Is Section 12J VCC applicable to my business?

If you are looking to expand your business or invest   new opportunities, creating a Section 12J Venture Capital Company (VCC) may be applicable to you.

Section 12J of the Income Tax Act was formed to incentivise South African taxpayers to invest into particular areas of the South African economy, through a significant tax incentive on the amount invested. An investor into a Section 12J VCC can reduce their income by the full amount invested into the VCC.

What is important to a South African taxpayer is whether this tax incentive is applicable to their business and how this could be implemented. At Jaltech, we have seen this tax legislation being applied across multiple areas, a few of these areas include:

  1. Franchisors looking to increase the number of franchisees (restaurant, print stores)
  2. Companies in the business of leasing movable property (yellow equipment, cranes, cars)
  3. Companies which have a substantial enterprise development and/or supplier development spend requirement
  4. Companies looking to raise finance for their projects
  5. Companies investing, acquiring or developing:
  • Renewable energy projects
  • Mining projects
  • Hospitality assets (hotels, student residence, B&Bs)
  • Manufacturing plants
  • Agriculture projects

How does the tax incentive work?

The tax rebate for a South African taxpayer is 28% for corporates and up to 45% for individuals or trusts and is applicable to the amount invested into a business or opportunity located in South Africa.

This tax incentive for investing into a Section 12J VCC is in the form of a reduction of the taxpayer’s taxable income by the full amount invested and this is claimed by the South African taxpayer in the year the investment into the VCC is made.

Therefore, a South African taxpayer effectively receives 28% as a corporate and up to 45% as an individual or trust on the full investment value into a VCC. By way of illustration, if a company invests R10 million, it will receive R2.8 million in the form of a reduced tax bill. This means that the company receives the full R10 million investment exposure for just R7.2 million.

In order to ensure that Section 12J has application to your business or opportunity, Jaltech’s senior management will invite you to attend a non-committal consultation in order to understand and discuss the possibilities of structuring your opportunity/ through a Section 12J VCC.

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New fund targets empowering junior SA mines

Johannesburg – Many junior mining companies struggle to raise capital because their deals, which range between R50m and R300m, are viewed as too small by banks and private equity funding, says an expert.

However, a new fund has been launched to make it easier for these mines to access capital.

Gaurav Nair, managing director and “the brains” behind the fund JSS Empowerment Mining Fund, explained how it all works at the ENS Africa offices in Sandton on Thursday.

He explained that this low-risk vehicle is designed for mines that have completed their exploration and licencing requirements and have reached bankable feasibility.

The fund is as a result of a joint venture between financial consultancy Jaltech and South African construction company group Stefanutti Stocks.

The construction and mining is contracted to Stefanutti Stocks, which helps mitigate operational risks. The operating phase is where most of these junior mines fail, explained Nair. The construction group also co-invests on deals by providing equipment to the value between R50m to R200m.

Stefanutti Stocks has developed and assisted a number of mines to become bankable, explained Nair.

“Junior miners just need a bit of capital to get over the hurdle to establish infrastructure and working capital… Stefanutti Stocks help them get over hurdle,” he said.

So far the fund has eight prospective projects in the pipeline, totalling R703m. The average size of the projects is R88m.

To meet fund requirements, the mines have to be South African, unlisted or listed on AltX, gross assets of less than R500m, employ open cast mining, bankable feasibility, and be viable at today’s prices.

The return objective is at CPI+10% per annum on the investment amount.

“There is a tax benefit, in that the investment is 100% deductible from the taxable income in the year the investment is made,” said Nair.

Returns could be as high as CPI +20% per annum including the tax rebate.

“Tax relief alone equates to 11% compounded return over a five-year investment period,” he added.

There is also a recurring Broad-Based Black Economic Empowerment (BBBEE) benefit, where investors can claim in addition to tax benefits, 70% of their investment into enterprise development and supply development shares as BBBEE qualifying spend.

“They can claim this year-in and year-out on a once-off spend.”

The fund is looking to raise R1bn in two windows. The one will close at the end of February, for those investors who want to secure a tax benefit for this financial year, explained Nair.

The second window will close at the end of August this year with the aim that the R1bn will be raised.

