When considering whether Section 12J is applicable to an investor or business, there are several aspects which one would need to consider. As a rule of thumb should any one of the below elements exist, for a potential investment, then Section 12J will not be applicable:
* The gross asset value of the investee company in which an investor seeks to invest exceeds R50 million (R500 million for mining projects)
* The investee company earns more than 20% of its income from investments (for example, an investment into an investment holding company would not be permissible);
* The investee company carries on the majority of its trade outside of South Africa;
* The investee company carries on one of the following “Impermissible Trades”:
* Any trade carried in respect of immovable property, other than a trade carried on as a hotel keeper (i.e. an investment in hotels, serviced apartments, holiday homes in specific estates and student residences may very well comply);
* Any trade in the financial services sector (for example, banking, insurance, money lending, hire-purchase arrangements, however, this does not prevent an investor from investing in technology within this sector);
* Any trade carried on in respect of financial or advisory services, including trade in respect of legal services, tax advisory services, stock broking services, management consulting services, auditing or accounting services; and
* Any trade carried on in respect of gambling, liquor, tobacco, arms or ammunition.
On the premise that an investor’s investment does not fall into one of the categories above, there is a real opportunity to take advantage of the Section 12J associated tax benefit.
Any South African taxpayer can take advantage of the Section 12J tax deduction. In other words, foreign or local companies or individuals and trusts who pay tax in South Africa, can invest in a Section 12J Venture Capital Company and claim the tax deduction.
100% of the tax deduction is claimed in the same year that the investment is made.
The tax incentive is for South African taxpayers investing into a local Section 12J VCC and is in the form of a reduction in the taxpayer’s taxable income, by the full amount invested. This is claimed by the South African taxpayer in the year the investment into the Section 12J VCC is made. Therefore, a South African taxpayer effectively receives 28% as a corporate and up to 45% as an individual or trust on the full investment value into a Section 12J VCC. By way of illustration, if a company invests R10 million, it will receive R2.8 million in the form of a reduced tax bill. This means that the company receives the full R10 million investment exposure for just R7.2 million.
| Description | Individuals/Trusts | Corporates |
| Gross Investment | R10 000 000 | R10 000 000 |
| Tax Relief | (R4 500 000) | (R2 800 000) |
| Net Investment (Risk Capital) | (R5 500 000) | (R7 200 000) |
| Effective % Tax Relief | 45% | 28% |
* Dividends received by South African resident corporates are not subject to dividends tax to the extent that they have complied with the relevant formalities.
**The above is based on an individual earning in excess of R1,500,000 in the tax year in which the investment is made.
Yes, however, legislation is unclear as to whether an individual can carry the tax credit over to the following tax year. In the case of a company, the company may carry the tax credit over to the following tax year.
The only real downside for an investor is that the capital investment in a Section 12J VCC is required to be held for a minimum of 5 years. Dividends can be paid to an investor during or after the 5 year period.
The legislation only limits the sectors into which a Section 12J VCC cannot invest. In other words, a Section 12J VCC can invest in any sector except:
* Immoveable property, unless in the hospitality sector (an investor can, therefore, in certain circumstances invest in hotels, serviced apartments and student residences);
* Any trade carried on in the financial services sector (i.e. banking, insurance etc.);
* Any trade carried on in respect of financial or advisory services; and
* Gambling, liquor, tobacco, arms and ammunition.
The minimum Application amount will be reflected in the Private Placement Memorandum / Prospectus and the maximum Application amount is the amount payable for 19.9% of the Investor Shares issued pursuant to the Offer (subject to the limitations of the maximum amount specified in the Private Placement Memorandum / Prospectus).
Section 12J VCCs are excellent vehicles to assist project developers and companies with raising finance for their projects. Investors will not only receive the returns, which they expect from their investments, they will immediately see a return on their investments through the tax deduction.
There are a number of sectors/types of businesses utilising Section 12J, some of the largest include (among several others):
* Asset finance;
* Franchising ;
* Car rentals;
* Hospitality and student accommodation;
* Mining and contract mining;
* Plant and equipment rental;
* Manufacturers;
* Renewable energy; and
* Logistics.
A Section 12J VCC must be structured correctly i.e. the legal structure with associated agreements. The VCC must hold a valid Financial Services Board (FSB) license (generally a category 1 license holder) and must be approved by SARS.