What does cancelling S12J tell us about SA?

The 2021/22 National Budget reminds me a bit of that old Doors blues song “been down so long it looks like up to me”; a fun meta take on the perspective from which you view things. The Budget is a huge improvement on what we were expecting in September last year, so in that sense it’s a relief. But, when all is said and done, revenue is down on the 2020/21 estimates by R213.2-billion.

Like all government budgets, however, some interesting things happen in the fine print, and this time one of those things is the cancellation of S12J Investments, aimed at supporting venture capital investments.

The Treasury’s perspective is that the scheme was designed to encourage the establishment and growth of small, medium and micro-enterprises. The scheme is pretty simple: it allows an upfront deduction on their investment, as opposed to most equity investments, which are not tax-deductible.

The Budget review says: “The National Treasury has determined that the incentive has not adequately achieved its objectives. The incentive has instead provided a generous tax deduction to wealthy taxpayers and most support has gone to low-risk ventures that would have attracted funding without the incentive. The incentive will therefore not be extended beyond its current sunset date of 30 June 2021.”

Smell a tax dodge

I have a lot of sympathy for the Treasury’s decision. Take even a cursory look at a lot of the companies taking advantage of this system and the whole thing smells of tax dodging. About half the investments were into physical structures. Yet I know too about some great companies that have used the scheme for doing things such as financing solar power projects.

The government introduced the tax incentive in 2008. It aims to help small, medium and micro-enterprises obtain funding that would otherwise not be available. Taxpayers investing in a venture capital company are allowed an upfront deduction for their investment.

In its response, the 12J Association of SA said the Treasury was “throwing the baby out with the bathwater”.

It concedes that the Treasury’s problem is with property-backed businesses such as hotels (whose operations are backed by real estate assets) and asset rental businesses (where risk tends to be mitigated through astute corporate structuring). You betcha. For “asset rental businesses” read millionaires putting their holiday homes on Airbnb and calling that “venture capital”.

Capital flight

But the association does make some good points. “We simply cannot understand the rationale for cancelling one of the few mechanisms available to convince high-net-worth individuals to invest long-term capital in South Africa and grow our tax base at a time when capital flight is one of the key economic risks to the country,” it says.

“... Our research shows that, if the 12J incentive was allowed to continue to operate, up to 45,000 jobs would be created in the next five years.”

Overall, the SA government grants tax incentives to businesses very sparingly. Since 2015/16, total tax revenue foregone because of the incentive was R1.8-billion. On the other hand, the total amount forgone through personal tax rebates in the 2018/19 financial year was R181-billion, of which the vast majority was for pension investments.

Put another way, the inventive system government has constructed heavily supports institutional investment but the support it provides for real physical investment in the economy is minuscule – and diminishing. Clearly, there are capacity problems at SARS, deciding whether companies are genuine venture capital companies or not.

But the whole thing tallies with my experience of government members, bureaucrats and advisers.

The vast majority have little or no personal experience of how corporations actually work, and they are heavily prejudiced against business and despise rich people, so the notion that they might be assisting the rich in some way is just horrendous.

Compare this, for example, to the support the US government has given car-maker Tesla since its inception. Even when Wall Street was hugely sceptical of the future of the company, the US federal government supported Tesla by offering buyers a thumping discount of about $7,500 at one point. Tesla is now worth more than the next six car companies combined.

Tim Cohen is editor of Business Maverick.