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Normal wear and tear deductions should remain when tax incentives lapse

Tax legislation commonly provides for such a deduction.
Sait is deliberating whether the incentive for the film industry could be replaced by one that assists start-ups in the gaming, animation and technology sectors. Image: Shutterstock

Several tax incentives will lapse within the next two years when they reach their respective sunset dates. The first of these, the Venture Capital Company (VCC) incentive, will lapse at the end of June this year.

Read: More tax incentives to be buried at sunset dates (Mar 2)

National Treasury regards tax incentives as public subsidies to the private sector. “They illustrate a persistent trade-off in tax policy: the narrower the tax base, the higher the tax rate required to raise a given level of revenue.”

Treasury’s assessment of the VCC incentive found that it did not sufficiently achieve its objectives of developing small businesses, generating economic activity and creating jobs. Instead, it provided a significant tax deduction to wealthy taxpayers.


Treasury said in the 2021 Budget Review that reducing the extent of tax incentives for individuals and companies would provide the fiscal room to lower the corporate tax rate.

Judge Dennis Davis, consultant for the South African Revenue Service, said during a recent PSG webinar that a corporate tax rate of between 22% and 23% would be more sustainable than the current 28%. The rate will only be reduced to 27% from April 2022.

End in sight

Other incentives that are set to end include deductions for airport and port assets, rolling stock, as well as a deduction in respect of the sale of low-cost residential units on loan accounts and an exemption in respect of investments into the film industry. The sunset clauses for these incentives are the beginning of 2022.

According to Treasury, tax incentives often undermine the principles of a good tax system, which should be simple, efficient, equitable and easy to administer.

The South African Institute of Tax Professionals (Sait) remarks in a written submission that it has no major objections to the removal of most of these incentives.

Most of them impact airport, port and rail assets (rolling stock) mainly owned by Transnet, Prasa (Passenger Rail Agency of South Africa) and Acsa (Airports Company SA), all of which are state-owned.

It is questionable whether one needs an incentive for these state-owned enterprises to undertake construction that their normal mandate requires.

Sait says the current incentive for low-cost housing by employers to employees was never properly targeted and can be dropped with little consequence. “Our members do not appear to have a great appetite in preserving this incentive.”

Wholesale elimination

However, Sait does take exception to the wholesale elimination of the wear and tear allowance for the assets covered in the incentives. Ordinary allowance for economic depreciation matches the economic decline of assets, which matches the current rules for most other assets.

Sait argues that the Income Tax Act commonly provides for a deduction in value due to wear and tear and says the specific section in the act is not an “incentive” provision but is merely intended to roughly match wear and tear accounting impairments in a simplified way.

“This economic decline in value should accordingly be taken into account to match the economics – and not be dispensed with altogether. Only the incentive element should be removed,” the institute recommends in its submission.

Film industry incentive

The tax incentive for the film industry (Section 12O) will end in January 2022.

It replaced section 24F in 2012 because of perceived abuse, but never gained much traction in the industry. In 2015 only R12 million was spent by government on this incentive, and in 2018 there was no uptake of the incentive.

Sait is currently engaged in deliberations to see if it could be replaced by a more effective and less complicated incentive that may also assist start-ups in the gaming, animation and technology sectors.

Sait believes the cost of retaining this incentive will be minimal.

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Fastest way to stop abuse is making it impossible to use the deduction for one of these against income in a wholly unrelated field.

So fine if you are tour operator and charter operator, you can get the airport deduction.
No if you are property developer you don’t offset your residential and office income with buying an airport.

End of comments.





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