Last week, the 2019 Draft Taxation Laws Amendment Bill (TLAB) was released and contains proposed amendments to certain elements to the Section 12J tax incentive.
The major proposed TLAB amendment reintroduces a limitation on the amount an investor can deduct from taxable income in respect of a particular year of assessment. It has been proposed that the tax deduction for an investment in a Section 12J company be limited to R2.5 million per investor per annum effective from 21 July 2019.
The 12J Industry Association of South Africa (the 12J Association), which was formed earlier this year, has released a statement which outlines its view that the proposed TLAB amendments, if promulgated, are likely to have the impact of reducing the amount of capital which will be raised in the industry going forward and in turn impact the industry’s ability to invest capital in the South African economy. In addition, the 12J Association believes that the draft amendments will make it more difficult for existing Section 12J companies to execute on their business models and could potentially result in certain Section 12J companies being unable to meet certain compliance requirements within the legislation.
According to the 12J Association: “Since major amendments which were made to Section 12J in 2018, industry players have found it challenging to continually modify their business models to remain compliant with the periodic changes in legislation and would benefit from policy certainty and stability going forward. These constant changes impact confidence amongst Section 12J investors, who invest five-year lock-up capital into SMEs across the country.”
The 12J Association adds, “We are in the process of obtaining statistics from members regarding the quantum of capital raised, capital invested, as well as the nature and success of the underlying investments which Section 12J companies have made into the SA economy, specifically including job creation and additional tax base created. This data will be used as the basis of a report which will be released to indicate of the impact and importance of the incentive in South Africa.”
In the context of the recent release of South Africa’s unemployment figures, which are the highest in years, the association believes that an incentive that can raise money from high net worth Individuals and Institutions for investment in SMEs across the country should be a key focus area for government which should at the very least have policy certainty until the legislated ‘sunset clause’ in June 2021.
Section 12J was introduced by the South African Revenue Services in 2009 as an investment tax incentive. The stated intention is to boost the South African economy by encouraging investment into a range of private companies which meet defined criteria. Members of the 12J Association believe that more than R5 billion has been raised into the incentive to date, with a significant amount having been invested across SA within the legislated 36-month deployment period.
The Section 12J tax incentive gives investors the ability to write off 100% of their investment against their taxable income in the year they invest. Therefore, investors can benefit from up to 45% immediate tax relief. This reduces the capital at risk for the investor, which provides downside protection and enhances overall returns.
The incentive is currently subject to a sunset clause, which provides that the incentive will cease to be available to investors from June 2021, unless extended by government.
12J Industry Association Board of Directors
- Dino Zuccollo (Westbrooke Alternative Asset Management) (Chairman)
- Jeff Miller (Grovest)
- Rolandi van der Westhuizen (Pallidus)
- Gidon Novick (Lucid Ventures)
- Hans Hillerman (Fundamental VCC)