Treasury Misses a Great Opportunity to Stimulate the South African Economy

Dear concerned South African Investor,

Let me start off by saying, I share your concern. As we know, recently the Minister of Finance announced that the Section 12J regime, which was initiated in 2009 to encourage retail investments in smaller businesses, will not be extended beyond 30 June 2021. His reasons stated “The incentive did not sufficiently achieve its objectives of developing small businesses, generating economic activity and creating jobs. Instead, it provided a significant tax deduction to wealthy taxpayers. The majority of investments supported by the incentive seem to be in low risk or guaranteed return ventures that would have attracted funding without the incentive.”

Whilst I do think the budget as a whole is a good one, in reducing government bond issuances, minimising increases in government salaries, reduction in company taxes, he certainly got it completely wrong when it comes to the Section 12J incentive.

He is correct in saying approximately 50% of the R11,2billion raised into Section 12J funds to date has been invested in hotels and student accommodation. With the reality of COVID 19, I would argue with the Minister that this is considered low risk investing. The hospitality industry, which represents close to 10% of our GDP and which is our second largest export, is in dire straits. Tens of thousands of jobs have been lost already, and until international travel resumes to normal, which will take 12 months or longer , this industry will continue to suffer major losses. I am not aware of many investors willing to support the hospitality industry without a decent incentive.

For South Africa to get out of its quagmire we need the private sector to support SME’s. The Venture Capital Trust (VCT) initiative in the United Kingdom, on which Section 12J was based, has been a massive success. By their own admission it takes time for the asset class to mature and flourish. Not only have VCT’s created hundreds of thousands of jobs in the UK, but the incentive is now creating positive tax receipts for the fiscus. In South Africa we were just at the beginning of this journey, with investments into Section 12J growing significantly in the last few years - making it one of the fastest growing alternative asset classes in SA. It doesn’t make any sense to pull the plug when this initiative is still in its infancy - and already showing such positive impact on job creation, growth, job retention, and giving SME’s access to capital they otherwise would not have.

The Section 12J initiative has created fully compliant tax paying entities, with strict oversight by the FSCA. In a short amount of time it has created approximately 8,500 jobs, with a projected steep upward trajectory of new jobs should the initiative be continued. A new asset class was born, within itself creating hundreds of jobs in fund management, fund administration, insurance, accounting services, secretarial services, tax advisors, compliance, corporate finance and wealth managers, to name a few.

Section 12J with its tax benefit was certainly a compelling reason for investors to keep their funds locally. I am convinced that going forward these investors will be taking their investments off-shore, in all likelihood never again to see the light of the South African sun.

The proposed bill is still to be presented to Parliament for approval. I implore the members of Parliament to see the wood for the trees. If there are weaknesses in the 12J incentive, let Treasury sit around the table with the 12J Association of South Africa and work a win-win for all .

Please share this with others if you believe that Section 12J should be saved.

Regards
Jeff Miller
CEO of Grovest
Director of the 12J Association of South Africa