‘President Ramaphosa should look at Section 12J tax incentive to help rebuild economy’

By Dino Zuccollo 

In the run-up to his State of the Nation Address on Thursday, President Ramaphosa is no doubt grappling with the huge task of rebuilding an economy ravaged by the COVID-19 pandemic. The President needs to look no further than his own government’s Section 12J tax incentive, which has been a notable economic success story.

Section 12J of the Income Tax Act was first introduced by the government in 2009. Following certain amendments necessary to make the legislation operational, implemented in 2015, the Section 12J industry has been enabled to invest more than R5.5 billion, creating approximately 10 500 new jobs. We expect the legislation to create tens of thousands of additional jobs over the next five years, with an additional R4 billion having already been raised and pending investment into SMMEs across the country. But these great expectations will soon end unless government extends Section 12J, which is currently subject to a ‘sunset clause’.

It would be hugely encouraging to see the President use the opportunity of SONA to announce the extension of Section 12J, that is currently due to expire on 30 June 2021. In extending the Section 12J tax incentive, he will signal that South Africa is once again open for business and that he is serious about growth, jobs, and transformation.

On Monday 1 February, investment advisory firm Impact Capital Africa reported on the excellent performance rating of a shining example of what Section 12J investments can achieve — the Mdluli Safari Lodge in Mpumalanga. The report not only reveals the substantial positive social and environmental effects of the project but also shows that these effects are fully in line with government’s policy objectives of economic growth, job creation, and transformation.

More than 120 people from the rural Mdluli community — which, like many other rural communities in South Africa, is beset by high unemployment and poverty — benefit from permanent employment at the Lodge. Around 85% of the Lodge’s current staff are Community members and 61% of them are women. Furthermore, a number of community members have been upskilled for the purposes of employment at the Lodge such as training in ranging, bushcraft, and conservation in order to staff the Mdluli Safari Park’s own anti-poaching unit.

Notwithstanding the devastating impacts of the Covid-19 pandemic on the hospitality and tourism industry, the next stage of the project is underway and will see a further 100 jobs being delivered, along with a range of infrastructure investments in the community, including clinics and roads.

The 12J Association commends the Lodge for setting a stellar example of the profound effects that Section 12J has had since inception. A partnership between private investors and the Mdluli community, the Mdluli Safari Lodge was funded through the Section 12J incentive to rebuild a geographical area and community that was forcibly displaced by the apartheid regime in the 1960s. Having acquired freehold title of the Mdluli Safari Park through a successful land restitution claim, the Mdluli Community entered into a joint venture with Section 12J investors to develop the Lodge.

The story of the Mdluli Community is just one of hundreds of successful examples from across South Africa that demonstrate how Section 12J has facilitated investment in local SMMEs and created local jobs, bringing sustainable growth and change to the economy. The transformative effects of the legislation are clear: up to 74% of new jobs created through 12J investment have been taken up by historically disadvantaged individuals, and 25% of investments have been made in projects situated in rural areas.

At a time in which unemployment is skyrocketing and investors look to move money offshore rather than investing locally, the Section 12J incentive is an ideal existing mechanism that should be leveraged to grow local jobs, retain local investment and develop the transformative gains that have already been made.

Section 12J also offers clear long-term benefits to the fiscus. Thanks to capital flight, a sluggish economy and the widespread failure of SMMEs due to the Covid-19 pandemic, South Africa’s tax base is rapidly diminishing. The 12J incentive is a reliable tool to maintain and expand the tax base through supporting SMMEs, enabling access to financing for new SMMEs, and sustainably creating jobs.

The 12J Association looks forward to continuing our work with Treasury to secure an extension on the empowering transformation, employment and broader economic growth benefits that Section 12J provides our country.

Zuccollo is chairperson of the 12J Association of South Africa, an industry association that informs the public about the impact of the 12J incentive in creating sustainable jobs and growth in key economic sectors in South Africa and acts as a point of contact for engagement with government.