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Jonty Sacks of Jaltech featured on 702

Jonty Sacks of Jaltech featured on 702

 

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Section 12J venture capital company structures ‘benefit investors’

The structures are incentivised with attractive rebates for individuals, funds, trusts and companies, says Jaltech co-founder Gaurav Nair

Section 12J venture capital company (VCC) structures can be commercialised to enhance returns from renewable energy projects for properties and for hospitality businesses, says Jaltech co-founder Gaurav Nair.

It would be a mistake for South African taxpayers who are making investments in SA not to consider structuring their investments through a section 12J VCC, as they are incentivised with rebates of up to 45% for individuals, funds and trusts and 28% for companies, says Nair.

Section 12J of the Income Tax Act is a piece of legislation that was created to promote investment in certain industries.

Jaltech is the only structuring specialist in the section 12J VCC space in SA, according to Nair. The group uses the section to structure businesses so that investors can enjoy tax benefits.

The law does not allow a section 12J deduction for investments in financial services, property development other than in the hospitality industry, the sin industries of tobacco, alcohol and gambling, arms and ammunition, or professional services consulting firms.

Substantial investments are being made in renewable
energy developments, including commercial and residential rooftop solar solutions, large photovoltaic projects and wind energy farms.

Nair says the ability of VCCs to invest in hospitality assets could be a boon for tourism in SA. For example, a person could buy a holiday home through a section 12J fund and the property could be classed as a hospitality asset. It would be serviced and managed by a third party and the owner would receive income and a tax rebate, he says.

Westbrooke Alternative Asset Management’s Jonti Osher, a commentator on section 12J, says there is limited time to invest in section 12J companies. The South African Revenue Service introduced section 12J with a sunset clause to take effect on June 30 2021 and the current regime might, or might not, be extended, he says.

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Developing or acquiring a hotel, lodge or student residence accommodation?

Section 12J of the Income Tax Act (“the ITA”), is about to get extremely interesting if you are looking to acquire or develop a hotel, lodge or student residence accommodation. Effectively, section 12J can provide a discount (in the form of a rebate) of between 28% to 45% on your investment into opportunities that fall within the ITA’s definition of ‘hotel keeper’.

In addition to other standard requirements of Section 12J, to qualify for the rebate, the investment (acquisition or development) must fall outside of the definition of “impermissible trades” under section 12J (1)(b). An extract of Section 12J (1)(b) reads as follows:

An “impermissible trades” is “any trade carried on in respect of immovable property, other than a trade carried on as a hotel keeper”.

Section 12J (1)(b) prohibits immovable property investments made by a Section 12J Venture Capital Company, unless the immovable property is utilised in a “trade carried on as a hotel keeper”. To understand the requirements of the definition of “hotel keeper”, one would have to consider Section 1 of the ITA which defines a “hotel keeper” as:

any person carrying on the business of hotel keeper or boarding or lodging house keeper where meals and sleeping accommodation are supplied to others for money or its equivalent” (emphasis added).

Taking into consideration the above definition as well as a binding private ruling issued by SARS, the following requirements are necessary for an investment to meet the requirements of “hotel keeper” in terms of the ITA:

  • The investee company must carry on a business in the hotel, boarding or lodging sector;
  • Offer:

-a meal service;

-sleeping accommodation; and

-levy a fee for its services.

The above indicates that, if structured in the correct manner, the following investments opportunities can effectively attract the tax rebate associated with Section 12J:

  • Hotels;
  • Student accommodation;
  • Lodges;
  • Guesthouses; and
  • Serviced apartments.

How to access the tax rebate?

In order to access the rebate, a Section 12J Venture Capital Company needs to be formed and all investments by the Section 12J Venture Capital Company into the “hotel keeper” asset/s needs to meet certain requirements.

If you are looking to develop or acquire a hospitality asset, we at Jaltech offer complete Section 12J Venture Capital Company formation, administration and management services. 

Huge ROI Boost in the Renewable Energy Sector through Section 12J

Section 12J of the Income Tax Act is extensively used by a significant number of renewable energy investors, and EPCs (“Project Developer/s”), to increase their return/competitiveness in the South African market. Industry leaders are Section 12J structures to significantly boost their return on investment (“ROI”) via the associated tax rebate.

Having structured multiple renewable energy projects in both the wind and solar sector, we have seen, first hand, the enhanced returns associated with structuring renewable energy projects through Section 12J Venture Capital Companies (“Section 12J VCC”).

