As investors exit Section 12J investments this year, they face substantial capital gains tax obligations, even in cases where their investments did not yield any returns. This stems from the fact that all capital returned upon exit – including any profits – is subject to capital gains tax.

Capital gains tax applies because investors can deduct 100% of their initial investment from their taxable income when investing.

For example, an investor who invested R1 million in a Section 12J investment and receives R1 million upon exit (i.e., no growth over the investment term) would incur a capital gains tax liability. This liability is calculated at a maximum rate of 18%, resulting in a tax payment of R180,000 upon exit.

Fortunately, investors can significantly reduce or fully eliminate this tax liability by strategically reinvesting a portion of the capital returned from a Section 12J investment into a Section 12B tax-deductible solar investment.

Understanding Section 12B solar investments

A Section 12B investment is similar to a Section 12J investment as it allows a taxpayer to reduce his/her taxable income by the amount invested. For an investor in the highest tax bracket, a R1 million Section 12B investment would decrease their taxable income by R1 million, resulting in a tax saving or refund of R450,000.

Combining Section 12B with Section 12J

Using the earlier scenario, the Section 12J investor will have a tax liability of R180 000 when exiting his/her R1 million investment. Should this investor decide to invest R400 000 into a Section 12B investment, the investor would be entitled to deduct R400 000 against his/her taxable income, which amounts to a tax saving of R180 000.

As a result, the investor can offset the Section 12J exit tax with the tax credit associated with the Section 12B investment.

Put simply, by investing R400,000, the investor eliminates the R180,000 Section 12J exit tax, retains R600,000 in liquid cash from the remaining Section 12J proceeds, and secures a Section 12B solar investment that generates annual income from the R400,000 investment. Alternatively, the investor can pay R180,000 to SARS and generate no returns.

Jaltech’s Section 12B investment

Jaltech is the leading fund manager within the Section 12B investment market, with nearly R1 billion under management across over 250 solar projects.

Jaltech will launch its next Section 12B investment in the next few months. If you are interested in finding out more, click here to register your interest, and a representative from Jaltech will contact you.

Jonty Sacks & Chris McCormick – Jaltech Fund Managers