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Tertius Troost, Senior Tax Consultant at Mazars.
Tertius Troost, Senior Tax Consultant at Mazars.

Treasury joins efforts to fix soe’s

ECONOMIC NEWS

Issued by Epic MSL Group - Aug 3rd, 10:37

In the recently published draft Taxation Laws Amendment Bill (draft TLAB), Treasury has made it clear that it will be joining the efforts to ensure the proper governance of public entities as it proposes that no income tax deduction will be allowed for fruitless and wasteful expenditure. 

According to Tertius Troost, Senior Tax Consultant at Mazars fruitless and wasteful expenditure is defined in the Public Finance Management Act as expenditure which was made in vain and would have been avoided had reasonable care been exercised. “Examples include interest and penalties on overdue accounts‚ litigation and claims, cancellation fees for accommodation and ineffective implementation of hardware.”

In terms of Section 11(a) of the Income Tax Act, colloquially referred to as the general deduction formula, expenditure actually incurred in the production of income may be deducted by a taxpayer provided that such expenditure is not of a capital nature. Conversely, section 23 of the Income Tax Act disallows certain expenditure even where it meets all of the requirements of section 11(a). Troost explains that since, fruitless and wasteful expenditure is currently not explicitly included in section 23, if companies are able to show that the expenditure was incurred in the production of income and not of a capital nature, even if this these expenses were not necessary[1], it could still be allowed as a deduction.

According to Troost, numerous reports by the Auditor General, Thembekile Kimi Makwetu, show that fruitless and wasteful expenditure at state-owned entities can run into the billions of Rand each year, resulting in what the public might feel is quite a large unjustified deduction for certain state-owned entities.

“As government, together with Public Enterprises Minister Pravin Gordhan, continues to ensure the proper governance of state-owned entities, it is proposed in the draft TLAB that fruitless and wasteful expenditure (as defined in the Public Finance Management Act) should be disallowed as a deduction for income tax. Treasury hopes that this will encourage further accountability for these institutions,” says Troost.

He adds that to ensure tax neutrality, it is further proposed that any amount of fruitless and wasteful expenditure that was not allowed as a deduction and was recovered by the public entity be deemed to be exempt from income tax during the year of assessment in which it is received or accrued.

Troost highlights that since most state-owned entities are currently in assessed loss positions, the public will have to wait and see whether the proposed amendment will generate additional revenue for the fiscus.

“As things stand, it will probably only reduce the balance of assessed losses of these entities. Furthermore, when these entities are in a profitable position and able to distribute dividends, the question must be asked what effect this amendment will have.”

On the assumption that the entity is wholly-owned by the state, the corporate income tax, dividends withholding tax, along with the actual after-tax dividend will all eventually be included somewhere is state coffers (i.e. either through SARS, or a government department).

“This proposed amendment indicates Treasury’s commitment to support government in its fight to clean up state-owned entities, however, it seems to be more of a public relations tactic than additional revenue collection,” Troost concludes.  

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