Smaller Section 12J funds will struggle to raise investor capital with new changes [Opinion]

National Treasury appears certain to retain changes to the Section 12J tax incentive, which allows South Africans to write off 100% of the investment against their taxable income while simultaneously benefiting from attractive returns, creating jobs and stimulating the economy.

According to the change (see this story and this one), individuals and trusts will now only be allowed to invest R2.5-million per annum and corporate investments will be capped at R5-million per annum (previously these amounts were uncapped).

Due to these legislative changes, it is likely that smaller Section 12J providers will struggle to raise sufficient investor capital and keep up with the various Section 12J compliance requirements as they will now need to raise capital from a wider more retail investor base.

Should this lead to non-compliance of the legislation, the Section 12J companies which they manage may be penalised by the SA Revenue Service (Sars) by up to 125% of capital raised, which will effectively negate a large portion of the Section 12J tax deduction.

Smaller Section 12J providers will struggle to raise sufficient investor capital and keep up with compliance requirements

I would therefore caution financial advisors and investors to do their homework on the asset manager and their investment strategies prior to investing.

Ensure that the asset manager is capable of raising sufficient capital to make sizeable underlying investments.

According to the Southern African Venture Capital and Private Equity Association (Savca), the minimum sustainable and economic fund size for a small Section 12J manager is approximately R200-million.

In addition, 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.

However, the larger, more established Section 12J providers with a proven track record of raising sizable funds and successfully investing this capital through an experienced and skilled team will still provide a compelling investment opportunity for taxpayers while at the same time reducing their tax liability.

In addition, the changes may be effective in curbing abusive structures which have crept into the industry.

We are working with The 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.

It is believed that significantly less than 2019’s approximately R4.5-billion will find its way into Section 12J investments in 2020.

This will reduce the amount of private sector investment into small businesses — the original intention of Section 12J was to boost the local economy and create jobs.

Read more: SMEs, investors to lose out with new threshold and changes to Section 12J [Opinion]
Read more: Is spike in energy deals evidence that Section 12J funds are driving VC boom in SA?
Read more: Experts raise concern over new Section 12J rule that limits deductions for investors

*Dino Zuccollo is a fund manager at Westbrooke Alternative Asset Management, one of SA’s largest S12J fund managers