Section 12J: What to know

Section 12J (S12J) has gained significant traction among individuals and businesses seeking to reduce their tax liability and find alternative sources of return.

If you’re keen to reduce your tax but want attractive returns, here are 12 things you need to know:

1. S12J investment has been around since 2009 when government introduced Income Tax Act amendments to stimulate the private sector and SA’s economy. This introduced tax incentives for investors via tax-deductible S12J companies. Today, there are over 60 registered S12J companies.

2. S12J companies differ in their roles, objectives, strategy and methodology. Some might be investment club-type entities in which a few friends invest in a portfolio of businesses; others are highly sophisticated operations run by professional asset management companies.

3. S12J companies must be licensed with the FSB and registered with Sars.

4. Investors invest a sum to acquire shares in an approved, registered venture capital company (VCC) – the S12J company – which then invests the funds in qualifying investee companies. The VCC can’t invest more than 20% of all investor-acquired funds in any single qualifying investee company, ensuring many privately-owned companies are supported, while creating diverse investments to mitigate risk.

5. There’s no legislated cap on the amount an investor may invest in a registered S12J company, although an investor would limit the investment to his aggregate taxable income for the year of investment.

6. Investors can claim the full amount used to buy shares in the S12J company as a deduction from taxable income in the year of that investment. If the shares are held for at least five years, Sars won’t recoup the initial tax benefit. After five years, the full proceeds from the sale of shares is subject to CGT.

7. The S12J company’s strategy determines the type of qualifying investee company in which it invests.

8. There may be no secondary market for investor shares in the S12J company after the investment period (five years plus) has elapsed. Professionally-managed S12J companies should have a clear exit strategy to create liquidity for investors.

9. A qualifying S12J investee company must be an SA entity, trade mainly in SA and can’t operate in certain economic sectors. It can’t involve companies that:

Trade in immovable property, except to trade as a hotel keeper; Offer financial service activities or provide financial or advisory services; Are gambling operations; or

Are involved in manufacturing, buying or selling liquor, tobacco products, or arms and ammunition.

10. Section 12J has a sunset clause that takes effect on June 30, 2021. The current regime may/ may not, be extended. Investors will keep receiving the tax benefit on funds invested in a registered S12J company prior to June 2021, even if the five-year investment period ends afterwards.

11. S12J companies may charge fees.

12. As with anything, investors should assess the investment strategy and mandate of a S12J company to fully understand the associated investment risk.