In the December issue of MoneyMarketing, Jonti Osher and Dino Zuccollo, Section 12 fund managers of Westbrooke Alternative Asset Management give an overview of the current Section 12J market.
Section 12J was introduced by the South African Revenue Services under Section 12J of the Income Tax Act in 2009 as an investment tax incentive. The intention was to boost the South African economy by encouraging investment into a range of private companies that meet defined criteria.
The incentive gives investors the ability to write off 100% of their investment against their taxable income in the year they invest. Therefore, investors can benefit from up to 45% immediate tax relief. This reduces the cost of the investment, which provides downside protection and enhances overall returns.
There are more than 100 registered Section 12J companies in South Africa and it is estimated that the market has raised more than R3.6bn in investments. S12J was instituted in 2009 with a 12-year sunset clause for 2021. We are technically at the six-year midpoint – the right time to question whether S12J is a success.
The truth is that S12J had a much delayed start. It took from 2009 to 2015 for the tax legislation to be amended to be more attractive to investors. For this reason, we will only have seven years of data to assess whether 12J has met its objectives.
S12J industry body
Westbrooke Alternative Asset Management – which looks after half of the capital invested in S12J funds today – is spearheading the formation of an industry body to assist in proving the viability of extending the incentive past June 2021. While the industry has been discussing how much has been raised, we plan to generate the type of relevant information that National Treasury can use to assist in extending the legislation post the sunset clause.
We will investigate the number of investments, the number and types of those investments, how many jobs have been created and sustained, how much of S12J capital has been deployed, and which sectors of the economy and geographic areas are benefiting. We want to know about successes as well as areas that can be improved for the benefit of the industry. We are also keen to hear about economic activity around S12J.
For instance, Westbrooke has been able to pioneer a new type of non-traditional equity capital for businesses that rent movable assets through Aria Growth Partners, a Section 12J fund. If a business can rent its movable assets, Aria Growth Partners can provide capital and assist in the growth of the business.
A practical example of how it works: Mobile Macs provides delivery motorbikes to the fast food franchise industry. Rather than owning, insuring and servicing the bikes themselves, it makes more sense for franchise owners to rent these from Mobile Macs. While demand for their rental solution was growing, additional funds were needed to enable the business to scale. With the injection of readily available capital from Westbrooke Aria, Mobile Macs increased its fleet from 800 to 1 500 bikes. In the 18 months since Westbrooke’s involvement in Mobile Macs, the company’s growth has resulted in a nearly 50% increase in direct employment. At the same time, 400 new jobs have been created for bike riders.
Since it was introduced, S12J has had positive spinoffs for South Africa. Westbrooke Alternative Asset Management has R1.7bn in assets under management from over 600 investors. The funds have made more than 20 investments with over R700m capital deployed to date. These investments have created more than 1 200 jobs.