Section 12J incentive creates value for SMMEs and jobs, calls for extension to 2027

29th June 2020 By: Schalk Burger - Creamer Media Senior Contributing Editor

The 2020 Section 12J industry report demonstrates that the tax incentive has not only managed to create jobs, but it has done so more economically than other government-backed job creation incentives, Section 12J Association of South Africa chairperson Dino Zuccollo said in a statement on June 29.

Based on the association’s calculations, the Section 12J incentive has been cost-effective for the South African government, at an average cost of about R126 000 per job already created. This is in stark contrast to other job-creation focused incentives in South Africa, which cost up to R450 000 for each job created, the association noted.

Further, respondents indicated that 74% of the jobs created have been for previously disadvantaged individuals and 25% of industry investments have been made outside of major metropolitan areas.

“Through Section 12J, small, medium-sized and microenterprises (SMMEs) are being meaningfully supported at a time when funding for these businesses has all but dried up. In the association’s view, the survey findings make a clear case that the June 2021 Section 12J sunset clause should be extended until at least 2027.”

“In only five years, this tax incentive has grown into a mature and successful incentive. By February 2020, Section 12J had total assets under management exceeding R9-billion, the bulk of which has been invested by South Africa's high net worth individuals (57% of total investment) for a minimum of five years. This is particularly significant in the wake of the devastation caused by the Covid-19 pandemic, at a time when the majority of high net worth investor capital is being invested offshore,” Zuccollo averred.

Of the R9-billion raised, about R5.5-billion (or 59%) has been invested into more than 360 SMMEs, implying an average investment size of R15-million per business. These businesses in turn support about 10 500 jobs across a variety of industries including education, agriculture, renewable energy, hospitality and tourism, student accommodation and many others.

“As is the case in the UK, which has a similar legislation to Section 12J, the survey proves that the underlying Section 12J investee companies will quickly begin to pay more tax than the aggregate of all Section 12J deductions granted," emphasised Zuccollo.

"Through Section 12J, government has effectively put the private sector to work in creating an efficient, SMME-investment focused ecosystem which will ultimately pay for itself."

As National Treasury points out in its 2019 Economic Strategy document: "Creating an environment in which SMMEs can thrive is inextricably linked to creating conditions in which all businesses can thrive."

"As Covid-19 causes our fiscal deficit to bulge even further, we should be extending incentives such as Section 12J - we simply cannot afford not to,” he stated.

The Section 12J Association of South Africa on June 29 released a report to Parliament and the National Treasury, outlining the results of the inaugural survey of its members which details the impact which the Section 12J incentive has had on the South African economy.

Section 12J of the Income Tax Act allows for tax breaks by allowing investment in approved venture capital companies, and allows the investor to deduct the full value of these investments from their taxable income for the year.

Section 12J has created a vibrant, SMME investment focused ecosystem which gives SMMEs access to not only financial capital, but mentorship and guidance not previously available. 100% of respondents surveyed believe that the Section 12J legislation should be extended beyond the current June 2021 sunset clause, emphasised Zuccollo.

The 12J Association of South Africa represents more than 25 Section 12J asset management companies, which collectively manage more than 50 12J venture capital companies and about 86% (about R8-billion) of the total industry assets under management.

Respondents in the report indicated that of the R9.3-billion raised, R7.6-billion would not otherwise have been invested in similar SMME initiatives had it not been for the attractiveness of the Section 12J legislation.

Further, 57% of total industry capital under management has been raised from individuals, 35% has been raised from companies and 8% has been raised from trusts, he added.

"Of the approximate R5.5-billion which has been invested into SMMEs, the survey finds that 76% is incremental i.e. had it not been for Section 12J, an approximate R4.2-billion would never have been invested into local SMMEs."

Meanwhile, an estimated R2-billion was raised in February 2020 with insufficient time to invest prior to the Covid-19 lockdown, making the industry investment rate (of 59% of total capital raised) closer to 75%.