Treasury to cap S12J tax incentive

Dino Zuccollo, fund manager at Westbrooke Alternative Asset Management

“The introduction of the new investment cap highlights the popularity of a growing asset class which is becoming mainstream amongst many South African investors. Section 12J remains an attractive incentive for those who want to reduce their taxable income, but smaller providers may struggle to raise sufficient investor capital as the caps require capital to come from a wider ‘retail’ investor base. At the same time, S12J providers need to comply with the many aspects of Section 12J, as non-compliance would effectively negate a large portion of the Section 12J tax deduction. South African Revenue Services penalties, for example, could be as high as 125% of capital raised," says Dino Zuccollo, fund manager at Westbrooke Alternative Asset Management.

“Ensure that the asset manager is capable of raising sufficient capital to make sizeable underlying investments. According to the South African Venture Capital and Private Equity Association (Savca), the minimum sustainable and economic fund size for a small Section 12J manager is approximately R200m. Investors should consider whether the manager has a history of successfully deploying funds raised in line with the 12J legislation and whether it has extensive operational and compliance structures in place which are capable of handling the larger number of investors as a result of the new investment cap.”

Curbing abusive structures

Zuccollo believes that the larger, more established Section 12J providers with a track record of raising scalable funds still provide a compelling investment opportunity for taxpayers while reducing their tax liability. It is believed that significantly less than 2019’s approximately R4.5bn will find its way into Section 12J investments in 2020, which will reduce private sector investment into SMMEs (the original intention of Section 12J was to boost the local economy and create jobs).

“In addition, the changes may be effective in curbing abusive structures which have crept into the industry. We are working with National Treasury and Parliament regarding these changes and are hoping to initiate a conversation regarding the potential extension of the Section 12J incentive in the coming months,” he says.

Since both retirement annuities (RAs) and Section 12J are effective annual investment options which allow individual taxpayers to reduce their income tax or capital gains tax liabilities, they should be considered in conjunction as part of a balanced and well diversified annual investment portfolio. When compared to RAs, Section 12J investments provide a shorter investment horizon (minimum 5 years), a larger annual cap, the potential to receive semi-annual dividends and the ability to invest in an alternative underlying investment as opposed to the more traditional asset classes into which RAs typically invest,” Zuccollo says.