Invest 12J

THE COMPLETE GUIDE TO SECTION 12J INVESTMENTS

Understanding Section 12J

Section 12J is a part of the Income Tax Act introduced by Treasury to incentivise South African taxpayers to invest in Section 12J Venture Capital Companies. Section 12J companies are companies which invest into South African businesses, for example hotels, asset rental companies, tech companies, agriculture businesses, solar businesses and many more. These businesses stimulate the economy and create jobs which our country desperately needs.

South Africans are incentivised by SARS to invest in Section 12J companies through receiving an upfront tax refund of up to 45% of their total investment amount. By way of illustration, if an individual investor in the highest tax bracket invests R1,00,000 in a Section 12J company, the investor will be able to claim a tax refund of up to R450,000. What this means is that an individual investor can expect to receive a return in the form of dividends and/or capital growth on the full R1,000,000 invested, but only have risk exposure on R550,000 of their original investment amount

Description

Individuals*/Trusts

Corporates

Initial investment

R1 000 000

R1 000 000

Tax relief (in the tax year of initial investment)

(R450 000)

(R280 000)

Net risk capital

R550 000

R720 000

*assumes individual is in the highest marginal tax bracket


What do Section 12J companies invest in?

Section 12J prohibits Section 12J companies from investing in; property (unless the property is within the hospitality sector), financial services business, certain professional services businesses and businesses which trade in alcohol, tobacco, gambling and arms and ammunition. Therefore, Section 12J companies generally have a focused investment mandate and invest in several sectors including:

  • Hotel, lodge, student residences and B&Bs;
  • Asset rental companies;
  • Technology;
  • Agriculture;
  • Franchises;
  • Manufacturers;
  • Renewable energy; and
  • General SMEs.

What are the limitations?

From an investor’s perspective, there are two main limitations when investing in a Section 12J company, namely:

    In order to retain the tax deduction, an investor must remain invested in the Section 12J company for a minimum period of 5 years. If the investor elects to exit the investment prior to the 5-year term, the investor would be required to pay back the full tax deduction to SARS with no interest or penalties incurred. When an investor exits the Section 12J company, the investor’s base cost for capital gains tax (CGT) purposes will be reduced to zero. This means the investor will pay CGT on their investment amount as well as any growth on the investment.

Who should invest?

South African taxpayers who have a significant capital gains tax event or are paying a significant amount of income tax should consider investing in a Section 12J company.

Capital gains tax

Using the Section 12J tax deduction, investors can offset any capital gains tax incurred from the proceeds on the sale of an asset. This is particularly substantial for anyone selling assets such as a business or property and could be equally beneficial to investors who have made redemptions from shares or investment vehicles, such as unit trusts.

What this means is that if a South African taxpayer has a capital gains tax event in the current tax year, the taxpayer can use a portion of his/her proceeds to make an investment into a Section 12J company and write off a portion or all of the capital gains tax owed.

See below capital gains tax example for an individual at the highest tax bracket:

Purchase price R1 000 000
Sale price R2 000 000
Capital gains tax payable on sale

R162 000

S12J investment R360 000
Capital gains tax payable after S12J investment

R0


Income tax

Additionally, if a South African taxpayer is earning a significant amount of income or commission, by making a Section 12J investment the taxpayer can reduce his/her taxable income (partially or completely) by investing in a Section 12J company. This will allow the taxpayer to claim a refund on PAYE tax already paid or reduce the taxpayer’s provisional tax amount.

These benefits add to the weight of the taxpayer’s investment into the Section 12J company and by reducing the taxpayer’s tax bill for the current tax year.

See below Income Tax example for an Individual at the highest tax bracket:

Taxable income R10 000 000
Income tax payable R4 500 000
Section 12J investment R10 000 000
Tax break from SARS R4 500 000
Income tax payable after S12J investment

R0