“The goal is to develop junior mining companies to become independent in the future,” he added.

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Jaltech and Stefanutti Stocks launch JSS Empowerment Mining Fund

Jaltech, a South African boutique corporate finance firm, and Stefanutti Stocks, a construction group listed on the JSE, have launched the JSS Empowerment Mining Fund to invest in junior mining companies.

The Fund will offer a funding solution for junior open cast mining companies, which will directly benefit Investors and stimulate growth in the South African economy.

Gaurav Nair, Executive Director of the JSS Empowerment Mining Fund, said: “We are looking to raise R1bn (approximately $75m).”

“To date we have not begun fundraising but have already attracted some interest from family offices and strategic investors. We are looking forward to beginning the fundraising and accepting commitments,” he told Africa Global Funds.

The fundraising begins on Thursday, February 2, with the support of the former minister of finance of South Africa, Trevor Manuel, as a guest speaker at the launch.

“We have an administrative close on February 28 to provide the tax benefit in this financial year to investors that desire this – but the raising close is the end of August this year,” said Nair.

“With resources looking like they are on the recovery path, there is heightened interest in investing in mining. Junior mining is particularly attractive given the higher returns possible. With our robust risk mitigation and governance structures, as well as the tax benefits of investing, this fund is extremely attractive to a wide gamut of investors,” he added.

Junior mining companies are often considered too small for traditional private equity or debt funding and hence struggle to raise capital despite being highlighted in Government policy as entities that should receive preferential treatment by State Owned Entities (such as Eskom) and preferential debt funding from development finance institutions, amongst other incentives.

“We have seen that there is a gap in investing in junior mining companies that have completed exploration and licensing but have yet to begin operations. Debt providers and private equity players either find these deal sizes too small (less than $15m) or too risky,” said Nair.

The Fund is managed by Jaltech, Stefanutti Stocks and Venture Capital Management Services (VCMS), an administrator of Section 12(J) funds.

It will invest between R30m and R500m in qualifying companies that have already completed exploration, secured licensing and entered into offtake agreements for a proportion of production volumes.

The expected holding period for each investment is two to five years.

The Fund already has a pipeline of eight potential investments with a total value of R700m ($52m) at this point.

“The deals are mainly in the coal space (thermal and export quality), with a few tailings opportunities. Our mandate is restricted to open cast mining and investments in companies with assets below R500m ($37.5m),” said Nair.

The Fund is targeting pre-tax return (gross of fees) of CPI + 10% p.a. on investment amount.

The mining operational risk is mitigated by contracting out the mining and processing to Stefanutti Stocks (on a right of first refusal basis and at market related rates) that will design and construct all plant and infrastructure as well as being responsible for mining production, including providing on demand guarantees (directly or indirectly) on the construction and mining production volumes to the Fund.

“By working with Stefanutti Stocks we overcome the major risk faced by junior miners, that being operational risk. Hence we think this is the lowest risk way for investors to get exposure to junior miners,” explained Nair.

The JSS Empowerment Mining Fund benefits from generous tax incentives to investors through Section 12(J)1 of the Income Tax Act.

Individuals, corporates and trusts will be entitled to deduct the full amount of their investment into the Fund from their taxable income in the tax year in which the investment is made.

In addition, corporate Investors are able to claim 70% of their investment into ED and SD Shares (net of upfront fees) as B-BBEE qualifying spend on their score cards every year, for as long as they are invested in the Fund.

According to Nair, similar funds have tried to play in this space unsuccessfully.

“The difference being that other funds did not have a partnership with a blue chip listed construction and mining services company like we do with Stefanutti Stocks – who are taking on the operational risk and providing third party on demand guarantees for the construction and contract mining.”

“Secondly we make use of a section 12J structure – which is a piece of legislation driven by the South African government to incentivise investment into small to medium sized businesses including junior miners. This means that 100% of the investment is deductible from the investors taxable income, reducing their exposure to risk and improving their returns,” he added.

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Enterprise development spending could be tax deductible

How using Section 12J vehicles could benefit local businesses.

