Critical issues to be addressed

- Paul Gering, CA (SA) - a tax director - PKF Chartered Accountants and Business Advisers

Every rugby spectator is a selector, and every taxpayer a Minister of Finance, which is why Trevor Manuel is inundated with budget advice at this time of year.

At this time of global economic turmoil, there are some critical issues that need to be addressed. Job preservation and creation is one, and encouragement to save another.

Government needs to stimulate the job market while also creating retrenchment disincentives. A penalty for retrenching workers can be created by adding back into an employer’s tax bill 20 percent PAYE reduction caused by the decrease in employees. At the same time, an additional deduction, of 20 percent of PAYE increase during the year of assessment in which jobs are created, could be granted to employers.

Job creation will also be stimulated by encouraging new businesses. To this end, the venture capital incentive announced last year by the minister was a bold step, but unfortunately it is not going to provide businesses with the access to funding they require until the low levels of gross asset value that have been set are raised. It would therefore be helpful if this venture capital incentive was expanded.

Changing people’s behaviour is never easy, but our already weak culture of saving might be encouraged if the minister were to dramatically increase the tax-free portion of interest that can be.

While the stimulation of employment and savings should lead in time to increased tax revenues, this will be of little avail if the present misuse of tax funds by government departments continues. Poor controls, leading to unauthorized spending and overpayment for services, must be improved. The Auditor General ought therefore to be given a larger budget so as to perform expanded control tests – with the active participation of private sector audit firms – and to do this more often.

The poor state of education in the country also needs to be addressed. Generally, private schools achieve much better results than state schools, showing clearly that far more resources need to be mobilised if education is to be improved. Many private schools have the capacity to teach more learners. The minister’s bold move last year to increase the deductions allowed for bursaries should therefore be expanded to allow all taxpayers, including employees (who are currently limited in this regard), to treat 20 percent of all school fees they pay (thus not only their children’s fees) as tax deductible. This would apply up to a limit of R5,000 per learner.

A final suggestion is that a new tax amnesty should be announced. The foreign exchange amnesty initiated a few years ago allowed many people to regularise their tax affairs without paying crippling penalties. A subsequent, more limited amnesty for small businesses that had been guilty of local tax evasion or administrative non-compliance was announced a few years later. Perhaps it is now time for a final all-inclusive amnesty to be announced to finally close the chapter on past irregularities.

This amnesty would have to cover all business structures, complex and simple, listed and unlisted, with different levels of penalties being set based on turnover in the year of assessment: for example, turnover up to R50 million, then R200 million, then anything above that.

The rationale for such an amnesty is four fold:

1. With the economy in decline, companies facing large arrears in tax liabilities could face liquidation.
2. The capacity of SARS to perform regular company audits is constrained, so that past infringements are not easily being detected.
3. There are many companies previously involved in aggressive tax planning that would like to close that chapter should the penalty for doing so not be too severe.
4. With tax revenues likely to drop with the decline in the economy, this is a good time to boost revenues with proceeds from the amnesty.

Mr Manuel’s job of balancing the budget this year is not an enviable one, but judging from past achievements he will surely do a fine job come February 11 when he presents the country’s budget to parliament. Perhaps he’ll even incorporate some of the above well-intended advice.