New Section 12J impact study shows scheme has been a success says association

The Section 12J Association of South Africa says a new impact report shows that the Section 12J incentive has not only managed to create jobs, but that it has also done so more economically than other incentives.

The association released the report to Parliament and The National Treasury, outlining the results of an inaugural survey of its members which details the impact which the Section 12J incentive has had on the SA economy.

The incentive, set up under Section 12J of the Income Tax Act, allows investors who make investments in approved VCCs — that then invest in qualifying small companies — a tax deduction.

In a statement yesterday the association’s chairman Dino Zuccollo said the report demonstrated that the incentive had not only managed to create jobs, but it has done so more economically to the fiscus than other government-backed job creation incentives.

Section 12J has not only managed to create jobs, but it has done so more economically than other incentives

“Through Section 12J, SMMEs are being meaningfully supported at a time when funding for these businesses has all but dried up. In the Association’s view, the survey findings make a clear case that the June 2021 Section 12J sunset clause should be extended until at least 2027,” he said.

The survey showed that as of February the total assets under management under the scheme, exceeded R9-billion.

The bulk of this has been invested by SA’s high net worth individuals (57% of total investment) for a minimum of five years.

Of the R9-billion raised, about R5.5-billion (or 59%) has been invested into more than 360 small businesses, with an average investment size of R15-million per business.

As of February these businesses in turn support about 10 500 jobs across a variety of industries including education, agriculture, renewable energy, hospitality and tourism, student accommodation and many others.

Based on the association’s calculations, the Section 12J incentive generated one job currently created for every R126 000 invested. This is expected to fall to R30 000 per job based on the total jobs which are expected to be created by the incentive in years to come.

Respondents in the survey indicated that 74% of the jobs created have been for black individuals and 25% of industry investments have been made outside of major metropolitan areas.

This is in stark contrast to other job-creation focused incentives in South Africa, which cost up to R450 000 for each job created, said Zuccollo.

Additional key findings include:

• Respondents indicated that of the R9.3-billion raised, R7.6-billion would not otherwise have been invested in similar small business initiatives had it not been for the attractiveness of the Section 12J legislation.
• In all, 57% of total industry capital under management has been raised from individuals, 35% has been raised from companies and 8% has been raised from trusts.
• Of the about R5.5 billion which has been invested into small businesses, the survey found that 76% is incremental — in other words had it not been for Section 12J, about R4.2-billion would never have been invested into local small businesses.
• An estimated R2-billion was raised in February 2020 with insufficient time to invest prior to the Covid-19 lockdown, making the industry investment rate (of 59% of total capital raised) closer to 75%.
• Fully 100% of respondents surveyed believe that the Section 12J legislation should be extended beyond the current June 2021 sunset clause.
• Section 12J has created a vibrant, SMME investment focused ecosystem which gives SMMEs access to not only financial capital, but mentorship and guidance not previously available.

“As is the case in the UK, which has a similar legislation to Section 12J, the survey proves that the underlying Section 12J investee companies will quickly begin to pay more tax than the aggregate of all Section 12J deductions granted,” said Zuccollo.

He said through the incentive, the government has effectively put the private sector to work in creating an efficient, SMME investment focused ecosystem which will ultimately pay for itself.

Said Zucollo: “As Covid-19 causes our fiscal deficit to bulge even further, we should be extending incentives such as Section 12J – we simply cannot afford not to.”

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Featured image: Section 12J Association of South Africa chairman Dino Zuccollo (Supplied)