Over the past two years Section 12J investments have gained a lot of attention due to their attractive tax benefits. Essentially, the entire amount investment into a Section 12J venture capital company (VCC) is tax deductible in the year in which it is made, and that deduction will be permanent if the investment is held for five years.

This is more beneficial to individuals and trusts than businesses, since they are likely to be paying higher marginal rates. However, there is another aspect to Section 12J investments that could potentially be of significant value to local companies.

Because Section 12J VCC’s invest into emerging companies, if a fund is correctly structured and targets black-owned businesses, it is possible that an investment into such a vehicle could qualify as spending on enterprise and supplier development under the BEE codes. In other words, companies could get empowerment credits by using these vehicles.

“If a company invests into a Section 12J fund, and that fund invests into qualifying small businesses, the investing company will receive credit for the empowerment spend,” says Jonty Sacks, a director at Jaltech. “We have received an opinion from a BEE rating firm that if the investment is into a qualifying entity, the company will not only receive their points in year one, but every year they hold the investment they will get credit for 70% of their spend.”

This could be a huge benefit to companies who are currently writing off their enterprise or supplier development spending as a donation or simply an expense.

“These companies are spending the money anyway,” says Sacks. “But if they use a Section 12J vehicle they not only get a tax rebate, but they also end up with an investment that can generate returns.”

What is even more compelling is that it is possible for companies to use a Section 12J vehicle to continue to support the businesses that they are already targeting.

“We can put this structure in between the current enterprise and supplier development spend of these companies and the current businesses they are invested into,” explains Jaltech director, Derrick Hyde. “So they can continue what they are doing already, but now they can get a tax rebate on those investments.”

As Neill Hobbs of Anuva Investments explains, the VCC would be structured in such a way that whatever the investing company put in, gave it no more than 49% of the shares. The remaining 51%, or more, would be held by the black-owned target company.

“For example, if a company wants to invest R40 million into a black-owned supplier they could put that R40 million into a VCC, which passes it through to the target company,” says Hobbs. “That supplier is now well-funded with R40 million in equity, could have management support, and at the same time the investing company would share in 49% of the profits.”

In other words there are three incentives for the investing company. It will receive credits for enterprise and supplier development spending, it gets the Section 12J tax deduction, and it retains a minority interest in the business it has sponsored.

“That is important, because then it’s not just about giving money,” says Hobbs. “It could be expertise as well.”

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Radio Investing in Section 12(J) companies

Investing in selected hospitality and accommodation facilities has a tax benefit, explains Jaltech co-founder Gaurav Nair.

NASTASSIA ARENDSE: I’m joined on the line by Gaurav Nair, who is the co-founder of Jaltech and also the MD of JSS Empowerment. As part of our Investment Unusual we are going to be talking about Section 12(J) companies and in particular how they apply to you, how you benefit if you are looking at acquiring or developing a hotel, lodge or student residence accommodation.

Gaurav, thank you so much for your time.

GAURAV NAIR: Thank you, Nastassia.

NASTASSIA ARENDSE: A few weeks ago we spoke about Section 12(J) companies, but just briefly take me through how it works.

GAURAV NAIR: Section 12(J) is a tax incentive to encourage investment into sectors. What this means is that anyone who invests into a Section 12(J) company gets a deduction from their income for tax purposes for the amount that they invest into a Section 12(J) company.

NASTASSIA ARENDSE: On the topic of developing or acquiring a hotel, lodge or student residence accommodation, how do I apply the benefits of a Section 12(J) if I’m in any of these particular sectors?

GAURAV NAIR: Anyone who is looking to either develop a new or invest into an existing investment in the hospitality sector, should do it through a Section 12(J) structure. The way that it would work is that one would approach us and we would advice them of a structure that would be compliant to invest into the sector.

NASTASSIA ARENDSE: What are some of the basic requirements that need to be met by Section 12(J) companies?

GAURAV NAIR: The basic requirement is that they have to invest in certain sectors. They are not allowed to invest into, for example, casino industries, and also the investment needs to be up to a maximum size of R50 million per investment. Really, it speaks to what Treasury is trying to achieve, which is to encourage investment into this part of the economy.

NASTASSIA ARENDSE: Gaurav Nair, thank you so much for your time.

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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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