Is popular job-creating incentive on Mboweni’s chopping block?

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The moment when Finance Minister Tito Mboweni explains how he and his government intend plugging the budget holes is fast approaching.
The revenue shortfall is substantial, and many fear he could curtail or reduce “any or all” of the tax incentives aimed at stimulating growth and creating desperately-needed jobs.
The Section 12J tax incentive is one example. Introduced in 2009, it offers investors a 100% tax deduction on the amount invested in venture capital companies (VCCs) that in turn invest in qualifying small and medium-sized enterprises (SMEs).
National Treasury has already put a limit on incentive-qualifying investments into Section 12J VCCs, with a new rule that came into effect on July 21 last year limiting individuals and trusts to R2.5 million per tax year and companies to R5 million.
According to industry players the incentive only really got wings in 2015 when the initial caps – R750 000 per tax year and a lifetime limit of R2.25 million – were lifted to allow for unlimited investments.
Read: There’s more to Section 12J than ‘45% immediate tax relief’
The ‘fund’amentals of Section 12J investing 12 ways Section 12J has impacted the SA economy
The industry grew from a R1-billion asset class to more than R8.5 billion assets currently under management. Research commissioned by the 12J Association of South Africa shows that around 27 000 jobs were created or sustained through the tax incentive until now, at a cost of around R200 000 per job to the fiscus.
The incentive is set to come to an end in June next year.
Gadi Cohen, CEO of Optomise Alternative Investments, says it understands the pressure Treasury is under. However, he believes it will be shortsighted to reintroduce a cap. The amount of funds raised for investments into deserving small businesses will be reduced, and it is quite possible that money that could have remained in the country through Section 12J investments will flow offshore.
The caps are not the only issue hampering the ability of the incentive to make a meaningful difference in the South African economy.
Unintended consequences
In 2018 Sars issued a draft guide on how it intends to interpret the legislation. This had some unintended consequences, especially for hotel keepers and petrol stations. The 12J Association highlighted some of the issues in a presentation to Parliament at the end of last year.

The Sars guide made it clear that a hotel keeper will be conducting an “impermissible trade” if even a single alcoholic beverage is sold by the hotel.

Similarly, any petrol station that sublets parts of its premises to retail tenants or that operates a convenience store that sells tobacco products will be involved in an “impermissible trade”.
Cohen says the intent behind the policy – that the incentive not be used to fund the gambling, tobacco or alcohol industries – is sound because these sectors are already well funded.
While the policy itself has merit, things went askew with Sars’s implementation. It has affected several 12J funds, especially in the hospitality sector.
Every hotel has a bar, mini-bars in the rooms, and room service. However, because of the wide interpretation of the legislation, not even a single beer may be sold at a hotel that is related to Section 12J funding. Any such investment had to be restricted to the hotel and food component, and could not be involved in the bar or beverage section of the business.
“This is achieved through very intricate hotel management agreements where the hotel cannot partake in the profits from the sale of alcohol,” says Cohen. The hotel may not be involved in the distribution of alcohol either. 
This has been quite a challenge. The Sars interpretation has an impact on the financial model for hotel keeping.
“Where you are not making margin on the sale of alcohol, it really compels you to have a far more attractive hotel offering without that side of the business,” says Cohen.
Objective clouded
Optomise director Namir Waisberg says the aim of the incentive is increased employment. However, the focus has been too much around the tax.

The tax is the incentive, but the purpose is the number of jobs created or sustained.

Waisberg says the most important consideration for Treasury – when deciding whether to extend the incentive beyond the sunset clause or not – is whether there has been job creation.
The economy has been shedding jobs at an alarming rate. Waisberg says it is already clear that the tax incentive has been making up for many of those losses.
“If you curtail that – whether through the caps or any other legislative changes – you are basically impacting on the ultimate objective, which is job creation,” he says.

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