When considering whether Section 12J is applicable to an investor or business, there are several aspects which one would need to consider. As a rule of thumb should any one of the below elements exist, for a potential investment, then Section 12J will not be applicable:
- The gross asset value of the investee company in which an investor seeks to invest exceeds R50 million (R500 million for mining projects) (see question 10 for further clarity);
- The investee company earns more than 20% of its income from investments (for example, an investment into an investment holding company would not be permissible);
- The investee company carries on the majority of its trade outside of South Africa;
- The investee 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 in specific estates and student residences may very well comply);
- any trade in the financial services sector (for example, banking, insurance, money lending, hire-purchase arrangements, however, this does not 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;
Any South African taxpayer can take advantage of the Section 12J tax deduction. In other words, foreign or local companies or individuals and trusts who pay tax in South Africa, can invest in a Section 12J Venture Capital Company and claim the tax deduction.
100% of the tax deduction is claimed in the same year that the investment is made.
The tax incentive is for South African taxpayers investing into a local Section 12J VCC and is in the form of a reduction in the taxpayer’s taxable income, by the full amount invested. This is claimed by the South African taxpayer in the year the investment into the Section 12J 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 Section 12J 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.
|Initial Investment||R10 000 000||R10 000 000|
|Tax relief (in the tax year of initial investment)||(R4 500 000)||(R2 800 000)|
|Net Investment (Risk Capital)||(R5 500 000)||(R7 200 000)|
|Effective tax relief||45%||28%|
Yes, however, legislation is unclear as to whether an individual can carry the tax credit over to the following tax year. In the case of a company, the company may carry the tax credit over to the following tax year.
There are two ways, you can either invest in an existing Section 12J VCC or you can structure your qualifying investments/opportunities/projects through a new Section 12J VCC. Jaltech provides a complete Section 12J service offering. This includes formation, structuring, registration and administration of the Section 12J VCC. Included in the offering are the necessary legal agreements drafted by ENSAfrica.
The only real downside for an investor is that the capital investment in a Section 12J VCC is required to be held for a minimum of 5 years. Dividends can be paid to an investor during or after the 5 year period.
The legislation only limits the sectors into which a Section 12J VCC cannot invest. In other words, a Section 12J VCC can invest in any sector except:
- immoveable property, unless in the hospitality sector (an investor can, therefore, in certain circumstances invest in hotels, serviced apartments and student residences);
- any trade carried on in the financial services sector (i.e. banking, insurance etc.);
- any trade carried on in respect of financial or advisory services; and
- gambling, liquor, tobacco, arms and ammunition;
There is no limitation, an investor can invest as much money as they wish.
A Section 12J VCC can make multiple investments, however, no single investment can result in the target/investee company’s gross asset value (book value) exceeding R50 million (R500 million with respect to mining investments), on the date of the investment. For example, assuming the Section 12J VCC was to invest in a car rental business which had a gross asset value (or vehicle fleet value) of R20 million. In this situation the Section 12J VCC could invest no more than R30 million as this would raise the gross asset value to R50 million. It is important to note:
- the Section 12J VCC is not limited to R50 million in total investments;
- the Section 12J VCC can make multiple investments however, no single investment can result in the target company’s gross asset value exceeding R50 million;
- after the date of investment, the target company’s gross asset value can exceed R50 million;
The simple answer is yes, provided the investor is at risk for the debt. By way of illustration, should an investor invest equity of R30 million and debt (at risk) of R70 million into a Section 12J VCC, the investor will receive a deduction on the full R100 million (this would amount to a deduction of R28 million for companies and up to R45 million for individuals and trusts). Accordingly, under this scenario and assuming the investor has sufficient taxable income, a company could effectively repay close to half of the debt in year one and in the case of an individual or trust, close to two-thirds of the debt could be repaid over the same period, from their tax saving.
Section 12J VCCs are excellent vehicles to assist project developers and companies with raising finance for their projects. Investors will not only receive the returns, which they expect from their investments, they will immediately see a return on their investments through the tax deduction. Jaltech has seen an increasing interest in projects funded through Section 12J VCCs.
There are a number of sectors/types of businesses utilising Section 12J, some of the largest include (among several others):
- asset finance;
- car rentals;
- hospitality and student accommodation;
- mining and contract mining;
- plant and equipment rental;
- renewable energy; and
A Section 12J VCC must be structured correctly i.e. the legal structure with associated agreements. The VCC must hold a valid Financial Services Board (FSB) license (generally a category 1 license holder) and must be approved by SARS.
Jaltech forms, structures and administers Section 12J VCCs in accordance with a client’s objectives. Jaltech has developed unique intellectual property in the Section 12J sector, which allows companies and investors to focus on their core businesses while Jaltech sets up, runs and administers the Section 12J VCC. This intellectual property is in the form of varying Section 12J structures, legal agreements (drafted by ENSAfrica) and policies and processes developed over the years.
Once the Section 12J VCC has been registered and the structure/legal agreements have been finalised, Jaltech will undertake the following administration services:
- ensuring a “Key Individual” with the requisite FSB licence is appointed;
- liaising with the compliance officer of the Section 12J VCC on a regular basis;
- preparing monthly management accounts in respect of the Section 12J VCC;
- liaising with the Section 12J VCC’s auditors and providing them with such information as they may require for the purposes of preparing the annual financial statements;
- procuring the issue, management and delivery of share and tax certificates to the investors of the Section 12J VCC;
- providing the necessary reports on behalf of the Section 12J VCC to SARS when required;
- providing the necessary reports on behalf of the Section 12J VCC to the FSB when required;
- providing such administrative and accounting services as are reasonably required;
- preparing and submitting PAYE, VAT and all other statutory returns required in respect of the Section 12J VCC;
- reporting to the Section 12J VCC’s board at such times as may be reasonably necessary about all aspects of the administration of the Section 12J VCC; and
- reporting to investors of the Section 12J VCC;
Jaltech’s fee is structured into two components, namely:
- an administration fee which is either a fixed monthly or a percentage of the funds under management; and
- a structuring fee, which is based on the percentage of the tax saving received by the investors;