The taxman could punish government for wasting money: expert
‘Fruitless and wasteful expenditure’ is a term that has come into the spotlight in recent years, with a November 2017 report finding that irregular expenditure by government had risen to over R45.6 billion across the country.
The issue was also a major consideration in the 2018 budget, which found that the the expenditure needed to be plugged to preserve a sustainable tax base.
According to Yashika Govind, a senior associate in tax at Webber Wentzel, the budget candidly noted that poorly governed and administered public entities are a burden to the fiscus due to the substantial costs of operational inefficiencies and financial mismanagement.
“Media reports over the last few years have echoed this, and increasingly note that public entities in particular are plagued by fruitless and wasteful expenditure,” she said.
However, according to Govind, the current Income Tax Act (ITA) does not use the term “fruitless and wasteful expenditure”, nor does it outline any mechanisim to penalise public entities for wasteful expenditure.
The Public Finance Management Act (PFMA), in contrast, defines fruitless and wasteful expenditure as “expenditure which was made in vain and would have been avoided had reasonable care been exercised”, she said.
Changes on the cards
“As part of its stated efforts to undo the ill effects of corruption on tax morality and to repair domestic confidence in public entities, the Budget proposes to disallow income tax deductions available to public entities, in instances where losses and expenditure are classified as fruitless and wasteful,” said Govind.
“Whether terminology similar to that of the PFMA will be introduced to the ITA, or which specific types of expenditure will be targeted and what test(s) will be employed to determine whether the expenditure is fruitless and wasteful, remains to be seen,” she said.
Govind added that because of its sensitive nature, it is likely that the amendments will undergo a thorough consultation process involving the relevant ministries and public entities, which could become obscured by political wrangling.
“In any event, this is an encouraging proposal, which will hopefully be realised soon in the form of a clear and practical fiscal remedy to address a very prevalent and harmful ill hampering the proper functioning of many public entities,” she said.
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