Budget 2021: Will Treasury seek Section 12J extension?

Minister Mboweni’s Wednesday Budget and Budget Review will be closely scrutinised by investors looking to grow the South African economy and create local jobs.

The uncertain political and economic climate has seen wealthier South Africans moving unprecedented amounts of money out of the country in the past few years, either through offshore investment or physical migration.

At the same time that local investors are divesting in droves, foreign direct investment (FDI) in South Africa is also waning. According to data published in the United Nations Conference on Trade and Development (UNCTAD) 2020 World Investment Report, South African FDI inflows decreased by 15,1% in 2019, a year-on-year loss of US$4.6 billion (around R67 billion) to our economy.

While President Ramaphosa announced in his State of the Nation Address last week that sizeable FDI commitments had been secured as a result of a series of South Africa Investment Conferences, it remains to be seen whether these will materialise in a meaningful way. With no less than 42 companies having delisted from the Johannesburg Stock Exchange since 2019, and a net R64.6 billion worth of South African bonds being dumped by foreign investors last year, the signs unfortunately point towards divestment.

Quite simply, there can be no economic growth and job creation without capital investment, and South Africa has a twofold obstacle to this goal: local capital flight and a lack of foreign investment. Government urgently needs to put measures in place to incentivise local investors to remain invested in South Africa instead of moving their money into what they perceive as safer investments overseas.

Fortunately for Treasury, this isn’t all doom and gloom as, for SMMEs, there is already an innovative solution in place in South Africa to ensure that investors keep their capital onshore where it can be put to use in key sectors, creating jobs and growing the economy. This solution was introduced by government in 2009 and is found in Section 12J of the Income Tax Act. But we are about to lose it if government does not act soon.

The Section 12J incentive encourages South Africans to invest in local SMMEs in specific growth-targeted industries, such as hospitality and tourism, agriculture, energy, student accommodation and manufacturing. Taxpayers making such investments can claim a deduction against their taxable income up to set limits of R2.5 million for individuals and R5 million for companies, each year. One of the real values of these investments for the local economy is that investors are locked in for at least five years to allow sensible and sustainable establishment and growth in the underlying investee company.

Crucially, Section 12J sees local investors freely choosing to invest in growth-driving South African businesses, instead of moving money offshore or holding on to cash.

And Section 12J has proved incredibly effective at doing so. In the last 5 years alone, Section 12J investments have resulted in over R5 billion worth of investment into more than 360 SMMEs. These investments have directly created over 10 500 jobs across the country — including in rural areas — and have the potential to create up to 45 000 jobs over time.

SMMEs are responsible for more than 50% of all employment opportunities in South Africa; the sector contributes more than 45% of the country’s GDP. We believe that dedicated Section 12J investments can continue to help open the way to more inclusive growth and jobs across the country.

But the immense benefits that Section 12J has to offer our economy at this difficult time could soon be lost. The legislation is subject to a ‘sunset clause’ in June 2021, meaning that if Treasury and Parliament do not act in this budget speech by proposing that an extension of the Section 12J be written into law, it will cease to exist.

The 12J Association of South Africa calls on Minister Mboweni to announce Treasury’s intention to seek an extension to Section 12J in his Budget Speech on Wednesday. We hope the Minister takes this opportunity to incentivise investors to keep their money onshore where it can continue to create jobs and drive much-needed inclusive economic growth.