3 minute read
The sunset of section 12J is fast approaching, or is it?
DR ALBERTUS MARAIS Director, AJM Tax
Section 12J was introduced to the South African Income Tax Act on 1 July 2009, creating an incentive for taxpayers to invest in qualifying venture capital companies (VCCs) in return for an income tax deduction equal to the amount invested. In other words, a full income tax deduction was provided for taxpayers investing in these entities. In its most beneficial form, taxpayers earning income that is taxed at the top marginal income tax rate of 45% are able to invest an amount and receive a refund from SARS of up to 45% of the invested amount. This presents a significant discount on the investment, which makes it all the more lucrative.
The policy behind the incentive is to encourage taxpayers to invest in active businesses in a bid to stimulate economic growth and job creation. Qualifying VCCs therefore cannot invest in any asset class, but are required to invest only in companies that conduct permissible trades. Passive investments by a VCC are not allowed; only active investments that stimulate job creation, such as in the tourism, retail or manufacturing sectors.
Since its introduction, though, the incentive was – like many others contained in the Income Tax Act – never intended to be a permanent one and a sunset clause was always part of the relevant legislation to determine that these tax deductions would only be available for investments made by 30 June 2021. This sunset clause is thereforeto come into effect soon to limit further deductions in terms of this highly lucrative tax incentive, unless Government were to introduce legislation for the 30 June 2021 deadline to be extended.
While various industries, notably the tourism industry, are in dire need of incentives to stimulate economic growth that will no doubt yield increased tax revenues in the long term, the unfortunate reality of the South African fiscal position is that incentives encouraging longterm economic growth may be unaffordable in the short term.
It is apparent that National Treasury is in the process of considering the efficacy of the section 12J incentive, as it has called for detailed submissions on the financial information of existing VCC structures. This will enable it to consider the impact of the incentive and whether it is worthwhile for it to be extended.
Considering how the annual fiscal legislative cycleworks, it is interesting that Government has waited this long before considering an extension of the sunset clause. The fiscal legislative cycle kicks off annually with the national budget speech, when Treasury also publishes a number of proposed amendments to the South African tax laws, which it intends to publish later the year. These proposals then culminate in the draft Tax Amendment Bills published around June/July of each year. After public consultation and debate among Treasury, SARS and tax practitioners, these draft Bills are then published in refined and final form (typically around October of
every year), and adopted by Parliament and signed into law in December/ January of the following year. This is relevant since, if Government intends to extend the lifeline of section 12J beyond the current 30 June 2021 sunset clause, it should have done so as part of the 2020 fiscal legislative cycle, with the amendment acts becoming law in December 2020/January 2021. Failing to have done so means that an extension will only be able to be passed into law after the sunset clause has already kicked in (in other words, expected during December 2021/ January 2022).
If the sunset clause is therefore to be extended beyond 30 June 2021, it will require Government to announce in the budget speech next year that it intends to introduce retrospective legislation to ensure that the sunset clause is retrospectively extended. This is not ideal, since it creates uncertainty between 30 June 2021 and when the tax amendment legislation is finally adopted. Whether Government actually pushes through with finalisation of the necessary legislation to extend the sunset clause will remain up in the air during this time.
