Research is key to 12J investing
BENEFIT: TIPS TO FIND PROFITABLE OPTIONS 12J space is a unique opportunity to make a positive social, economic and environmental contribution to SA.
Carefully-selected section 12J venture capital investments (VCCs) have an important place for investors seeking tax efficient investments and returns uncorrelated with listed entities. Section 12J of the Income Tax Act offers individuals, trusts and companies resident in SA, a tax rebate on investments (up to 45% for individuals and trusts and 28% for companies) if made through an approved VCC.
Minimum investments in 12J VCCs range from R100 000 to R1 million; for the tax rebate to apply, investors must hold the investment for at least five years from the date of investment.
Assuming this type of investment is a good match for your profile, look out for the following:
Companies offering access to new investments where the business case is sound and able to grow and develop without the investment benefit of 12J.
Some VCCs don’t comply with the letter or spirit of 12J legislation. Others start off well but don’t remain compliant. If companies fall foul of 12J requirements, they risk their 12J status being withdrawn. Investors in these projects may be penalised. We favour VCCs that show they’re mindful of the central objectives of 12J legislation (job creation and sustainability) and have met these requirements.
The liquidity of the investment (or lack of it) is material. VCCs must design exit arrangements for investors who wish to disinvest after five years, at the outset of the agreement. Be alarmed if there’s no mention of exit arrangements and the future price of your investment.
If you invest in a 12J project, the law allows the VCC three years to invest your capital. It’s up to you to ask when your money will be deployed and to be reassured that it won’t spend three years invested in the VCC money market account while the company looks for investable projects. The VCC’s management team should have a deal pipeline and projects lined up ready for equity investment. Recently, it was emphasised that investments should be allocated quickly and not invested unduly in interest-bearing accounts.
When you’re narrowing down your field of potential investments ensure projected estimates for dividends and capital growth are calculated on the same basis. Estimated returns should be based on gross investment, not post-tax-rebate investment.
It’s the norm for VCCs or their managers to charge fees based on assets under management, performance fees and third party costs. If there are additional fees levied for director’s fees, initial fees or any other kind of expenses, ensure you understand the likely impact on the investment return.
Historically, the calculation of performance fees has been problematic in the 12J companies as they have not all been calculated on the same basis. Some companies calculate performance fees excluding the tax-saving component, others including it.
This calculation can make an enormous difference to the final returns enjoyed by investors.
Disclaimer: this article shouldn’t be construed as solicitation, advertising, sale, or advice.