SIMON BROWN: I’m chatting now with Dino Zuccollo. He’s of course, chairman of the 12J Association of South Africa. You also find him at Westbrooke at his day job. Dino, good morning, I appreciate your time. We were chatting last year around the review which Treasury has talked around on Section 12J (s12J); we said that they were going to have a review period and see what it was like. Have we got any sort of clarity from Treasury where we all with that? Is s12J still in play, or are they’re looking to wrap it up? Any news on that front?
DINO ZUCCOLLO: Morning, Simon, and happy new year. Simon, since we last spoke there hasn’t been a whole lot of an update. And just to remind everyone as to where we are with Section 12J at the moment, National Treasury put out a set of additional questions and review measures that they were looking at, trying to get more information last year around the debate of whether or not they want to extend Section 12J. The responses to that are due later this week,
and we’ll know … probably by the budget in February what National Treasury’s intention is regarding the future of Section 12J.
But, to your question, the most important thing is that, for the individual tax year ended February of this year, Section 12J is very much still here – and until June this year as well. So investors are still able to take advantage of the tax break, even though we’re not sure as to whether or not Section 2J will be around for a whole lot longer.
SIMON BROWN: Okay. But we can enter at this point. And I suppose that’s the critical point. Tax laws change from time to time but, once you’re in, you’re in. You’re grandfathered in, in a sense. The deal with 12J is we can put money into it, and we essentially have that reduced from our taxable income. So you can get a nice tax break in this tax year. Of course, at the end, when you cash out, if I’m correct, the full benefit that pays out is then CGT [capital gains tax]. So you benefit from tax. Now you get a slight hit at the end, but that, of course, is CGT, a lower tax rate.
DINO ZUCCOLLO: Correct, Simon. So Section 12J is effectively a tax incentive that government puts in with an intention to promote private investment into SMMEs [small, medium and micro enterprises] around the country and, in so doing, investors get a healthy tax break.
Like you’ve mentioned, you get a rand-for-rand deduction of every rand that you invest in a Section 12J company against your taxable income in the same year that you invest.
So if I earn R100 this year, and I invest R100 in a Section 12J company, effectively this year I don’t pay any tax.
And then what happens in turn, is a Section 12J compliant fund manager will take your money and invest it into different areas of the South African economy. And of course, that has a whole lot of knock-on benefits, both to the investor who, as you mentioned, pays exit CGT, but he gets a very healthy tax break upfront.
And it has knock-on benefits for the South African economy, insofar as the fact that those investments then go and pay tax and they create jobs, and they stimulate investments into South Africa. It’s almost become, in our ecosystem of investments, Simon, a viable alternative to something like an RA [retirement annuity].
If you look at Section 12J investment, for individuals and trusts you can invest up to R2.5 million every year. For a company, you can invest up to R5 million. If you just quickly contrast that to a retirement annuity, you’ve got a few R150 000 per annum capped for individuals, so it’s obviously smaller. But in the same vein, a Section 12J only needs to be held for five years, whereas an RA can only be commuted once you turn 55. And, of course, the big benefit to a 12J is that you get to make an uncorrelated alternative-type investment to the underlying, which is very different, of course, from your traditional equities that a retirement annuity is typically invested into.
SIMON BROWN: Yes. They are a totally different asset class, a different space. And one of the big spaces in 12J has been hospitality. Are we still seeing them? We see what’s happening with lockdowns, with the pandemic, are we seeing less in hospitality or are the 12J funds very much looking through the pandemic and saying, you know what, yes, it is very real in 2021, but it will pass in time and there will be a returning demand for those hotels, guests lodges and the like.
DINO ZUCCOLLO: Correct. About 50% of the industry’s assets under management have been invested in hospitality. And this is exactly the purpose, Simon. You have a tax incentive that’s designed to give you a tax break, but then that money is incentivised to be invested into areas of the economy where maybe it otherwise wouldn’t have been invested. At the moment, with Covid-19, hospitality’s a tough sector.
We still expect to see a decent amount of money invested in hospitality this year, notwithstanding the fact that Covid-19 has been tough.
In these things, there are always swings and roundabouts in the sense that it has been tough. But at the same time, there are very attractive investment opportunities out there at the moment. So I would still expect to see money going into hospitality. I think the tax break does give investors an element of downside protection because they get 45% of what they totally invest back from the taxman in respect of the forgone tax or tax that they would have paid. However, [regarding] those industries that have been hardest hit by the Covid-19 pandemic – it would be naive to think that there wouldn’t be less money raised. So there will still be a flow into hospitality, but I would expect to see money going into some of the sectors that investors perceive to be a little bit more robust.
SIMON BROWN: I’ll take your point on that one hundred percent. We’ll leave that there. Dino Zuccollo, the chairman of the 12J Association of South Africa. I appreciate your early morning.