27 February 2020 by Special Budget Speech Alert

The sun begins to set on tax incentives

Tax incentives are aimed at encouraging certain behaviours and activities by providing businesses and individuals with favourable tax treatment. The introduction of a tax incentive is generally based on a social, economic or environmental need that has been identified, which need can be alleviated by the actions or behaviours of taxpayers in exchange for a tax benefit.

Although tax incentives are introduced in order to remedy or improve a particular circumstance or behaviour, there are potential negative effects to these incentives that make them economically less desirable, including:

  • reduction of the tax base;
  • increasingly complicated governing legislation;
  • greater benefits to larger entities that can obtain specialised tax advice; and
  • additional SARS resources required to monitor and audit the incentives.

In order to mitigate these negative effects and in accordance with Government’s aim to broaden the corporate tax base, it has been proposed that several of the tax incentives contained in the Act be reviewed and, specifically, that sunset clauses either be inserted (to the extent that no such clause currently exists) or be reviewed in order to determine whether they should be extended.

Among the tax incentives to be reviewed are those dealing with airport and port assets, rolling stock, and loans for residential units. It has also been proposed that the urban development zone (UDZ) incentive be extended by one year in order for the review thereof to be completed and that the section 12I tax incentive pertaining to industrial policy projects not be renewed beyond 31 March 2020.

One of the most topical tax incentives is section 12J of the Act, which provides for the venture capital company (VCC) tax incentive regime. In simple terms, section 12J allows taxpayers to claim an income tax deduction in respect of expenditure incurred to subscribe for VCC shares provided various requirements are met. The section 12J VCC incentive currently provides for a sunset clause of 30 June 2021. It has been proposed that this tax incentive be reviewed in order to assess the effectiveness, impact and role thereof and to determine whether or not the VCC tax incentive regime will be discontinued.

The VCC tax regime was initially introduced for purposes of assisting small and medium-sized businesses and junior mining exploration companies in terms of equity financing. At the time of its inception, National Treasury intended it to be a marketing vehicle that would attract retail investors. In particular, it was envisaged that it would have the benefit of bringing together small investors as well as concentrating investment expertise in favour of the small business sector.

However, since its conception, the VCC tax incentive regime has not at times been implemented in the manner in which National Treasury initially envisaged and in particular, it has been subject to various avoidance and investment structures outside the initial policy intent. While various ongoing amendments have been made to the legislation in order to address these abuses, certain aspects of the VCC tax incentive regime remain a concern for National Treasury. With reference to the purpose for which this tax incentive was initially introduced, being the combatting of growth challenges faced by small and medium sized businesses due to the inaccessibility of equity finance, and the various abusive schemes identified by National Treasury it will be interesting to see whether Government decides to extend the incentive or rather discontinue it.

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