostly via national transfer payments).

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 will
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. Madame Speaker, I hereby table the “small
business tax amnesty and the amendment of Taxation Laws Bill, 2006” as well as
its companion, the “second small business tax amnesty and amendment of Taxation
Laws Bill, 2006.”

Issued by: Ministry of Finance
13 June 2006
Source: National Treasury (http://www.treasury.gov.za)