The 12J Industry Association of South Africa has criticised proposed amendments to the country’s Income Tax Act that would limit the amount individuals could invest tax-free in Section 12J companies.
Under Section 12J of the Income Tax Act, South African investors are able to make tax-deductible investments in approved companies, who in turn make investments in startups.
The incentive has been linked with an increase in the number of active VC funds in South Africa, with the likes of Knife Capital, Kalon Venture Partners, Kingson Capital and METTA Capital among those launching approved Section 12J funds.
However, the recently-released 2019 Draft Taxation Laws Amendment Bill (TLAB) contains proposed amendments to certain elements to the Section 12J tax incentive, one of which limits the amount investors can deduct from their taxable income to ZAR2.5 million (US$170,000) a year.
The 12J Association, which was formed earlier this year, said in a statement that the proposed amendments, if promulgated, would likely have the impact of reducing the amount of capital which will be raised in the industry going forward and in turn impact the industry’s ability to invest capital in the South African economy.
In addition, the 12J Association believes the draft amendments will make it more difficult for existing Section 12J companies to execute on their business models and could potentially result in certain Section 12J companies being unable to meet certain compliance requirements within the legislation.
“Since major amendments which were made to Section 12J in 2018, industry players have found it challenging to continually modify their business models to remain compliant with the periodic changes in legislation and would benefit from policy certainty and stability going forward. These constant changes impact confidence amongst Section 12J investors, who invest five-year lock-up capital into SMEs across the country,” the association said.