The Select committee received an oral presentation from the 12J Association on the proposal in the 2019 Tax Bill to place caps on the tax deductions provided under section 12J of the Income Tax Act to investors in Venture Capital Companies (VCCs).
The association called for the cap of R2.5 million on individuals’ deductions to be raised to R5 million, in line with the R5 million cap applied to corporations. It warned that a cap could affect the success the 12J incentive was having on job creation and economic growth in South Africa. It was one of the few mechanisms to raise five-year South African investment capital from high net worth individuals, as opposed to them investing offshore.
The association submitted that 12J was a new and growing asset class in South Africa. Initial findings of a survey were that the incentive had created about 27 000 jobs in South Africa. It said the cap could not be seen as an interim measure until a “:sunset clause” was considered in June 2021. The changes proposed could shut down many VCCs and fund managers prior to this.
National Treasury said the arguments presented to the select committee were the same ones presented at an earlier hearing of the National Assembly’s Standing Committee on Finance. Treasury was concerned about the way in which the 2J incentive had been aggressively advertised as a tax avoidance measure and not as an investment. It was not persuaded by the association’s arguments.
At the beginning of the meeting, the Chairperson pointed out that the Select Committee, as a committee of the National Council of Provinces, did not have powers to amend Bills which were classified under section 75 of the Constitution and which were sent to it after being approved by the National Assembly. The Chairperson said the committee had been given very little time to consider the Tax Bills which had been finalised by the NA. The rules of Parliament should provide for the select committee to receive an informal copy of the Tax Bill before the Medium Term Budget Policy Statement. While the committee had little latitude to change the Bill, this did not prevent it from raising issues about it in the committee’s report to Parliament.
Committee members listened to an exchange of views between the National Treasury and the 12J Association. They agreed that they needed more facts and figures in order to properly consider the submissions.
The committee also received written submissions. Three called for higher excise duties on tobacco. A fourth raised objections to some measures against tax avoidance proposed in the Tax Bills.
The Chairperson said he wished to make a general statement aimed at those who had come to make presentations to the Committee and those who had sent submissions. The Select Committee on Finance was a committee of the National Council of Provinces NCOP). If the Bill being considered was not a section 76 bill under the Constitution, lobbying should be taken to the Standing Committee on Finance which was a committee of the National Assembly (NA). “You can’t win here on a bill like this what you’ve lost out there”. He appealed to officials of Parliament to respect the rules of Parliament and the roles the Constitution gave to the NCOP and the NA. Too much was coming to Parliament via the NCOP committee when it belonged in the NA.
The Chairperson asked the Parliamentary Legal Advisor to outline what the limitations were on the committee’s handling of the Tax Bills.
Adv Frank Jenkins, Senior Legal Advisor, Parliament’s Constitutional and Legal Services Office, said since the Tax Administration Laws Amendment Bill was classified under section 75 of the Constitution. It did not directly affect the provinces, and such, the select committee did not have the power to amend it. The select committee could send proposals back to the NA committee. However, it should be asked whether it would not be a waste of time and resources to send back to the NA committee an argument it had already rejected. It did not make sense to bring the same argument that had been lost in the NA to the NCOP whose role was to lift provincial issues into a national sphere of debate.
The Chairperson said there were circumstances where the NCOP committee is convinced that what the NA had decided had to be reconsidered. He said those making representations should not repeat what they had told the NA committee, because that committee would merely repeat its answers.
The Chairperson noted that the Committee had already heard a National Treasury submission on the Tax Bill at an earlier hearing. He proposed that, instead of repeating this, the committee go straight into hearing public submissions and the Treasury’s response.
Mr D Ryder (DA; Gauteng) said there needed to be a discussion on the committee’s role in dealing with section 75 Bills and what powers it had. He believed the Committee should be as well informed as possible on the issues brought to it. Stakeholders present should make their submissions and the Committee should hear what the Treasury had to say about them.
The Chairperson pointed out that the committee would not be making any decisions on representations until the following week.
Briefing by Section 12J
Mr Dino Zuccolo, Chairperson, Section 12J Association, said a cap would affect the success the 12J incentive was having on job creation and economic growth in South Africa. It was a mechanism to raise five-year South African investment capital from high net worth individuals, as opposed to them investing offshore
The association acknowledged that the cap did alleviate revenue lost by the fiscus in the short-term. As a fair compromise, it believed the proposed cap should be R5 million for all investors, including individuals, trusts and companies. There was no logic in granting corporates a larger annual investment cap on the basis that companies paid corporate tax at 28 per cent and individuals and trusts paid tax at a maximum marginal rate of 45 per cent and therefore obtained a larger deduction. This approach failed to recognise that a company must pay dividends withholding tax at a rate of 20 per cent on after-tax profits when declaring distributions to individual and trust investors, thereby increasing the “effective” tax rate to the ultimate shareholder.
The association submitted that 12J was a new and growing asset class in South Africa. Initial findings of a survey by PricewaterhouseCoopers were that the incentive had created about 27 000 jobs in South Africa, many of which would not have been created should the annual investment limitation have been implemented in the past.
The association argued that the cap could not be seen as an interim measure until a “sunset clause” was considered in June 2021. The changes proposed could shut down many VCCs and fund managers prior to this. It asked that the 12J industry be granted an extension beyond June 2021 in order to be able to effectively adapt business models for any changes made to the law and to begin to grow the industry on a long-term, sustainable basis.
