Ongoing amendments to the Section 12J Income Tax Act have left investors at risk as to whether the companies in which they have either invested, or hope to invest, continue to qualify, law firm CMS South Africa partner and tax co-head Andrew Wellsted tells Engineering News & Mining Weekly.

Section 12J was introduced to attract private funding that could be used to stimulate specific sectors to boost South Africa’s economy.

It has become popular in recent years, with an estimated R3.6-billion having been invested through Section 12J to date.

Much of this investment has been into construction projects for the development of hotels and other accommodation establishments, as well as student residences and manufacturing and renewable-energy companies.

Wellsted notes that, since its introduction in 2008, Section 12J has been complicated, which has only been exacerbated with ongoing technical amendments, which creates difficulties for investors to interpret.

He explains that, in just the past two years, the amendments made have also caused consternation for administrators, with both administrators and investors needing to accommodate a slew of legislative changes and grey areas as they try to keep up with new amendments.

“It is thus becoming increasingly difficult to maintain compliance as constant change occurs, often retrospectively.”

Purely from a legal perspective, he notes, certainty is always something to be strived for. “But just looking at the changes in the last two years, Section 12J funds are becoming increasingly technical and complex.”

The amendments made over only the past two years have included a number of specific anti-avoidance amendments, Wellsted points out.

The most significant recent change was the introduction of the new Subsection (3C), which put a cap on the amount an investor could deduct − R5-million for a company and R2.5-million for a natural person, applying to expenditure incurred after July 21, 2019.

However, Wellsted highlights that a good illustration of the ongoing confusion caused by continual amendments is the changes to the concept of a qualifying company (QC), which is a key definition in the provision.

He explains that the definition of a QC has changed substantially in recent times and has included the entities in which a venture capital company (VCC) can invest.

“Initially, there were limitations on the QC’s ownership in relation to other corporate entities. These have been substantially enhanced in the last few years in a fairly confusing fashion.”

Further, he says other examples include limitations on the QC’s relationship to investors in its VCC shareholder.