Moonstone 25 August 2008: Revenue Laws Bill

REVENUE LAWS AMENDMENT BILL UNDER FIRE

Tax loophole exposed in draft Bill
Legalbrief Today last week published an article based on a report in Business Day which pointed out an unexpected tax loophole in the draft Revenue Laws Amendment Bill. It contains a proposal to exempt all proceeds from life insurance policies from estate duty. This would open up a yawning loophole for tax evasion. Lump-sum retirement benefits would also be exempt from estate duty in a bid to help financially distressed families who lose their income provider. The Bill – which is currently before Parliament's Finance Committee – fleshes out the tax proposals outlined by Finance Minister Trevor Manuel in the 2008-09 Budget.

Tax experts note that life insurance policies are so broadly defined as to include pure investment products which would be given a significant tax advantage of 20 percent by the proposed exemption.

Treasury chief director of Tax Policy Keith Engel pointed out three aspects that could prevent this from happening:

• a general anti-avoidance rule to be introduced into the Estate Duty Act would deal with the pre-death conversion of life savings into life policies.
• As most real wealth was tied up in shares and bonds, there would be a huge capital gains cost of 10 perecent involved in their conversion into a life policy.
• Another disincentive would be the administration costs of these policies.

Retrospective tax liability foreseen

Tax experts also complained about the effective date of significant tax amendments contained in the same draft legislation being made retrospective, claiming that this severely undermined certainty and tax planning.

Big business deals were held up or retrospectively encumbered with enormous tax liabilities because of the backdating of tax laws, tax practitioners from Webber Wentzel, Bravura and PricewaterhouseCoopers submitted to Parliament’s finance committee conducting hearings on the Draft Revenue Laws Amendment Bill. The bill gives effect to tax proposals announced in the budget such as conversion of secondary tax on companies to a withholding tax on dividends and the introduction of a presumptive turnover tax for small businesses. Many of the tax changes will apply to years of assessment ending on or after January 1 next year, which will render them retrospective.

Treasury chief director of tax policy Keith Engel said this instability in tax legislation was a worldwide phenomenon, and occurred in SA so that tax changes were aligned with the introduction of new tax rates from the start of the fiscal year. Engel agreed on the need for a general policy to be formulated on the issue. “It is a very valid issue which we need to discuss.” PricewaterhouseCoopers tax director David Lermer blamed an excess of retrospective tax laws on “the speed of light” at which they were processed. Webber Wentzel’s Ed Liptak said retrospective tax laws were placing enormous strain on businesses, which needed certainty and predictability. The worst-case scenario was when laws were made retrospective by several years, adding huge sums in tax liabilities to what at the time were legitimate business transactions.

Liptak said that several countries had constitutional provisions limiting the scope of retrospective tax legislation or prohibiting it. “Taxpayers’ obligation to pay tax imposes a reciprocal obligation on fiscus that the law be fair and reasonable,” he said.