National Treasury indicated in the 2020 budget that government is reducing the number of tax incentives in the tax system, and the 2021 budget has reminded taxpayers that four further tax incentives are scheduled to lapse on reaching their respective sunset dates.
Treasury noted that: “Tax incentives often undermine the principles of a good tax system, which should be simple, efficient, equitable and easy to administer.”
It also observed that: “Tax incentives and some expenditure deductions provide favourable tax treatment to certain taxpayers or groups of taxpayers, and inevitably result in the creation of vested interests and lobby groups.”
The incentives in respect of airport and port assets, rolling stock, and low-cost residential units have a sunset clause of February 28, 2022.
The film incentive, which provides for the exemption from normal tax of income derived from the exploitation rights of approved films, expires on January 1, 2022.
Treasury has invited stakeholders to provide detailed reasons on why the sunset clauses should be extended. The submission deadline is March 31.
However, Treasury has not indicated what information it requires, or in what format.
Nevertheless, on receiving the mishmash of information from various sources, Treasury “will determine the extent to which these tax incentives enhance efficiency, transparency and fairness in the business tax system, together with how these incentives [will] facilitate economic growth through improved investment and competitiveness”.
Incentives put on watch
Urban development zones and learnership tax incentives
Treasury is currently reviewing the urban development zones and learnership tax incentives. The incentives have been extended for two years while their reviews are completed.
Research and development tax incentive
The research and development (R&D) tax incentive introduced in 2006 is administered by the South African Revenue Service (Sars) and the Department of Science and Innovation (DSI), formerly called the Department of Science and Technology (DST). In 2015 the minister of the DST established a task team to assist in ironing out problems and making recommendations.
Bizarrely, the DST would not allow any patent attorney to sit on the task team.
In the opinion of a well-known patent attorney “the task team’s published report [April 2016] is riddled with misstatements of law, inaccuracies and an entirely superficial treatment of intellectual property and legal concepts”.
The R&D incentive expires on October 1, 2022, and Treasury and the DSI will be publishing a discussion paper inviting public comment on the future of the incentive.
Tax provisions for travel and working from home
Treasury will review current travel and home office allowances to investigate their “efficacy, equity in application, simplicity of use, certainty for taxpayers and compatibility with environmental objectives”.
Treasury recognises that this could potentially have an impact on salary structuring, and will commence consultations during 2021/22.
Does working from home in casual wear turn out to be more expensive than the cost of travelling to work? And for those who are already claiming expenses, beware the capital gains tax sting-in-the-tail if you own your home.
Upstream petroleum industry
After two large gas discoveries off the coast near Mossel Bay, Treasury and the Department of Mineral Resources and Energy are of the view that there is potential for further exploration. They will jointly publish a discussion paper on potential tax reforms.
A tax incentive should not only yield greater benefits than the cost in monetary terms, it should also create sustainable businesses that will grow and thrive once the incentive is used up. Obviously, the incentive should boost employment. Other required measurements should be contained in the legislation.
Unfortunately, the loose legislation written around certain incentives creates opportunities for the tax avoidance sharks to come up with creative ways of utilising the incentive.
The sharks will turn the incentive into a saleable product. Without sharp watchdogs at Sars to audit all the incentives, and to challenge those getting abused, the fiscus is unnecessarily drained.
Treasury should publish an annual cost benefit analysis of all the tax incentives as part of the annual budget. The information should include the cost of each incentive, the total revenue earned, the total amount of tax paid (if any), as well as the new jobs created in the payroll system (not moved from one department to another).
There should also be information regarding businesses that closed down after the incentive ran its course.
The public has a right to know how their tax money is allocated (and how it was wasted).