Proposed amendments to Section 12J of the Income Tax Act, which provides a generous tax incentive for South Africans investing in venture capital schemes, have drawn criticism from the 12J Industry Association of South Africa.
The association says the industry and the economy will be adversely affected.
The 2019 Draft Taxation Laws Amendment Bill was released last week, and it contains proposed amendments to Section 12J.
The major proposal reintroduces a limitation on the amount an investor can deduct from taxable income in a tax year.
It is proposed that the tax deduction for an investment in a Section 12J company be limited to R2.5 million per investor per year, effective from July 21, this year.
The 12J Association says that if promulgated, “the amendments are likely to have the impact of reducing the amount of capital which will be raised in the industry and in turn impact the industry’s ability to invest capital in the South African economy”.
The association also believes that the changes will make it more difficult for Section 12J companies to execute their business models and could potentially result in some of them being unable to meet certain compliance requirements.
“Since major amendments which were made to Section 12J in 2018, industry players have found it challenging to continually modify their business models to remain compliant with the periodic changes in legislation and would benefit from policy certainty and stability.
“These constant changes impact confidence amongst Section 12J investors, who invest five-year lock-up capital into SMEs across the country.”
The association says it is obtaining statistics from members regarding the amounts of capital raised, capital invested, “as well as the nature and success of the underlying investments that Section 12J companies have made into the economy, specifically including job creation and the additional tax base created”.
“The data will be used as the basis of a report which will be released to indicate of the impact and importance of the incentive in South Africa.”
In the context of the recent release of South Africa’s unemployment figures, which are the highest in years, the association says an incentive that can raise money from high-net-worth Individuals and institutions for investment in SMEs should be a key focus area for the government.
Section 12J was introduced by the South African Revenue Service in 2009. The incentive gives investors the ability to write off 100% of their investment against their taxable income in the year they invest.
Members of the 12J Association say more than R5 billion has been raised via the incentive to date, with a significant amount having been invested across the country within the legislated 36-month deployment period.
The incentive is subject to a sunset clause, which provides that the incentive will cease to be available to investors from June 2021, unless extended by the government.