Will job cre­ator be cut?

BUD­GET: PLAY­ERS FEAR SEC­TION 12J TAX BREAKS MAY BE CUR­TAILED

The Citizen (KZN) - - Business - Amanda Visser Money­web Un­in­tended con­se­quences Ob­jec­tive clouded

Around 27 000 jobs cre­ated or sus­tained through the tax in­cen­tive.

The mo­ment Fi­nance Min­is­ter Tito Mboweni ex­plains how he and his gov­ern­ment in­tend plug­ging the bud­get holes is fast ap­proach­ing. The rev­enue short­fall is sub­stan­tial and many fear he could cur­tail or re­duce “any or all” tax in­cen­tives aimed at stim­u­lat­ing growth and creat­ing des­per­ately needed jobs.

The Sec­tion 12J tax in­cen­tive is one ex­am­ple. In­tro­duced in 2009, it of­fers in­vestors a 100% tax de­duc­tion on the amount in­vested in ven­ture cap­i­tal com­pa­nies (VCCs) that in turn in­vest in qual­i­fy­ing small and medium-sized en­ter­prises (SMEs).

Na­tional Trea­sury has al­ready put a limit on in­cen­tive-qual­i­fy­ing in­vest­ments into Sec­tion 12J VCCs, with a new rule that came into ef­fect on 21 July last year, lim­it­ing in­di­vid­u­als and trusts to R2.5 mil­lion per tax year and com­pa­nies to R5 mil­lion.

Ac­cord­ing to in­dus­try play­ers the in­cen­tive only re­ally got wings in 2015 when the ini­tial caps – R750 000 per tax year and a life­time limit of R2.25 mil­lion – were lifted to al­low for un­lim­ited in­vest­ments.

The in­dus­try grew from a R1 bil­lion as­set class to more than R8.5 bil­lion. Re­search com­mis­sioned by the 12J As­so­ci­a­tion of South Africa shows that around 27 000 jobs were cre­ated or sus­tained through the tax in­cen­tive at a cost of around R200 000 per job to the fis­cus.

The in­cen­tive is set to come to an end in June next year.

Op­tomise Al­ter­na­tive In­vest­ments chief ex­ec­u­tive Gadi Co­hen says it will be short­sighted to rein­tro­duce a cap. The amount of funds raised for in­vest­ments into de­serv­ing small busi­nesses will be re­duced and it is quite pos­si­ble that money that could have re­mained in the coun­try through Sec­tion 12J in­vest­ments will flow off­shore. The caps are not the only is­sue ham­per­ing the abil­ity of the in­cen­tive to make a mean­ing­ful difference.

In 2018 the SA Rev­enue Ser­vice (Sars) is­sued a draft guide on how it in­tends to in­ter­pret the leg­is­la­tion. This had some un­in­tended con­se­quences, es­pe­cially for ho­tel keep­ers and petrol sta­tions.

The 12J As­so­ci­a­tion high­lighted some of the is­sues in a pre­sen­ta­tion to par­lia­ment at the end of last year.

The Sars guide made it clear that a ho­tel keeper will be con­duct­ing an “im­per­mis­si­ble trade” if even a sin­gle al­co­holic bev­er­age is sold by the ho­tel.

Sim­i­larly, any petrol sta­tion that sub­lets parts of its premises to re­tail tenants or that op­er­ates a con­ve­nience store that sells to­bacco prod­ucts will be in­volved in an “im­per­mis­si­ble trade”.

Co­hen says the in­tent be­hind the policy – that the in­cen­tive not be used to fund the gam­bling, to­bacco or al­co­hol in­dus­tries – is sound be­cause these sec­tors are al­ready well funded.

How­ever, things went askew with Sars’ im­ple­men­ta­tion. It has af­fected sev­eral 12J funds, es­pe­cially in the hos­pi­tal­ity sec­tor.

Things went askew with Sars’ im­ple­men­ta­tion

Op­tomise di­rec­tor Namir Wais­berg says the aim of the in­cen­tive is in­creased em­ploy­ment. How­ever, the fo­cus has been too much around the tax.

Wais­berg says the most important con­sid­er­a­tion for Trea­sury – when de­cid­ing whether to ex­tend the in­cen­tive be­yond the sun­set clause or not – is whether there has been job creation.

The econ­omy has been shed­ding jobs at an alarm­ing rate. Wais­berg says it is al­ready clear that the tax in­cen­tive has been mak­ing up for many of those losses.

Pic­ture: Shut­ter­stock

BAD IDEA. Cap­ping the ven­ture cap­i­tal tax in­cen­tive fur­ther is likely to af­fect in­vest­ments into small busi­nesses, with that money pos­si­bly flow­ing off­shore.

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