ROI BOOST

Structuring the equity investment of renewable energy projects through a Section 12J VCC provides significant increases in equity returns for Project Developers. There are, however, ways for Project Developers to achieve an even larger uptick in return through additional adjustments in the finance structure.

An example of one of these adjustments is for the Project Developer to raise debt for a portion or the entire funding requirement. The debt and equity can then be invested into the Section 12J VCC. Provided that the debt qualifies, the investor will still be eligible to claim a tax rebate on the full investment amount.

By way of illustration, should a Project Developer invest equity of R30 million and debt of R70 million into a Section 12J VCC, the Project Developer will receive a rebate on the full R100 million (this would amount to a rebate of R28 million for companies and up to R45 million for trusts and Accordingly, assuming the Project Developer has sufficient taxable income, the Project Developer could effectively repay close to half of its debt in year one if a company, and close to two-thirds of its debt over the same period in the case of a trust or individual.

In addition, a Section 12J VCC can be structured such that the Project Developer can still benefit from the Section 12B rebate for renewable energy projects.

Having the right structure can significantly boost the project’s ROI by more than 20%. 

TYPICAL SECTION 12J RENEWABLE ENERGY STRUCTURES

We have tried and tested several Section 12J structures for renewable energy projects, thus for illustrative purposes, we have set out below two typical Section 12J structures used in the renewable energy sector, however, these structures can be amended to suit a client’s needs:

Structure 1 – Lease / PPA Structure 

This structure is typically used where the Project Developer is looking to develop a project/s to either lease the renewable energy asset to the customer or conclude a PPA with the customer.

As illustrated in the diagram below, the Project Developer will structure its project through the Section 12J VCC. Once completed the renewable energy asset will either be leased to the customer or a PPA will be concluded with the customer.

Given the significant tax rebate associated with Section 12J, the Project Developer could either benefit from higher returns on the discount the lease (or the PPA tariff) to the customer in order to make the offering more attractive.

Structure 2 – Customer-owned structure    

This structure is typically used where the customer elects to own the renewable energy asset. As illustrated in the below diagram, the Project Developer forms its own Section 12J VCC and the customer will invest funds (debt/equity) into the Section 12J VCC. In the customer would receive the tax rebate and be issued with a specific share class linked to a specific special purpose vehicle (“SPV”). The Section 12J VCC would then the SPV and develop the renewable energy asset.

The specific class of share will ring-fence all economic benefits flowing from the SPV to the customer and ensure that no other investor has exposure to the customer’s SPV. Once the renewable energy asset has been developed, the SPV will either lease the asset to a third party or a PPA will be concluded with a third party. In certain circumstances, the third party can be replaced by the customer.

Given the significant tax rebate, the customer will effectively be acquiring the renewable energy asset from the developer or the EPC at a discount (28% to 45%).

OTHER BENEFITS – FUNDRAISING

Section 12J VCC’s are excellent vehicles to assist Project Developers with raising finance for their projects from investors who typically appreciate renewable energy returns and are thus further to invest into the renewable energy projects due to the 28% to 45% rebate on an investment they would ordinarily have made without the rebate.

From our perspective, we have seen an increasing interest in funding renewable energy projects through Section 12J VCCs.

HOW DO I TAKE ADVANTAGE OF SECTION 12J?

Formation and structuring 

If you are considering forming a Section 12J VCC, we provide customers with a complete Section 12J service offering. This includes formation, structuring, registration and administration of the Section 12J VCC. Included in our offering are the necessary legal agreements drafted by ENSAfrica.

Don’t need your own Section 12J VCC but have a few projects? 

Having formed multiple Section 12J VCCs, we can introduce Project Developers to existing Section 12J VCCs, which can be used to structure their projects through.

Fundraising

Having raised hundreds of millions of Rands, we are well positioned to assist customers with forming a Section 12J VCC and raising finance for their projects. During the fundraising process, Jaltech will assist the Section 12J VCC through every step of the fundraising process, this includes preparing the private placement memorandum (“PPM”), which is presented to potential investors. The PPM will include all the relevant information necessary for investors to consider investing into the project/s.

Articles to follow:

  • Moveable asset leasing
  • Mining
  • Private Equity
  • ED & SD

For further information feel free to contact Jonty Sacks at jonty@jaltech.co.za

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SAVE 28% TO 45% USING JALTECH’S SECTION 12J STRUCTURING SERVICES

Private equity firms, family offices, private individuals, trusts and companies who have invested in start-ups or mature businesses during 2017 may have made a huge mistake if they have not considered investing through a Section 12J Venture Capital Company (“VCC”).

