The sunset date for the venture capital company (VCC) incentive – Section 12J – which was initiated in 2009 to encourage retail investments in smaller businesses, will not be extended beyond 30 June 2021.
In the Budget documents, the National Treasury (NT) said that the incentive did not sufficiently achieve its objectives of developing small businesses, generating economic activity and creating jobs.
Instead, it “provided a significant tax deduction to wealthy taxpayers.” NT added that the majority of investments supported by the incentive “seem to be in low‐risk or guaranteed return ventures that would have attracted funding without the incentive.”
Assessing the venture capital company incentive
NT explained that over the past year, it had solicited information from 100 VCCs and 360 qualifying companies on the performance of the VCC incentive. The results showed that R11.5 billion had been invested at VCC level (on which a 100 per cent tax deduction was applicable), with R4.2 billion invested at qualifying company level. The total tax contribution from qualifying companies was R207 million for 2019/20, half of which was VAT.
Qualifying companies employed 8 239 people, of which 4 035 people were in direct employment. In total, only 37 per cent of qualifying companies added new jobs after receiving VCC funding. Over 50 per cent of the investments appeared to be in low‐risk moveable asset rental structures, low‐risk income‐producing investments and guaranteed‐return real estate investments.
The NT said its findings broadly corresponded with the 12J Association’s own survey, but differed from modelled predictions on job creation and tax estimates, “with the association’s estimates more optimistic than the actual responses.”
Since 2015/16, total tax revenue foregone due to the incentive was R1.8 billion, of which R1.7 billion went to individuals who had a taxable income and VCC investment above R1.5 million per year. Revenue foregone in 2018/19 was R745 million before the deduction cap of R2.5 million was introduced.
The NT said that based on this information, the incentive seems to give a significant tax deduction to high net‐worth taxpayers that cannot be justified given its limited economic impact.
“As announced in the 2020 Budget, a sunset date of 28 February 2022 has been introduced for tax incentives dealing with airport and port assets, rolling stock, and loans for residential units. Together with the incentive providing exemptions for films, these incentives will lapse once they reach their respective sunset dates.
“The National Treasury is accepting detailed submissions from affected stakeholders who wish to retain these provisions in the tax code. The submission deadline is 31 March 2021. The urban development zones and learnership tax incentives will be extended for two years while their reviews are completed.”