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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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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. 

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

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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