At first glance, sophisticated investors may be convinced that Section 12J has no application to their investments. However, if investors are South African taxpayers, the chances that their investment/s may qualify for the Section 12J associated tax incentive are high.

The Section 12J benefit translates into a tax rebate on the full investment (28% for companies and up to 45% for individuals and trusts). This, in turn, results in a significant boost to return on investment.

When considering whether Section 12J is applicable to an investor, one would need to determine whether any of the below elements exist. If so, an investment will be regarded as non-qualifying and thus Section 12J will not have application:

  1. the gross asset value of the target company exceeds R50 million (unless the investment can be broken down into separate special purpose vehicles);
  2. the target company earns more than 20% of its income from investment income (for example, an investment into an investment holding company would not be permissible);
  3. the target company carries on of its trade outside of South Africa;
  4. the target 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 and student residences under certain circumstances will be permissible);
  • any trade in the financial services sector (for example, banking, insurance, money lending, hire-purchase arrangements etc, however, this doesn’t 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 benefits. In order to illustrate a vanilla Section 12J transaction, we have set out below a recent transaction structured on behalf of a client.

CASE STUDY

In this case study, the investor is a property holding company which is looking to Section 12J for three reasons, namely to:

  1. invest in solar PV which will be installed on the property holding company’s roof. The power will be sold to the property holding company;
  2. acquire equity in an existing business; and
  3. a cleaning services company which will offer its services to the property holding company and to third parties.

Effectively, the transactions will flow as follows (see below diagram):

  1. the property holding company will invest R50 million into the VCC and in return receive equity in the VCC and a tax deduction of R14 million.
  2. the VCC will then:
  • acquire issued equity in the target company; and
  • the solar SPV and the cleaning services SPV. The solar SPV will acquire the solar assets and enter into a power purchase agreement with the property holding company (that way ensuring the Section 12B deduction) and the cleaning services entity will the capital injection for operational purposes.

IS THIS REALLY SO SIMPLE?

Absolutely, provided the structure from the outset is compliant with the legislation and the company managing the VCC has the correct compliance processes, expertise experience.

HOW DO I KNOW WHETHER MY TRANSACTION COMPLIES WITH SECTION12J? 

If your investment falls outside of the categories mentioned above, then there is a very high probability that your transaction may well comply with the Section 12J requirements.

Accordingly, If you have just realised that Section 12J may be applicable to your business, or you are still not sure, feel free to email Jonty Sacks (jonty@jaltech.co.za) or Rory Sim (rory@jaltech.co.za) and they will be sure to assist you with determining whether there is an opportunity for you to structure your transaction through a VCC.

We have structured VCCs across multiple sectors and we work exceptionally close with ENSAfrica in order to be 100% certain our structures are legally sound. Below are a few examples of the sectors which we have experience in structuring Section 12J transactions:

  1. renewable energy: Commercial and residential rooftop solar, large PV projects and wind energy projects
  2. franchises
  3. mining
  4. hospitality: Student residence developments, hotel developments, holiday homes in specific estates,
  5. Moveable leasing

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Interest building in attractive tax incentive for mine owners

Interest building in attractive tax incentive for mine ownersJOHANNESBURG (miningweekly.com) – Interest is building in the Section 12J of the Income Tax Act incentive structure introduced by Treasury to promote venture capital investments and stimulate growth and job creation in the South African economy, Mining Weekly Online can report.

The aim of Section 12J is to encourage investment into qualifying investments, with qualifying investors in turn receiving a tax deduction for the investment.

More than 70 Section 12Js have been registered and Jaltech director Jonty Sacks describes the provision as having now found its feet.

It has an attractive structure for mine owners looking to expand operations or to acquire new plant and mines.

The structure makes use of incentives allowing companies and individuals to receive a tax deduction of up to 28% to 45% on their investments.

In addition, the structure can be formed so that investments into the Section 12J venture capital company attract enterprise development or sustainable development points, where the underlying investments qualify.

The full amount invested in the venture capital company is 100% deductible from an investor’s taxable income in the year in which the investment is made and applies to any South African taxpayer.

Funds invested are zero rated for capital gains purposes and Mining Weekly Online can report that the effect on a R10-million investment offers tax relief of R2.8-million in the tax year of initial investment, a relief of 28%.

All mining companies need to do is to identify the investments and carry on operating as usual and companies like Jaltech see to developing the most efficient structures within the required legislation and manage processes and controls.

Earlier this year, Jaltech established the JSS Empowerment Mining Fund, a new empowerment fund aimed at filling a junior-mining niche funding gap, in partnership with construction, mining and processing group Stefanutti Stocks.

