Tax breaks could spur economic growth in South Africa
Economy / 12 January 2020, 09:00am / Sizwe Dlamini
JOHANNESBURG – South Africa’s economic woes have impacted the SA Revenue Services (Sars), who are finding it difficult to meet its targets for the collection of tax revenue.
With little prospect of collecting what is needed by the state for the delivery of services to South African citizens, the prospects for the country’s future look bleak.
The words: “For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle,” by Winston Churchill come to mind.
Experts have said that it might be tempting just to tax high income-earners even more, but this would come with significant risks. If these people feel that they are being targeted by the taxman, they might choose to leave the country or to take their money elsewhere.
This would result in a loss of skills when talented individuals leave, the closing of businesses, and consequent job losses.
This is why the initiative by the government to keep private individuals investing their funds locally makes sense. Section 12J of the Income Tax Act is geared to do just that, according to experts.
Section 12J was introduced into the Income Tax Act in July 2009 to provide individuals, companies and trusts with a tax incentive to invest in venture capital companies (VCCs), which fund small and medium-sized enterprises that are believed to have long-term growth potential in economic sectors that are often hard-pressed for financing.
It offers high net-worth individuals the opportunity to invest their funds in particular projects in return for a tax benefit. The tax benefit is attractive enough to entice many people to put funds into these local projects, which target job creation and investment in sectors where there is a need for a specific development.
While not all S12J funds are achieving the goals intended by the state, if done with the right approach, a fund of this sort can make a very real contribution to the country. A fund such as 12Cape is a good example of this.
Chris Derksen, a partner at 12Cape explains, said the founders of the fund, chose tourism and hospitality as an economic sector with the best potential to grow over long periods and to create jobs. “We then looked at where the greatest need exists for additional hospitality services, such as accommodation for visitors. Cape Town, with its huge and increasing popularity among travellers the world over, ticks all the boxes.”
He said their next consideration was that, within Cape Town, they needed to identify the particular areas where property held significant value and was likely to continue to grow. “Since we needed a location for our Aparthotels – a new favourite amongst travellers globally – we wanted it in an area known for prime property, such as the Atlantic Seaboard of Cape Town where we can add capital growth for our investors - who can now invest in these areas without the large sums of money needed for individual properties.”
The money that the investors put into the 12Cape fund are deductible from their taxable income, and invested in the purchase of valuable properties used for accommodation for both domestic and international business and leisure travellers.
“We have every reason to believe that this area will continue to deliver significant growth in property values,” Derksen said.
Derksen said this demonstrated the effectiveness of the incentive. “The initial allowance has been more than recouped. This is before capital gains taxes at exit are taken into account. In addition, this particular project has most certainly had a positive impact in terms of work opportunities.
“Through local sourcing of the products needed when we first set up the aparthotel, we indirectly employed close to 140 people, and Latitude itself is responsible for the creation of various permanent jobs both in the hotel itself and in the restaurant on the top floor of the building. In addition to this, every seven or so tourists who visit the country create one permanent job in South Africa.”
Clearly, when S12J is applied correctly, it’s a win-win for the country and for the individual investor; what the investor gains is paid back by foreign tourists, with the fiscus making a great return on its investment.
The government has identified small and medium-sized entities (SMEs) as a major contributor to future economic growth. One factor that hampers the growth of SMEs is a lack of access to equity funding, according to CH Consulting.
In order to alleviate this problem the government added Section 12J to the Income Tax Act as a catalyst for equity funding for SMEs, which 12J provides a marketing vehicle to venture capital companies (VCCs) due to the tax incentive.
A VCC accepts investments from any taxpayer and manages the collective investment and make investments in SMEs. The VCC will issue a certificate to the taxpayer for the amount of the investment. The taxpayer is then allowed to deduct their full investment against their taxable income in the relevant tax year.