Tax incentives are applied to encourage certain behaviours and activities by providing businesses and individuals with favourable tax treatment. The introduction of a tax incentive is generally based on a social, economic or environmental need that has been identified and can be alleviated by the actions or behaviours of taxpayers in exchange for a tax benefit.
Although tax incentives are introduced to assist business, there are negative effects from these incentives:
the reduction of the tax base;
increasingly complicated governing legislation;
greater benefits to larger entities that can obtain specialised tax advice; and
additional South African Revenue Service resources required to monitor and audit the incentives.
In order to mitigate these possible negative effects, tax incentive provisions often include a sunset clause that indicates a predetermined date on which the relevant incentive will cease to be in effect.
These incentives are often reviewed in order to determine their effectiveness and ascertain whether the desired outcome has been achieved; and outweighs any negative consequences arising from the incentive. These reviews often inform a decision by the National Treasury either to extend or discontinue a tax incentive.
The Minister of Finance has indicated that the following corporate tax incentives provided for in the Income Tax Act 58 of 1962 have not been renewed:
section 12DA, dealing with deductions in respect of rolling stock, which will end on 28 February 2022;
section 12F, dealing with deductions in respect of airport and port assets, which will end on 28 February 2022;
section 12O, providing for an exemption in respect of films, which lapsed on 31 December 2021; and
section 13sept, dealing with deductions in respect of the sale of low-cost residential units on loan account, which will end on 28 February 2022.
The research and development (R&D) tax incentive, provided for in section 11D of the Act is intended to come to an end on 30 September 2022. Public consultation process for reviewing the R&D tax incentive is still ongoing and it was proposed in the 2022 Budget Speech that the sunset clause for the R&D tax incentive be extended until 31 December 2023 in order to create certainty for taxpayers.
Taxpayers who have benefited from the tax incentives that are being discontinued should take note of the dates on which the relevant incentives cease to be in effect in order to ensure that they do not erroneously rely on the relevant provisions going forward. Whether the R&D tax incentive will be extended beyond 31 December 2023 remains to be seen and will likely depend on the outcome of the public consultation process that is in motion.
Employment Tax Incentive
The ETI is aimed at encouraging employers to hire young work seekers. It reduces an employer’s cost of hiring work seekers between the age of 18 and 29 through a cost sharing arrangement with government by allowing the employer to reduce its monthly employees’ tax liability with an amount of up to R1000 per qualifying employee while leaving the qualifying employee’s wage unaffected.
With effect from 1 March 2022, the current maximum employment tax incentive of R1 000 per month is increased to R1 500 per month for the first 12 months of employment and to R750 per month for the second 12 months of employment. It is also proposed to refine the incentive to target long-term unemployed work seekers, to improve the incentive for small businesses and to allow for the imposition of understatement penalties for reimbursements of the incentive that are improperly claimed.
It is routine that taxpayers undergo verifications and audits of their ETI claims resulting in additional assessments issued by SARS reversing the ETI initially claimed by these employers. To-date SARS has not imposed any understatement penalties in relation to the reversal of the ETI claims. As a result of cases of abuse of the ETI, SARS and Treasury suggested that the ETI Act be amended to impose understatement penalties on reimbursements that are improperly claimed.