It has since discovered significant application for mining companies in general, big and small, to access the tax incentive to stimulate the market.

It sees many angles of benefit for mining majors, mining investors and traders. All of these entities have access to Section 12J to increase internal rates of return, said Sacks.

Typically, mining companies can either invest into junior miners doing exploration, or mining operations, and effectively acquire an interest in a junior miner at a 28% discount, assuming they have taxable profits that they can offset.

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The investment that is 100% tax deductible

It would be a mistake for South African taxpayers who are making investments into South Africa not to consider structuring their investments through a Section 12J Venture Capital Company (VCC), as they are significantly incentivised with rebates of up to 45% for individuals, funds and trusts and 28% for companies.

For example, if an individual was planning on investing R10 million into a business and structures the investment through a VCC, he/she will receive R4.5 million in the form of a reduced tax bill. This means that the individual receives the full R10 million investment exposure for just R5.5 million.

Section 12J of the Income Tax Act is a piece of legislation that is used to structure South African taxpayers’ investments in a way, which affords the investor the opportunity to receive a rebate on 100% of their investment. This means that the entire amount invested is deductible from the investor’s taxable income.

According to the South African Revenue Service one of the main challenges to the growth of small and medium-sized businesses and junior mining exploration is access to equity finance. To assist these sectors in terms of equity finance, the government has implemented a tax incentive for investors in these enterprises through a VCC regime.
VCCs are intended to be a marketing vehicle that will attract retail investors and they have the benefit of bringing together small investors as well as concentrating investment expertise in favour of the small business sector.

“While Section 12J may encourage an investor to invest in enterprises which they may not have previously considered, it also provides an investor with the opportunity to receive a rebate on an investment, which he/she may have made without the rebate being in place”, says Gaurav Nair, co-founder and director at financial advisory firm Jaltech.

While there are limitations as to the industries in which a VCC can invest in order to qualify for the rebate, the main challenge is to ensure that the VCC has the necessary compliance processes in place, to take full advantage of the tax incentive while not falling foul of any related provisions.

Currently the law does not allow a Section 12J deduction for investments in financial services, property development (other than in the hospitality industry), the sin
industries (tobacco, alcohol and gambling), arms and ammunition or professional services consultancy firms.

“It is important for an investor to partner with the right firm that understands the legislation and regulations governing VCCs thoroughly. Such a firm should also have a track record in structuring such arrangements. “If they do not, then investors can run into serious challenges and harsh penalties,” says Nair.

“There has been increasing VCC activity in South Africa and there are exciting and lucrative opportunities to be had in the variety of industries that are able to take advantage of the Section 12J deduction”, Nair adds.

Substantial investments are being made in renewable energy developments including commercial and residential rooftop solar solutions to large photovoltaic projects, wind energy farms and across the hospitality sector.

“Having structured multiple renewable energy projects in both the wind and solar sector, we have seen, first hand, the enhanced tax benefits for investors associated with projects through Section 12J VCC,” Nair says.

There are, however, ways for project investors to achieve an even larger uptick in return through additional adjustments in the finance structure. An example of one of these adjustments is for the investor to raise debt for a portion or the entire funding requirement. Both debt and equity can be invested into a Section 12J VCC.

Provided that the debt qualifies, the investor will not only be eligible to claim a tax rebate on the full investment amount, but be able to pay off the debt in a shorter period of time.
By way of illustration, should a project developer invest equity of R30 million and debt of R70 million into a Section 12J VCC, the developer will receive a tax rebate on the full R100 million (a rebate of R28 million for companies and up to R45 million for trusts and individuals).

Assuming the developer has sufficient taxable income, he/she could effectively repay close to half of its debt in year one in the case of a company, and close to two-thirds of the debt over the same period in the case of a trust or individual.
In addition, a Section 12J VCC can be structured in such a way that the developer can still benefit from the Section 12B tax rebate for renewable energy projects.

“Having the right structure in place can significantly boost the project’s return on investment by more than 20%,” says Nair.

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Claim a tax rebate of 28% on the value of renewable energy projects – South Africa

Jaltech financial consultants has developed an attractive tax structure for EPCs and developers in the renewable energy sector.

Effectively the EPCs and developers or their customers will be entitled to claim a tax rebate of 28% on the value of the renewable energy project.

This discount will allow the EPCs and developers to be more competitive in the South African market.

In addition, the structure can be formed so that investments attracts ED or SD points.

The tax structure is formed in line with Section 12J of the Income Tax Act, and requires the formation of a Section 12J Venture Capital Company (Section 12J VCC).