The Chairperson complimented the association for the simplicity and clarity of its presentation. He asked what engagement there had been with the Treasury.
Mr Zuccolo responded that there had been stakeholder meetings. In fairness, he acknowledged that the Treasury had raised the cap on individual deductions to R2.5 million as a result. However, determining what the cap should be was a matter of speculation. He knew of high net worth investors who found the current cap made it not worth their while to invest. Investments made under 12J took money that would have gone out of South Africa and put it into things like student accommodation.
The Chairperson invited the National Treasury to respond.
Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, National Treasury, said Treasury was always willing to engage with stakeholders and had done so during parliamentary hearings. The arguments presented to the select committee were the same ones presented to the standing committee on finance. There would always be disagreement about the cap on deductions and a decision had to be made. Tax deductions were a privilege and not a right. Incentives were aimed at attracting investors who might not otherwise have invested. Treasury was concerned about the way in which the 12J incentive had been advertised on radio as a way of reducing tax and not as an investment. Some 12J investments had been in hotels in Sandton and Umhlanga which he believed would have been built anyway.
Mr Momoniat added that he was not persuaded that the cap should be changed. Treasury would continue to engage stakeholders but the decision had been made.
Mr Chris Axelson, Chief Director: Tax Analysis, National Treasury, said it was a concern that the wealthiest individuals were getting huge upfront tax deductions of seven figures. At the end of the five-year investment period they paid capital gains tax at a far lower rate than the top marginal income tax rate. This undermined the progressivity of the tax system. It was difficult to ascertain what the benefits of the incentive were. Would the investments have happened anyway? Projects like student accommodation had large capital base and were not particularly risky. The issues would be reviewed when the sunset clause was considered in 2021.
Ms Yanga Mputa, Chief Director: Tax Policy, National Treasury, said while there had been huge upfront tax deductions, only about a third of the money had so far been invested in SMMEs.
Ms Lerato Makhetla, Deputy Director: Business Tax, National Treasury, said some of the projects in which 12J investments were made also qualified for building and job creation incentives. The sunset clause would provide an opportunity to weigh revenue foregone against any upside for the incentive.
Mr Momoniat invited SARS to comment.
Mr Franz Tomasek, Group Executive: Legislative R & D, SARS, said the term VCC conjured a mental picture of leading edge, high risk ventures. The projects 12J investments were going into did not appear to match this picture.
The Chairperson invited Mr Zuccolo to respond.
Mr Zuccolo said he had gained an understanding of the issues the Treasury was grappling with. It appeared that the cap was less of a concern than the type of investments that were being made. Using the cap to address this was like taking a sledgehammer to a mosquito. The 12J industry was willing to work with Treasury in determining what sectors VCCs should invest in. A cap had an impact on investors across the board.
To date, a total of R8.3 billion had been raised under 12J and R3.7 billion had been spent. Fund managers were investing in small, high risk ventures and could not spend the money straightaway. The law gave them 36 months in which to do so. By the end of 2018, R3.8 billion had been raised. So far R3.7 billion had been spent, so he did not agree that deployment rates were slow.
Changes to the law in 2018 had got rid of abuse of the tax incentive. The issue now was what type of investments were being made.
Mr Zuccolo said investment managers were advising clients to invest 80 % of their funds offshore. The only way to keep some of that money in the country was through 12J investments. He appealed for the industry to be given more time to show what it could achieve.
The Chairperson invited the Treasury to respond, commenting that the association had made some good arguments.
Mr Momoniat said there had been big abuse of the incentive. If people who had gone against the spirit of the incentive got hurt, that was their problem. Treasury needed to be convinced that what the 12J industry was proposing would lead to more productive and risky investments.
Mr Axelson said Treasury was concerned about radio adverts that offered 12J investments as an alternative to a tax revolt. He said the majority of people who took part in 12J projects contributed less than R2.5 million. The cap was aimed at the few who claimed massive deductions.
Mr Zuccolo agreed that advertisements talking about tax revolts were not in anyone’s interests. He added a cap of R5 million would achieve the desired spread of investors.
The Chairperson invited comment from committee members.
Mr Ryder said the committee lacked the information it needed to grasp the issues that had been raised. It needed more information about the investments made and the jobs created. There were questions about the revenue foregone as opposed to other taxes raised through new investments. There were no numbers and no examples. This should be the start of a discussion and a review involving other players in the market.
The Chairperson agreed that the committee needed to be provided with more facts and figures. He suggested that Treasury and the association should discuss their differences.
Mr Zuccolo said they would be happy to work with the Treasury.
Mr Momoniat said Treasury would never agree to negotiate thresholds it had set.
In ending the discussion, the Chairperson said the committee had been given very little time to consider the Tax Bills which had been finalised by the NA. The rules of Parliament should provide for the select committee to receive an informal copy of the Tax Bill before the Medium Term Budget Policy Statement (MTBPS). While the committee had little latitude to change the Bill, this did not prevent it from raising issues about it in the committee’s report to Parliament.
The Committee Researcher informed the Committee that four written submissions had been received on the Tax Bills. Three were from the National Council Against Smoking; the University of Cape Town’s Research Unit on Excisable Products; and Dr Yussuf Salojee. All three called for an increase in excise duties on tobacco to reduce consumption. The fourth, from PricewaterhouseCoopers, dealt with some of the anti-avoidance and profit shifting measure proposed in the Tax Bills.
After hearing brief summaries from a committee researcher, the Chairperson ruled that they should be considered at a committee meeting the following week.
The meeting was adjourned.
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