Section 12J of the Income Tax Act is a bold piece of legislation that incentivises high-income earners to keep their money in South Africa and support new job-creating business ventures. But recent amendments are likely to kill the growth it was meant to create.
We have no shortage of spectators and commentators in South Africa, passing judgement daily on the state of our land. Twitter and other social media channels have made it easy, and commonplace, to watch and chirp.
While our president is no PR genius and could learn a trick or two from Donald Trump and Boris Johnson, it’s hard to argue that he and his brave team are not making the right strategic calls to get us back on track. In fact, many policies that have preceded Cyril Ramaphosa have been sound but poorly implemented, or worse, derailed by corruption. It’s worth remembering that the framework for all our rules (ie the Constitution) is still one of the most progressive in the world.
An example of what I would argue is excellent policy is Section 12J of the Income Tax Act. This is a bold piece of tax legislation that incentivises high-income earners to keep their money in South Africa and support new job-creating business ventures. Investors are rewarded with a full tax deduction of their investment into qualifying funds. To date, about R6-billion has been raised.
This legislation is similar to other successful programmes around the world. In the UK, for example, their programme has funded over 27,000 companies over the past 16 years. I run a 12J fund called Lucid Ventures that builds and then operates boutique hotels in prime areas of South Africa. We employ about 80 construction workers on each project and about 15 full-time staff in each new hotel. By the end of 2020, we will have six operating hotels. This means jobs and money in South Africa.
Like most legislation though, there are loopholes and opportunities for abuse. Past tax incentives like the movie incentives in the Nineties were notoriously abused. No doubt, there is the “letter of the law” and then there is the “spirit of the law” – and these do not always coincide. There are ample intelligent tax lawyers who will happily navigate the “letter of the law” but often with little consideration for the spirit and intended impact on society. So, inevitably, the legislation is either shelved or severely restricted. For example, 12J has recently been amended to restrict the size of investments to such a degree that meaningful growth in the industry going forward will probably be curbed.
It’s a tribute to South Africa’s entrepreneurial culture that we are always looking for gaps in the market and in regulation. The downside of aggressive schemes, however, is not just the compliance risk to which they expose investors, but that they “kill” an entire industry and with it, opportunities to effect positive change and growth while delivering good returns to capital providers.
May 2020 be the year that we all decide to move off the sidelines, out of the commentary boxes and into the game. And the year that we start playing by the rules and honouring their positive spirit and intent.
Happy 2020. DM