Section 12J Investments

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Section 12J Investments

There has been a whole lot of buzz within the investment landscape about Section 12J Investment, but it’s important to get a firm grasp on what it actually is. Because government have realised that small and medium-sized entities (SME’s) play quite a major role in South Africa’s economic growth, but that access to equity funding can be a major stumbling block for these entities, they have added Section 12J to the South African Income Tax Act. This means that equity funding is now available for SME’s and Section 12J Investments have given investors (both retail and corporate) in equity funding a tax incentive benefit in order to promote them. The investments in these funds need to be through a Venture Capital Company (VCC), registered through the SAVCA (South African Venture Capital Association). The VCC will issue a certificate to the taxpayer for the amount of the investment and the taxpayer is then allowed to deduct their full investment against their taxable income in the relevant tax year.

So, in a nutshell, investors with a higher risk appetite, or who have maxed out their Retirement Annuity, Pension Fund and Tax Free Savings Account contributions, a Section 12J Investment into a SARS approved Venture Capital Company (VCC) is the perfect way to allocate capital in a tax free way in order to maximise your tax deductions.

AND any investment into a Section 12J Venture Capital Fund is fully tax-deductible, meaning that if you are in the top tax bracket, SARS is willing to give you up to 45% of your investment back!

So how exactly will the tax deduction work?

Investors need to make sure the VCC is registered with SAVCA and SARS and have a registration no. which is used when filling in your tax returns. Investors (retail and corporates) can approach a registered VCC, fill in the investment form and invest an amount not exceeding 25% of the overall fund value in exchange for VCC shares. Investors can then use the tax certificate given by the VCC to claim a 100% deduction of the amount from their taxable income through SARS (either directly at a SARS branch or using e-filing) as long as they stay invested for 5 consecutive financial years in the fund. An individual can, therefore, claim up to 45% and corporates up to 28% of tax benefit. AND, claiming your tax back is very easy, as SARS has streamlined the process through the annual tax filing route (using either branch filing or SARS e-filing system).

Sounds great, doesn’t it? But before you go jumping on the 12J Investment bandwagon, consider these points:

1. Experience, Capability and Credibility of the VCC Management team that you will be using.

2. Make sure you follow an investment due diligence process to identify opportunities.

3. VCC’s value addition to the growth in the invested companies.

4. Overall fees and charges in running the fund.

The above should all be key factors when making any investment decisions, but so should your choice of investment advisors. Keep in mind that a Section 12J investment does definitely carry a higher risk than investing in shares/ETF’s on the JSE because the invested companies are not listed and could go bust. However, this risk can be mitigated if the fund manager invests in a diverse range of companies, so the most important message here is that you need to choose the very best investment advisors, who have your financial goals at heart. This is where Maysure comes into play. Our team of investment experts can assess your portfolio and guide you along this sometimes very tricky financial path.

Contact us today for an honest discussion around the pro’s and con’s of 12J Investing, we are here for you and your financial peace of mind.