A common tax question which we are currently being asked by exiting Section 12J investors is which option is more appropriate to mitigate the Section 12J exit tax, namely, an investment in:

1. a collective investment scheme which would offer investors Section 42 roll-over relief, thereby differing the exit tax event to a later date; or
2. a Section 12B solar investment which shields the tax consequence.

The choice between these options hinges on the investor’s objectives. If the primary goal is to mitigate the Section 12J exit tax, then a Section 12B investment generally emerges as the preferred route.

This preference stems from the fact that opting for a Section 12B investment typically entails parting with only around 21% of the Section 12J capital to reduce the tax liability to zero. In contrast, a Section 42 investment necessitates committing 100% of the investor’s capital to defer the Section 12J exit tax. – see the calculation below.

If the motivation for the new investment is solely driven by returns, then it could be argued that a Section 12B investment offers flexibility.

The reason is that a Section 12B investment which is geared conservatively, allows an investor to receive an amount of up to 90% of their investment back in the first year through SARS refunds and cash inflows. This in turn will allow the investor to invest the proceeds less the Section 12J exit tax into the collective investment scheme or an alternative investment.

Comparative Analysis

Here is a comparison of three options: exiting a Section 12J investment, allocating a portion of the capital to Jaltech’s geared Section 12B investment, and making use of Section 42 roll over relief.

Thankfully, investors who have already chosen the Section 42 route have the option to exit the structure and redirect their capital towards a Section 12B investment. It’s crucial for investors to act promptly because the Section 12B deduction mandates that the capital must be invested in energy-producing solar assets within this fiscal year. Failure to do so would restrict the deductibility of the investment based on the amount effectively deployed.