Section 12J – What it’s costing the fiscus
By Neill Hobbs
The Section 12J tax incentive, introduced by revenue in 2009, has grown exponentially in the last five years. Investors and tax payers have finally picked up on SARS’s efforts at stimulating economic growth and job creation by investing via the 100% tax incentive offered to venture capital companies and investors. To date over R9.3 billion of taxpayers’ funds has been invested into various SMMEs via the sector, creating approximately 10 500 jobs. But what is this costing the fiscus and does this have an impact on revenue?
According to a report published via the Section 12J Association of South Africa, “An analysis of the impact of the incentive on SMMEs and the associated benefits to the South African Economy”, the Section 12J legislation will cost the economy significantly less than the up-front tax deductions afforded to investors. Figures derived from a survey facilitated by the association indicate that although R9.3 billion has been raised into Section 12J funds, the cost to the economy is calculated at R1.3 million, only 14% of the total deductions allowed.
The report also indicates that at any given time, Section 12J may be able to generate more tax revenues than the initial deductions allowed. National Treasury estimates that the cost to fiscus is R1.3 billion, but section 12J supporters believe that this is mitigated, for example, by capital gains tax due upon exit of the investment, corporate tax on income of the underlying investment, VAT on revenue generated and PAYE in respect of staff costs.
The report cites significant economic upsides too, including:
- A large portion of investment into 12J companies is considered ‘impact’ investment into renewable energy, student accommodation, agriculture, schooling, etc.
- Anchor investors often have a keen interest in the start-up or SMMEE and provide a knowledge base, mentorship and guidance to ensure success.
- Section 12J VCCs have created an excess of 10 500 jobs across the country.
- The underlying investees have generated in excess of R1.5 billion in turnover.
- Investors are locked in for a period of 5 years, boosting local economy.
Respondents to the survey agree that as much as 82% (R7.6 billion) of the capital raised via Section 12J would not otherwise be invested in similar initiatives if it not had been for the attractive tax relief offered. R5.5 billion has been invested into more than 360 SMMEs across the country. Most of the capital raised from high-net-worth individuals, trusts and companies could very well have been destined out of South Africa. Speaking to investors, I acknowledge that “Section 12J has been efficient in keeping investment local, despite a weakening economy. Naturally, this has a knock-on effect as many businesses have found it extremely difficult to access funding, be it debt funding or equity raising as banks and institutions become increasingly cautious.”
Commenting on the report, Dino Zuccollo, chairman of The Section 12J Industry Association of South Africa, says that “In the wake of the Covid-19 pandemic, the South African economy is in a very vulnerable state and our fiscal deficit is ever-widening. Given the importance of the role that SMMEs play in job creation and economic growth, the existence of the Section 12J incentive could not be more important and relevant.”
Forecasts provided in the association’s report indicate that, given time, South Africa could follow in the successful footsteps of the UK’s similar tax incentive scheme, the Seed Enterprise Investment Scheme (SEID). Section 12J has the potential to create more tax revenues for the fiscus and generate much-needed proceeds while fulfilling Government’s intention of creating jobs and stimulating the SMME sector.
Neill Hobbs is the CEO Of Anuva Investments