Section 12J of the Income Tax Act is a powerful tax incentive available to South African individuals and companies who are looking to reduce their taxable incomes.
Having worked in the Section 12J tax incentive sector for a number of years now, I meet daily with accounting firms, financial advisers and CFOs of some of the largest companies in South Africa who simply are unaware that the legislation can benefit their clients or companies.
In fact, many of those who don’t know much about the legislation simply remark, “it sounds too good to be true”, guess what, it’s not too good to be true for the taxpayers, who over the last 18 months have invested more than R2 billion into the sector.
The sad part of all of this is that the legislation has a sunset clause and unless advisers and CFOs take the time to consider how Section 12J can benefit their clients or employers, I would go as far as to say that they are being careless by not advising their clients to consider investing in a Section 12J Venture Capital Company as time is running out.
The Section 12J Venture Capital Company market has matured rapidly over the past few years. There is now well-established Section 12J Venture Capital Companies, managing a significant amount of capital on behalf of investors, across multiple sectors. These Section 12J Venture Capital Companies offer various risk profiles, from capital perseveration with guaranteed returns, to riskier asset classes, targeting exceptionally high returns.
Treasury introduced this tax incentive to encourage South African taxpayers to invest in the local economy, via a tax deduction on the amount invested, provided the investment is made into an approved Section 12J Venture Capital Company.
The benefit of investing in a Section 12J Venture Capital Company, will mean that the investor will have exposure to a specific asset class and the investor’s exposure is reduced through the write off of their investment against their taxable income.
By way of illustration, if an individual in the highest tax bracket invests R1 million in a Section 12J Venture Capital Company, the individual will not be required to pay up to R450 000 in tax at the end of his/her financial year. What this actually means is that an investor will receive a return on 100% of their investment but only have exposure to 55% of their original investment amount, as SARS will be repaying the investor up to R450 000 in tax they already paid in that year.
Time is running out for South African taxpayers to take advantage of the tax incentive as the sunset clause provides that only investments made before 30 June 2021 will qualify for the tax incentive. Accordingly, South African taxpayers have 3 years to wake up and take advantage.
We have realised that South African taxpayers are not familiar with the various Section 12J Venture Capital Companies, so we have put together the 12J Marketplace conference. The conference will be held on the 2nd of August and for the first time, investors will have the opportunity to interact with more than 15 of the various Section 12J Venture Capital Companies in the market.
Let us hope that advisers wake up before the sunsets.
Sacks is a director at the financial advisory firm, Jaltech.