Section 12J companies in a bid to prove their value

SA’s largest section 12J asset manager has established an industry association, hoping to convince the Treasury to extend the tax incentive past 2021.

Founding member Dino Zuccollo said the association was collecting data to present to the Treasury to prove the positive contribution of section 12J companies in SA.

"Since it was introduced, it is clear that section 12J has had a positive impact on SA and the economy. The section 12J Association will prove it."

Introduced in 2009, the tax incentive on section 12J companies was aimed at encouraging investors to put money into early-stage small and medium businesses as well as junior mining companies. It is the only investment that allows people who have bought shares in these companies to claim up to 100% deduction of their investment with SARS.

Section 12J companies are a form of venture capital companies operating in various sectors and make use of a tax break offered by the government to stimulate job creation and economic growth.

Even though the tax incentive has been in place for 12 years, section 12J companies only started gaining prominence in the past few years and there are only just more than 100 registered companies in this category.

Westbrooke Alternative Asset Management, SA’s largest section 12J asset manager, which manages half of the capital invested in those type of funds estimates that this market has raised more than R3.6bn. 

Zuccollo says the tax incentive for investing in section 12J companies was not that attractive in earlier years and this was why investors had not been keen to take on that risk.

“It took from 2009 to 2015 for the tax legislation to be amended to be more attractive to investors,” he said.

Warren Ingram, executive director of Galileo Capital, said since the legislation governing section 12Js was tweaked, it had become more practical for investors to use the tax incentive. However, some wealth managers and investors have chosen to stay away because of the risk inherent in them.

“There are too many risks for me to quantify to be able to make a decision for my clients. But there are also concerns around how many of these companies have been established because of the tax incentive. A good investment should be able to stand alone to attract capital. Many of the providers of section 12J are unfortunately marketing the incentive much more than explaining the essence of their investments,” said Ingram.

He also raised concerns about the high cost as most section 12J funds charge fees similar to those of private equity funds.  There are also a few players who register 12J companies but their operations do not comply with the legislation. 

buthelezil@businesslive.co.za