Section 12J was introduced into the Income Tax Act in July 2009 to provide individuals, companies and trusts with a significant tax incentive to invest in qualifying companies. The aim of Section 12J was to encourage investors to participate in the capitalisation of qualifying businesses, which will stimulate economic growth and create jobs.
As more and more of our entrepreneurially-minded clients look into the options around Section 12J investments, Hans Hillerman of Moore Stephens and
Westbrooke Alternative Asset Management share their insights:
How does Section 12J help me to save tax?
Section 12J is an investment tax incentive which was introduced by SARS to boost the South African economy by encouraging investment into qualifying businesses which operate in select industries. Individuals, companies and trusts can benefit from up to 45% immediate tax relief, reducing the cost of the investment while providing downside protection and enhancing overall returns. However, the investment must be held for at least five years. The Section 12J asset class is particularly attractive to those tax payers who have incurred capital gains tax, as the 40% inclusion rate for individuals allows investors to invest less than the total cash realised on a capital gains event.
However, a Section 12J investment carries a base cost of zero and therefore on exit from the investment, the investor will be liable for capital gains tax on the full proceeds.
Is this investment right for me?
If you are a South African tax payer, you could consider a Section 12J investment as your taxable income that can be offset by this investment e.g. salaries, bonuses, capital gains tax, interest, rental income etc. Section 12J investments range from lower risk asset-backed investments to higher risk venture capital investments and it is, therefore, necessary to assess your risk appetite.
What are the risks?
As with any private equity style investment, an investment in a Section 12J company carries risk. It’s important, therefore, to assess the investment strategy of the Section 12J company to ensure you understand the associated investment risk, as well as the expertise and track record of the asset manager. You can read more about Section 12J risk here.
Which Section 12J investment should I pick?
This is dependent on your desired risk / reward profile. Investors may also elect to invest in diversified Section 12J portfolios to spread risk.
Westbrooke Alternative Asset Management has developed a recommended diversified portfolio of Section 12J funds that suit an investor’s requirements, all with a single manager. The options include the income, balanced and growth portfolios, which will each invest into an appropriate weighting of various Westbrooke Section 12J funds.
Can I use debt or gearing to make an investment into a Section12J company?
Yes, you may utilise a loan or gearing to make an investment into a venture capital company, as long as you comply with Section 12J(3)(a) of the Income Tax Act. Most importantly, investors must be seen to be ‘at risk’ for their investment.
When and how do I claim my tax deduction?
An investment into an approved Section 12J company is 100% tax deductible in the tax year you invest. Investors can claim the tax relief by either reducing their estimate of taxable income when submitting provisional tax returns or by obtaining a tax refund through the annual income tax assessment. To benefit this year, your investment needs to be made by 28 February 2019.
What is the annual limit per investor for investment into a Section 12J company?
There is no annual limit, but investors should not invest more than their taxable incomes.
What is the term of my investment?
The minimum term of the investment will be five years. However, certain funds may carry a longer minimum investment period.
What if I invest and then I die or emigrate?
On death during the five year investment period, your investment will be treated as if you had sold your shares and SARS will recoup the tax benefit unless you specifically state that you have left your Section 12J investment to your surviving spouse in your will. Should you emigrate within the five year period, your investment will be treated as if you had sold your shares and SARS will recoup the tax benefit. You should consider these implications upfront before making your investment.
What does the future hold for Section 12J?
In the Budget Review published in February, National Treasury noted that there has been significant growth in section 12J investments over the past two years. It said the legislation would be amended to encourage further uptake of these investments. Although the exact nature of the amendments is not yet known, Treasury’s comments have been taken as a positive sign that the section 12J regime will be extended beyond June 2021.
For more information, contact your partner at
Moore Stephens. There are more than 100 registered Section 12J Companies in South Africa and it is important to choose the right company with which to partner.