Experts have criticised an intended legislative crackdown on abuse of the Section 12J tax incentive, saying it could stifle growing SMEs just as the incentive begins to deliver results.
Section 12J of the Income Tax Act was originally meant to raise funding for development of small and medium enterprises by giving investors a tax break.
It enables investors already at the highest marginal tax rate of 45%, to deduct the full amount of an investment in a qualifying business from his or her tax liability in the year in which it is made.
Sectors which qualify include hospitality, renewable energy and manufacturing.
The 2019 Taxation Laws Amendment Bill, gazetted last year, proposes that Ferial Haffajee: Is the business investment strike finally over?
Gadi Cohen, CEO of Section 12J asset manager Optomise Alternative Investments, believes National Treasury's proposal to cap the amount that high net worth individuals can invest in Section 12J schemes will stifle the aim of growing SMEs just as the incentive is starting to deliver real results.
According to Cohen, the South African S12J industry has matured as more sophisticated investors became aware of the tax benefits involved. Optomise recently partnered with Stockdale Street's CCP S12J fund, to create an S12J asset manager in South Africa with R340m assets under management.
"As the industry has only begun gaining traction over the last three years, it is still young but over time, the multiplier effect of the growth of businesses and job creation will provide additional impetus to raising South Africa's employment rate," says Cohen.
Jeff Miller, CEO of Grovest Corporate Advisory, says that, rather than looking to banks, which, in his view, have become more stringent in their lending, local hospitality businesses should rather consider other capital-raising alternatives such as Section 12J.
In his experience, new Section 12J hospitality projects have even contributed towards sustainable land reform. He gives the Mdluli Safari Lodge, situated within the borders of the Kruger National Park, as an example.
Francois van Zyl, a partner at 12Cape, a Section 12J investment fund that owns the newly opened Latitude Aparthotel in Sea Point, Cape Town, says the prospective growth in tourist arrivals in Cape Town will increase the demand for serviced holiday villas and self-catering apartments. He sees the hotel as an example of how the Section 12J company plans to deploy investors' capital in future.