Tax incentive structure associated with Section 12J was introduced by Treasury to promote venture capital investments and stimulate growth and job creation in the South African economy.

Aim is to encourage investment into ‘qualifying investments’ and in turn, the investor receives a full tax deduction for the investment,

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JSS Empowerment Mining Fund to aid emerging miners

New fund aims to provide working capital to help junior mining projects get started with an average investment size of about R88m

The R1bn inaugural JSS Empowerment Mining Fund launched at the ENSafrica offices in Sandton on Thursday, boosting prospects for emergent miners.

It aims to provide working capital to help junior opencast mining projects that have reached bankable feasibility stage get started. The average investment size is about R88m.

The fund is a joint venture between boutique advisory firm Jaltech, JSE-listed construction group Stefanutti Stocks and Venture Capital Management Services, which specialises in ventures eligible for Section 12J tax relief.

“We are looking at eight projects totalling R703m ,” said Jaltech cofounder and director Gaurav Nair. “What we think we have created is a vehicle for the lowest-risk investment in junior miners,” he said.

Former finance minister Trevor Manuel told delegates at the launch event that South Africans were bound together and defined by mining. He said investors needed to defend the sector from being seen as a “sunset industry”.

Nair said Stefanutti Stocks had a track record of helping junior miners and would invest equipment and plant.

The government has indicated that one of the biggest hurdles to the growth of small and medium-sized businesses and junior mining exploration is access to equity finance. To this end the state has implemented tax incentives for investors in venture capital companies.

“We have been working on this quite a while,” said Stefanutti Stocks CEO Willie Meyburgh. The group was looking at opportunities where it could grow while helping emerging miners and contractors get off the ground.

Stefanutti Stocks had approached the Development Bank of Southern Africa and commercial banks, only to be told that projects were “too risky and too small”.

The JSS Empowerment Mining Fund aims to change all this with a minimum investment holding period of five years.

Investors can gain tax relief of up to 41% by deducting 100% of the investment amount from their taxable income in the year in which the investment is made. In addition, 70% of one-off investment is counted towards the investor’s broad-based black economic empowerment scorecard.

The risk profile is one of investing in mines that have completed exploration and licensing and have material offtake agreements in place, while also having contracted construction and mining activities to Stefanutti Stocks.

The fund is targeting a pre-tax return — gross of fees — of inflation plus 10% per year. Including the rebate, this jumps to nearer inflation plus 20%.

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Mining fund partnership to provide lowest risk vehicle for investing in junior mining companies

The JSS Empowerment Mining Fund, established by boutique financial consulting firm Jaltech and Stefanutti Stocks, was launched at the Mining Indaba in February 2017. Through extensive risk mitigation and tax benefits, this Section 12J fund offers attractive investment opportunities to investors. Its target capital is R1 billion.
Junior mining companies are often considered too small for traditional private equity or debt funding and hence struggle to raise capital. The JSS Empowerment Mining Fund has been created to fill this funding void and will operate in a unique niche, providing investment of between R30 million and R500 million to qualifying South African junior miners. The fund will support junior miners in respect of operational expertise and financial stability.

Construction and mining services contractor Stefanutti Stocks will provide contract mining, material handling services and mine infrastructure design and construction if required, as well as appropriate on-demand guarantees against mining production volumes and processing quality. This will vastly reduce the operating and financial risks traditionally associated with junior mining operations. Stefanutti Stocks’s particular expertise is in open cast mining operations (from mine design through to operations), however its recent alliance with Redpath Mining (South Africa) will also grant access to underground mining expertise if necessary.

The Fund’s board and investment committee members bring executive level and governance experience gained in leading (often listed) companies from various industries to the table. Board members include Chairman Mpho Makwana and directors Derrick Hyde, Mano Moodley, Gaurav Nair and Zukie Siyotula.
Potential investments will be identified and considered by the fund’s investment committee, whose members boast a broad range of relevant experience. This includes expertise in geology, mining engineering, mining operations across the whole value chain, mining investments and development, mining finance and auditing, mining contracting, and corporate and project finance. The investment committee is chaired by Zukie Siyotula and its members are Dr. John Hancox, Vinay Somera, Derrick Hyde, Frik Venter and Nthabi Ledwaba.

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Unit 19,1 Melrose Blvd, Melrose Arch
Gaurav Nair  |  Director email: gaurav@jaltech.co.za
Derrick Hyde  |  Director email: derrick@jaltech.co.za
Jonty Sacks  |  Director email: jonty@jaltech.co.za

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