Big tax break for 12J investors

BENEFIT: GOVERNMENT INCENTIVE FOR INVESTMENT IN SMALL BUSINESS AND JUNIOR MINERS Investors can write off 100% of their investment against their taxable income in the year they invest in these companies.

Section 12J stimulates economic growth by attracting investments with substantial tax benefits.

Section 12J is a tax-based regime designed to stimulate economic growth by getting investors, individuals and corporates to invest in a wide range of private companies. In doing so, they get a really nice tax benefit.

This is according to Richard Asherson at Westbrooke Alternative Asset Management, who was speaking on the SAfm Market Update with Moneyweb.

Section 12J is a section of the Income Tax Act that came into effect from July 1, 2009. According to the SA Revenue Service (Sars), small- and medium-sized businesses and junior mining exploration firms struggle to get access to equity finance. As such, government implemented a tax incentive for investors in these enterprises through a venture capital company (VCC) regime.

VCCs are a marketing vehicle that will attract retail investors, says Sars.

“The tax benefit or the incentive that we give our investors by being an accredited 12J company is that they have the ability to write off 100% of their investment against their taxable income in the year that they invest.

“And as long as they hold those shares for five years, that tax benefit is permanent,” said Asherson.

Westbrooke Alternative Asset Management is a Section 12J asset management company. The minimum investment amount needed is R500 000, giving a tax saving of just over R200 000 in that year.

Individuals, corporates and trusts can invest. “It’s really open to everyone, the fundamental principle being that you need to have taxable income to obtain the benefit.”

There’s a wide range of businesses you can invest into. But a few limitations. “There’s a size limit on the companies you can invest into as an accredited 12J company.

“We can’t invest into businesses that have assets of more than R50 million after the date that we invest.”

Then there are qualifying company criteria. For example, the companies can’t be listed, a control group company, or carry on an impermissible trade.

The latter comprises a few major categories:

You can’t invest in businesses that trade in immovable property, e.g. bricks and mortar, other than a hotel-keeping operation. You can’t invest in businesses that undertake financial services. You can’t invest in gambling, alcohol, tobacco. You have to invest in businesses that operate mainly within SA.