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Capital Flight: Amend Income Tax Act to encourage local investment in SMMEs

24 November 2020 The 12J Association of South Africa

The 12J Association of South Africa today warned Parliament of the risk of billions of Rands of capital investment leaving the country unless local investment incentives like those under Section 12J of the Income Tax Act are permitted to continue.

The 12J Association presentation was made during the Select Committee of Finance’s public hearings on the TLAB, TALAB and Rates Bills.

First introduced by government in 2009, the Section 12J investment incentive provides investors with a tax deduction in exchange for the making of investments into local SMMEs in selected industries. But this incentive may soon end as a result of a ‘sunset clause’ in the Income Tax Act which only makes provision for such investments until 30 June 2021.

The Association believes that the Income Tax Act should be amended to extend the ‘sunset clause’ for at least another five years. Today, we made the case for this amendment to be made urgently in order to shore up local investor confidence.

In the last five years, 12J investments have resulted in over R5 billion worth of investment into more than 360 SMMEs in various strategic sectors including renewable energy, student accommodation, agriculture, schools and tourism. According to the Association’s data, these investments have directly created over 10 500 jobs across the country (and have the potential to create up to 45 000 in time), including in rural areas.

While accurate current data on capital flight is difficult to come by, anecdotal evidence suggests that billions of Rands are at risk of pouring out of South Africa due to uncertainty and perceived instability of investing in the country. One factor helping to stem the tide is the existence of the Section 12J tax incentive which offers domestic investors a full rebate on their income tax if invested in a 12J fund, provided that they invest this capital locally for a minimum 5 year period.

Over the next five years, the 12J Association believes that Section 12J funds have the potential to secure billions of Rands in additional onshore investment that will create tens of thousands of jobs. However, if the sunset clause in the Income Tax Act is not extended, this potential investment and these potential jobs will be lost - on top of all the gains that have already been made.

More specifically:
• South Africa will lose the opportunity to foster and embed an essential SMME-focused eco-system that can grow local jobs and skills;
• Billions of Rands in investment from ultra-high net worth individuals will flow out of South Africa; and,
• The businesses that are eligible for investments under Section 12J, having been identified as those in most need of additional capital, risk closure – especially those in the hospitality sector that are battling to stay afloat due to the Covid-19 pandemic.

The 12J Association fully supports government’s ‘Operation Vulindlela’ that was recently initiated to drive through growth-supportive structural reforms. We believe passionately that 12J investments can continue to help government open the way for more investment, growth and jobs in the next five years.

At last week’s SA Investment Conference, the President assured investors that South Africa’s fiscal priorities are to “direct resources to where they will have the greatest impact on long-term growth and poverty alleviation”. The President also committed to macroeconomic stability and fiscal prudence as critical building blocks for investment and growth.

For domestic investors who would like to contribute to the rebuilding and renewal of South Africa’s economy, the extension of the sunset clause is fundamental for stability in local investments.

The 12J tax incentive is also cost-efficient to administer and is a net benefit to the economy. While the Association’s data suggests that R9.3 billion has been invested in Section 12J funds in the past five years, the associated tax relief has only cost the fiscus an estimated R1.4 billion, which amount is expected to reduce going forward. This is due to taxation at other points in the investment cycle, such as capital gains tax which investors pay when exiting their investments, as well as various taxes paid by the underlying investee companies, including corporate tax, VAT and PAYE. Over the medium to long term, initiatives like the Section 12J incentive ultimately help increase tax revenues due to their positive impact on economic growth and job creation.

If government is to open the way for investment, growth and jobs, it needs to act swiftly to initiate the legislative process to have the Section 12J sunset clause extended – at least for the next five years. According to National Treasury’s 2019 Economic Strategy document, SMMEs are responsible for more than 50% of all employment opportunities in South Africa and the sector contributes more than 45% of the country’s GDP. We, as the 12J Association, look forward to working with government to ensure that 12J funds continue to benefit every South African by unlocking the potential in our local SMMEs.

 

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