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Government Kills Off Section 12J Incentive

Treasury has terminated the SME funding incentive, even though it's performed better than government departments.

Government Kills Off Section 12J Incentive

The comprehensive review accompanying last week's budget speech included an unpleasant surprise: the termination of the Section 12J tax incentive. The decision sounds the death knell for billions of rand in equity funding for local SMEs and calls into question government's commitment to small business development.

The Section 12J tax incentive was introduced in 2009 to encourage private investors to fund local entrepreneurs in exchange for a 100% tax deduction. While the primary intention was to develop SMEs and create jobs, it also kept capital in South Africa that would have otherwise been invested offshore.

According to the 12J Association of South Africa, the incentive has raised R9.3b for 360 SMEs and created over 10 000 jobs at a fiscus cost of just R1.3b (after accounting for venture capital company taxes, dividend withholding taxes, and capital gains taxes). That's an average cost per job of approximately R126 000.

So why was it terminated?

According to Treasury, the incentive amounted to "a significant tax deduction to high net-worth taxpayers", which is a curious criticism because that is, quite literally, what it was designed to be. Who else, other than wealthy investors, are going to risk funding SMEs on an equity basis?

More important, Treasury alleges that the incentive has had a "limited economic impact". While they broadly agree with the 12J Association's report, they claim that only 8 239 jobs were created at a fiscus cost of R1.8b. That works out to an average cost per job of R218 473.

How does that compare?

Well, during the 2020 financial year, the Department of Trade, Industry and Competition disbursed R5.3b and the Industrial Development Corporation disbursed R11.7b. The DTIC created 9 984 jobs, while the IDC created 10 414. That works out to an average cost per job of R530 849 and R1 123 487 respectively.

Even by Treasury's own numbers, the Section 12J tax incentive has comprehensively embarrassed government's flagship economic development agencies.

Maybe that's the real reason for ending it?