The 12J Association of South Africa has expressed disappointment at the decision by the National Treasury not to extend Section 12J of the Income Tax Act beyond June 30.

Association chairperson Dino Zuccollo points out that this was announced in the National Treasury's 2021 Budget Review, on February 24, and that Parliament will now have to decide whether to accept that decision or take an alternate course of action.

“The Section 12J tax incentive, which was introduced by government with a view to creating jobs and developing small businesses, is an ideal mechanism to help stem capital flight because it incentivises investors to keep their money in the country. This money is then invested in small and medium-sized business that help grow the economy and create jobs for a minimum period of five years.

"Our concern is that the ending of the 12J incentive will precipitate and accelerate the flight of capital out of South Africa. 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,” he comments.

He says one of Treasury’s primary objections to Section 12J is that the majority of investments supported by the incentive are in what it believed to be “low-risk” or “guaranteed-return ventures” that would have been able to attract funding even without the incentive.

This objection seems to relate primarily to property-backed businesses like hotels (whose operations are backed by real estate assets) and asset rental businesses (where risk tends to be mitigated through astute corporate structuring). Since Treasury perceives these businesses as less risky, the view is that they already have easy access to equity capital, notes Zuccollo.

However, he says the Covid-19 pandemic has highlighted that this view is not correct.

For example, he notes, hotels and tourism, have been impacted severely by the pandemic and have definitely not enjoyed easy access to equity capital over the past year.

Similarly, Zuccollo says many of the small, medium-sized and microenterprises (SMMEs) that managed to navigate their way through the pandemic will attribute the resilience of their businesses to the existence of an understanding equity provider who continued to provide them with funding at times when all traditional sources of capital had dried up.

“These equity providers often take the form of Section 12J asset rental structures, providing patient equity capital to SMMEs at a time when they need it most,” he says.

Zuccollo further points out that many South African investors perceive any onshore investment to be risky, especially given the country’s current economic climate and even more so when investing in new, small businesses.

He says the perceived risk of investing locally is the reason why capital flight is exceptionally high at present.

Zuccollo argues that the legislation needs to be given more time to operate before any reliable claims can be made about its likely economic impact and consequential decisions be taken regarding the future.

He cites research conducted by the association, which 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.

“We stand by our view that the Section 12J incentive has been extremely beneficial for the South African economy. By revoking the 12J incentive, Treasury is effectively inviting investors to put their money elsewhere (in a different asset class, currency or even country).

The 12J Association certainly does acknowledge that the incentive could be targeted better to ensure that only investments which Treasury deems economically beneficial will qualify for a tax deduction. This is something that we could support, and we are open to engaging further with Treasury and Parliament on how this could be structured,” Zuccollo says.

He notes that the organisation will continue to engage further with Treasury on its announcement regarding Section 12J of the Income Tax Act, and hopes to take its case to Parliament as it deliberates on the draft Revenue Bills tabled by Finance Minister Tito Mboweni.  

“Our goal is to ensure that the 12J incentive’s economic benefits are maximised, and that South African capital is invested in South African projects,” Zuccollo says.