End of the road for Section 12J

It’s the end of the road for the popular section 12J tax incentive.

The incentive, which allows taxpayers to invest in start-up companies in leu of paying income tax will come to an end on June 31, 2021.

The 12J incentive has been popular with high net worth individuals as it enables them to possibly earn an income and have a holding in an asset from money they would have had to pay out in taxes.

The incentive resulted in a total of R11.5 billion being invested into emerging businesses, R207 million in taxes collected in 2019/20 and created 8 239 job of which 4 035 were directly employed.

These outcomes were not enough to convince treasury to keep it going.

“A National Treasury assessment determined that the incentive did not sufficiently achieve its objective of developing small businesses, generating economic activity and creating jobs.”

It found that only 37% of qualifying companies added new jobs after receiving funding from venture capital companies (VCC), and over 50% of investments appeared to be in low-risk ventures and assets, like income movable asset rental structures and guaranteed return real estate investments.

Treasury also noted that 12J was not used in the way it was intended because the business funded were not the high-risk start-ups it was attended to assist.

“The majority of investments supported by the incentive seems to be in low-risk or guaranteed return ventures that would have attracted funding without the incentive.”

Aside from not being achieving what it set out to do, treasury notes that the incentive “seems to give a significant tax deduction to high net-worth taxpayers” and argued that this could not be justified given its limited economic impact.

Treasury said its own research broadly corresponded with that of the 12J Association, but it differed with it on modelled outcomes, saying the association was optimistic when it came to its predictions on tax estimates and job creation.

Treasury said the since it was introduced in 2015/16, tax revenue of R1.8 billion was forgone, of which R1.7 billion went to individuals and VCC of above R1.5 million a year.

Before the deduction cap of R2.5 million was introduced, R745 million in tax revenue was forgone in the 2018/19 period.