SECTION 12B SOLAR INVESTMENT
Jaltech is offering South African investors the opportunity to take advantage of the energy supply crisis in South Africa and to gain exposure to an asset class which provides long-term predictable yields.
Jaltech’s Section 12B Solar Investment combines the predictable return nature of the solar sector with the tax benefit available to South African taxpayers who participate in the National Treasuries renewable energy incentive.
In addition, the investment will aim to enable investors* to be completely de-risked by the end of the second year of investment through SARS refunds and cash inflows.
Similar to Section 12J investments, Jaltech’s Section 12B Solar Investment allows investors, through Section 12B of the Income Tax Act the ability to claim a 125% tax deduction on their investment.
In other words, if an investor* in the top tax bracket invests R1 million in Jaltech’s Section 12B Solar Investment, the investor will be able to reduce his/her taxable income by R1 250 000, thereby resulting in a tax saving/refund of R562 500.
The 125% deduction can be used to reduce the investor’s taxable income, thereby reducing his/her income tax and/or capital gains tax liability.
Jaltech aims to introduce debt funding at the underlying investment level during 2024 at a maximum of 34% of funds under management. The benefit from an investor’s perspective is that the additional funding allows the investor to claim an additional tax benefit thereby further de-risking the investor. By way of example:
As a result, the two refunds plus the projected cash flow during the first two years will most likely result in the investor receiving cash inflows (after tax) equivalent to his/her entire investment value thereby de-risking the investor completely by the end of year two.
Investors must be mindful that where debt is raised within the investment, investors will have limited recourse exposure based on their pro-rata share in the partnership. Jaltech will look to reduce investors’ exposure by:
As with any investment, there are numerous risks investors need to consider. With this investment, we believe that there are four main risks, namely:
The performance of this investment is dependent on the energy consumer’s ability to make regular payments towards their energy consumption. To mitigate this risk, Jaltech will be undertaking an in-depth due diligence and credit check on each energy consumer or project owner as well as diversify its investment across multiple projects.
Investors will only be entitled to claim a tax deduction, in the year of investment, if the solar project/s are producing electricity. In this regard, Jaltech will limit its capital raise to projects which can be executed within the year of investment.
The investment will look to introduce debt at a maximum of 34% of the assets under management. As a result (and by way of example), should all the underlying investments be repossessed by the debt provider, the investor will stand to lose his/her original investment value and the investor may be recouped a portion of the tax savings. Jaltech has mitigated this risk by limiting the debt facility to a maximum of 34% of funds under management.
The investors’ liability within the investment is limited to 125% of their investment value, the remaining liability is held by the General Partner in the partnership. The reason why the investors’ liability is 125% and not 100% of their investment value is that investors must be at risk for 125% of their investment value to claim a 125% tax deduction. Jaltech has introduced various risk mitigations to reduce investors’ risks.
Jaltech’s Section 12B Solar Investment aims to generate a consistent annual yield paid to the investor over a period of 10 years.
Below is an example of cash-inflows over the period of the investment to an investor* who invests R1 million.
|Cash-inflows to the investor
|Year 1 – SARS refund
|Year 1 – Pre-tax income (after fees)
|Year 2 – SARS refund (debt funding)
|Year 2 – Pre-tax income (after fees)
|R131 984 – Investor de-risked
|Year 3 – Pre-tax income (after fees)
|Year 4 – Pre-tax income (after fees)
|Year 5 – Pre-tax income (after fees)
|Year 6 – Pre-tax income (after fees)
|Year 7 – Pre-tax income (after fees)
|Year 8 – Pre-tax income (after fees)
|Year 9 – Pre-tax income (after fees)
|Year 10 – Pre-tax income (after fees)
|Total pre-tax income + tax benefit (net of fees)
|R2 517 843
|Pre-tax IRR + tax benefit (net of fees)
|Post-tax IRR + tax benefit (net of fees)
|20% above a hurdle of the investment amount, calculated and charged annually with a high-water mark (with catch-up) – see explanation.
Jaltech earns a performance fee annually on returns generated above the investment amount divided by the total average term of the power purchasing agreements (PPA) signed with the end customers.
As an example, if the total average PPA term is 10 years, and an investor invests R100 the annual hurdle would be R10. Accordingly, if Jaltech returns R12 in year one, Jaltech would charge a fee of 20% on the R2 (R12 less R10). If in year two, Jaltech returns R5 no performance fee would be earned. For Jaltech to earn a performance fee in year three, Jaltech would need to return more than R15.
Disclaimer: The contents of this document does not constitute and should not be construed as an offer to subscribe for shares or investment, tax, legal, accounting and/or other advice. For advice on these matters consult your preferred investment, tax, legal, accounting and/or other advisers about any information contained in this document. All mentioned returns in this document are estimates at current tax rates, and past performance is not an indication of future performance.
*in this example, an investor is a natural person with an income tax rate of 45%