Will job creator be cut?
BUDGET: PLAYERS FEAR SECTION 12J TAX BREAKS MAY BE CURTAILED
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.
BAD IDEA. Capping the venture capital tax incentive further is likely to affect investments into small businesses, with that money possibly flowing offshore.