Is the sun setting on Section 12J?

In providing reasons for its decision, National Treasury alluded to the fact that the majority of investments were made into “low-risk moveable asset rental structures” and “low-risk income-producing investments and guaranteed-return real estate investments.” According to National Treasury these low-risk ventures “would have attracted funding without the incentive.”

The move by National Treasury to not extend the sunset clause, therefore, seems to be driven by their view that the section 12J incentive had been abused by the implementation of certain (in their view abusive) structures. Most notably the fact that National Treasury is of the view that the majority of VCC funding was not utilized in the manner originally contemplated by National Treasury i.e. investments in high-risk startup companies.

The question needs to be asked whether this was the right decision, specifically given the impact Covid-19 had on the SA economy and the desperate need for investment in SA. If one takes the example of the “real estate investments” structures, as mentioned by National Treasury, it is common knowledge that these (perceived) structures arose as a result of the anomaly contained in the definition of impermissible trades. In essence, an impermissible trade is inter alia defined as any trade carried on in respect of immovable property, “other than a trade carried on as a hotelkeeper”.

This exclusion opened the door for a VCC to deploy its capital and make an investment into real estate, but always ensuring that it indeed is carrying on the trade as a hotelkeeper. A possible manner in which the concerns voiced by National Treasury could be alleviated would be to amend the definition of impermissible trade and remove the “loophole” pertaining to hotelkeeper. Such an amendment could possibly open the door for a reinstatement of the section 12J allowance.

The final decision on the future of section 12J now lies with Parliament, who is faced with the decision on whether to accept the proposal by National Treasury or to decide upon a different course of action. However, for the time being, it seem as if the sun is indeed setting on section 12J.