Section 12J Investment: One last bite of the apple

Last week Finance Minister Tito Mboweni confirmed that the sunset clause on Section 12J (of the Income Tax Act) investments will not be extended beyond 30 June 2021.

What are Section 12J Investments?

Section 12J of the Income Tax Act refers to the tax deduction allowable to individuals, trusts and companies for investing in SARS approved Venture Capital Companies. It is an incentive to increase access to equity finance for SME's within South Africa and to promote job creation. Investors’ funds must remain invested in the Venture Capital Companies for a minimum of 5 years to avoid the tax refund being recuperated.

What does this mean for you?

Any South African tax-payer can reduce their tax bill by investing in approved Venture Capital Companies.

Individuals and Trusts can contribute up to R2,5m per tax year, while companies can contribute up to R5m per tax year and receive a tax deduction on the full amount.

It is important to note that although Section 12J investments offer an attractive tax incentive upfront, taxes applicable to the investment (dividends, capital gains etc.) are still taxable. Importantly, the base cost utilised for capital gains will be zero.

These are equity investments into a number of typically smaller businesses and an investor should be aware of the risks involved in this asset class. Fund managers do extensive due diligence to ensure the underlying businesses are robust and have a clear path to profitability.

An example:

An individual investor who contributes R1m to a Section 12J investment and holds the equity for five years. Dividends may pay out within the five year period, depending on the investment (this calculation assumes a 7,5% dividend yield for the five year period).

The after tax internal rate of return experienced by the investor would be 16,41%.

The opportunity to make new contributions towards Section 12J investments and receive the tax benefit will end after 30 June 2021. Therefore, if you would like to understand this opportunity deeper and how it would apply to your situation, please reach out to your GIB Wealth Manager.

Watch our discussions with two Section 12J Managers below: