S12J investments – a Win-Win for the Investor and South Africa!

What is the potential of S12J investments?

In our previous article, we described how S12J investments is designed to boost the local economy.

Section 12J of the Income Tax Act stipulates that taxpayers who invest in qualifying S12J companies can deduct 100% of their investment against their taxable income in the year they invest [1] and how Investors benefit from up to 45% in immediate tax relief [2], reducing the cost of the investment, providing downside protection and enhancing overall returns.

[1] Limited to R2.5m per individual/trust and R5m per company per annum

[2] At the maximum marginal South African income tax rate

In this article, we look at the potential growth in the investments and how not only investors, but South Africa at large can benefit from these investments.

How successful has the S12J investments been in South Africa?

According to survey results conducted by the12J Association of South Africa, the Section 12J industry had raised approximately R9.3 billion as at 29 February 2020. As a result of the mechanics of the legislation, this capital is required to be invested in the country for a minimum period of five years. In addition, respondents indicated that they believe approximately 82% of this capital raised is to be incremental, i.e. respondents believe that approximately R7.6 billion would not otherwise have been invested in similar venture capital initiatives had it not been for the attractiveness of the Section 12J legislation.

This finding is significant, especially given the significant offshore investment flows currently being made by high net-worth South Africa n individuals, trusts and corporates; a result of a weakening currency and local economy.

Importantly, when investor capital is lost to the country, so too are the positive impacts which the underlying investments have on the economy. The importance of an incentive which can successfully convince South Africans to invest in South Africa for a five-year minimum period cannot be over-emphasized, especially when the impact of the COVID-19 pandemic is expected to cripple an already fundamentally weak economy.

What are the typical investor returns of an S12J Investment?

From 1 March 2016 till end August of 2019, several Section 12J funds have outperformed traditional local and international benchmarks. A basket portfolio of S12J funds achieved a return of 14,0%, substantially outperforming the MSCI World Index (9,5%), the JSE Top 40 (5,5%) and the SA Listed Property Index (-0,9%), respectively.

How does South Africa benefit from an S12J Investment?

A few typical examples:

Renewable energy (46 investments, R464 million)

South Africa is currently experiencing an energy crisis and renewable energy is going to play an ever-increasing role in the country’s energy mix. According to international research, every megawatt of solar installed generates 30 full-time jobs.

Student accommodation and education (22 investments, R388 million)

Education in South Africa is crucial in alleviating the jobs crisis and the Section 12J investment in schools makes a direct impact to this.

Technology development and Fintech (46 investments, R484 million)

Around 9% of total investment has been invested into technology. Fintech start-ups giving much needed capital and mentorship at the most critical stage for a business.

Agriculture (26 investments, R374 million)

The agricultural sector is one of the most important contributors to South Africa’s GDP. Several features of agriculture make it important in the pursuit of inclusive, labour-intensive economic growth: its rural linkages, ability to absorb less-skilled labour, large economic multipliers due to extensive links with the rest of the economy, globally competitive labour productivity, and importance for export-led growth. According to research from PwC, for every R1 invested into agriculture an additional R0.44 of GDP activity is generated and for every R1 million invested into the sector 8 jobs are created.

What has the impact been on Job Creation?

Section 12J has created over 10,500 jobs across a diverse range of industries. Fifty percent of the jobs created are permanent in nature.

Until when can investments be made in accordance with S12J?

Although Section 12J of the Income Tax Act was initially drafted into law in 2009, it was only in 2015, when certain favourable amendments were made to the legislation, that the industry really began to gain traction.

From inception in 2009, Section 12J has been subject to a 12-year sunset clause i.e. the benefits it affords is only available in respect of shares issued before 30 June 2021. This sunset clause currently remains in place until Government reviews the effectiveness, impact and role of the Section 12J regime to determine if the sunset clause should be extended. Expectations are high that this will indeed be done and is being lobbied strongly by industry and the 12J Association of South Africa.