The Treasury’s decision not to extend an incentive scheme that provides investors with a tax reprieve in exchange for investing in small, medium and micro enterprises (SMMEs) will accelerate the flight of capital out of SA, an association of asset management companies warns.
Despite appeals for an extension, the Treasury stated in budget documents tabled in parliament on Wednesday that the date for the venture capital incentive — which came into effect in 2009 to encourage investments in smaller businesses — will not be extended beyond June 30, arguing that the scheme had not served its purpose.
The government introduced a clause into the Income Tax Act, which offers taxpayers a 100% tax deduction if they invest in SMMEs in selected sectors. It is the only investment that allows people who have bought shares in these companies to claim up to 100% deduction of their investment with the SA Revenue Service (Sars).
The Treasury said the incentive scheme had mostly served to provide a significant tax deduction for wealthy taxpayers. It noted that tax revenue forgone since 2015/2016 because of the incentive amounted to R1.8bn, with R1.7bn of this going to individuals who had a taxable income and venture capital company investment above R1.5m a year.
But investors argue that in the past five years of the “Section 12J”, as the clause is known, investments worth R5.5bn have poured into more than 360 SMMEs in sectors as renewable energy, student accommodation, agriculture and tourism, creating close to 11 000 jobs.
The 12J Association of SA — an independently constituted industry body representing more than 25 asset management companies that collectively manage 80% of total industry assets — said the incentive scheme is an ideal mechanism to help stem capital flight because it incentivises investors to keep their money in the country.
“Our concern is that the ending of the 12J incentive will precipitate and accelerate the flight of capital out of SA,” the association’s chair Dino Zuccollo said.
“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 SA and grow our tax base at a time when capital flight is one of the key economic risks to the country,” he said.
The Treasury’s view that Section 12J’s economic impact has been limited seems to be based on anecdotal evidence over a short period of time, Zuccollo said.
“It should be noted that the Section 12J legislation only gained traction following changes to the law in 2016, and as such the majority of 12J investments were made in the past two years. This is far too short a period of time to gauge the resultant impact which these investments have had on SMMEs, which, on average, take at least three to five years to become profitable, grow, and begin employing more people.”
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, Zuccollo said.
“By revoking the 12J incentive, the Treasury is effectively inviting investors to put their money elsewhere (in a different asset class, currency or even country). We will seek to engage further with the Treasury on its announcement regarding Section 12J of the Income tax Act, and we hope to take our case to parliament as it deliberates on the draft revenue bills tabled by the minister.”
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