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Criteria for refunds on diesel tax have been changed

Tuesday, 28 February 2017   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (Business Day)

The emphasis is now on what a user does, rather than their status — a change that has been welcomed — but there is still concern that compliance is onerous and confusing

The diesel tax refund system and its administration is set for an overhaul to address anomalies in the system and to find more "equitable" rules and administrative procedures.

National Treasury and the South African Revenue Service (SARS) recently published a discussion document on the refund system and how it might address concerns about the current system.

One of the major criticisms has been the increasingly onerous compliance requirements to qualify for the refund. Treasury has also acknowledged that some eligible beneficiaries have been excluded from the system while others appear to be making disproportionate refund claims.

According to the discussion document, electricity’s (Eskom’s) share of the diesel refunds increased from 3% in 2010-11 to 60% in 2015-16.

The share going the country’s economic growth and employment drivers showed significant declines over the same period: agriculture, forestry and fishing received 11%, down from 46%; and mining and quarrying received 24%, from 45% in 2010-11.

The diesel refund system, introduced in 2000, offers full or partial relief from the fuel levy, the Road Accident Fund and excise duty.

It is aimed at protecting the competitiveness of South African producers in agriculture, forestry and fishing and the mining sectors by reducing these road-related levies for non-road users.

Interim amendments have been implemented while the current system is being reviewed.

The interim amendments have been praised for focusing on the activity rather than the recipient’s status.

Contract and small-scale farmers in sugarcane production will qualify for refunds, as will ceded mining rights holders and those engaged in ongoing mining rehabilitation. Meanwhile, the benefit is reduced from 100% to 50% for peaking electricity generation plants.

Des Kruger, consultant at law firm Webber Wentzel, says the proposed changes are in the main positive. They address to a large degree some of the existing issues being experienced both by the authorities and qualifying diesel users.

He says the proposal to base the entitlement to refunds on the specific activity as opposed to status of the user is especially welcomed.

"This will address the contracting issue being faced by small farmers where the refund is available, but the contractor is not the qualifying user. This will now change as one would look at the activity rather than the status of the user," says Kruger.

The South African Institute of Tax Professionals (SAIT) has welcomed the opportunity for role-players to participate in the reform process.

SAIT head of tax policy Erika de Villiers hopes there will be a balance between the need to enforce compliance and practical constraints on the ground.

"Many taxpayers who depend on the diesel refund to be globally competitive are finding the compliance burden almost prohibitive."

A major concern raised last year was the fact that the diesel refund was to be limited to operational mines, and refunds associated with post-operation rehabilitation would not be allowed.

Mining companies have been concerned in recent years by a view expressed by some SARS officials that rehabilitation activities are not primary mining activities.

This concern was laid to rest by way of the interim amendments, which now explicitly include rehabilitation activities up to the point that a mine closure certificate is issued as a primary mining activity.

But additional record-keeping requirements proposed in the discussion document have already been met with some trepidation.

Treasury proposed that two logbooks be kept: one to reflect the receiving and dispensing of diesel at each storage facility at every primary production site, and another to provide a detailed record of the claimant’s usage of the dispensed diesel.

"The dispensing of diesel is one of the greatest risks in the diesel refund system. The diesel should therefore be delivered to the physical site where the qualifying primary production will take place and independent logbooks should be kept for each storage facility at such sites," Treasury says.

Diesel refunds will be allowed only in respect of diesel dispensed from storage facilities formally on record with SARS to diesel-powered equipment and vehicles also formally on record with SARS.

Kruger says there is some confusion as to what documentation is required.

The proposal is to set out the requirements more clearly, namely documentation (logbooks) recording the "receiving and dispensing of diesel at each storage facility", and documentation (logbooks) that records the usage of such diesel.

"These requirements seem reasonable to me, and in any case were arguably required under the existing regime. Importantly, the intention is to develop the logbook requirements on an industry basis after consultation with the industry."

In addition to logbooks, claimants will be obliged to maintain proper service and repair records for such machinery and vehicles to prevent ghost claims.

De Villiers says these record-keeping requirements should be "carefully considered". The diesel refund compliance should as far as possible be focused on financial data as opposed to physical measurement of diesel used.

Companies already use sophisticated systems of internal control to prevent misuse and losses to the company, and consideration should be given to relying on these systems.

Ideally, the diesel refund should become claimable as soon as the diesel has been purchased, to be used for qualifying activities.

It is often impossible to measure the diesel left in the tank of equipment such as a vessel or underground mining vehicle at the end of the month.

In the case of taxpayers who are entitled to claim diesel refunds on multipurpose vehicles (such as bakkies, trucks and SUVs), a different system may be required.

Treasury has also proposed a "standalone diesel refund administration system", which will be separate from the value-added tax (VAT) system that is currently processing the refund claims.

Small producers not registered for VAT are "inadvertently" excluded from the diesel refund system.

Kruger, however, is not in favour of separating the refund system from the VAT system.

"At present the refund is seamless in that the refunds are claimed through the VAT system without the need to submit copious documentation and to wait for approval. This will obviously not be the case if a separate refund administration is established," he says.

Written comments on the proposed interim and future reforms of the diesel refund system must be submitted to Treasury or SARS by May 15.

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