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Section 12J Investments and Reducing Taxable Income

In this article, we discuss Section 12J investments in South Africa and how they offer investors an opportunity to invest in a tax-deductible investment vehicle.

Section 12J investments are typically for individuals with a particular interest in high-risk investments or who have reached their capacity in their retirement annuities, pension funds or tax-free savings account contributions.

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What is a Section 12J Investment?

Section 12J of the Income Tax Act aims to incentivize taxpayers to invest in the economy via a Venture Capital Company which is Section 12J approved.

The South African government has added Section 12J to the South African Income Tax Act in an effort to afford small and medium-sized entities equal access to equity funding.

Small to medium entities have been identified and acknowledged as one of the main contributors to future economic growth. Section 12J serves as a much-needed catalyst for equity funding for SMEs.

Anyone who invests in a Section 12J venture capital company (VCC) will qualify for a full deduction of the total investment amount from their taxable income within the relevant tax year. What’s more is that investors will also be indirectly strengthening the struggling South African economy while supporting local businesses.

Section 12J Tax Deduction South Africa

Investing in an approved Section 12J VCC is indirectly investing in and building the South African economy. It also acts as a tax-efficient incentive for investors as it allows for a full tax deduction of the amount invested for the specific tax year.

A VCC may accept investments from any taxpaying entity, whether it is a private individual, another company or a trust, in order to raise capital needed to build the business. In return, the VCC offers investors shares in the company.

As a result, the investor can enjoy benefits from a tax-deduction perspective while also enjoying a return on their investment in the form of company shares.

The ultimate aim of Section 12J is to stimulate investments in locally owned SMMEs, which subsequently contributes to GDP growth and encourages job creation in an impoverished South Africa.

Section 12J Investment Explained

As a tax-paying entity, you will approach a VCC with your investment offer and, if an agreement is made, the VCC will invest the sum directly into their own company. At this stage, the VCC will issue you with a tax certificate for the exact amount of your investment.

The certificate is then used to deduct the entire value of your investment from your taxable income in the same tax year.

When you are paid out your dividends, you are then faced with capital gains tax, or you pay dividends withholding tax. When the investment reaches maturity and you withdraw from the VCC portfolio, the base for capital gain will be zero. This is due to the initial benefit of 100% tax-deductibility.

An important note to make is that Section 12J investments should be treated as medium- to long-term investments which require a commitment of no less than 5 years. You do not qualify for tax-deductibility if you withdraw your investment before the 5-year period has passed.

Qualifying Businesses

Businesses that qualify for Section 12J investments are:

  • Student residences
  • Manufacturers
  • Technology companies
  • General SMMEs
  • Renewable energy companies

Olemera – Financial Advisors in Johannesburg

There are many factors to consider before investing in a Section 12J VCC, including risk versus reward, among many others.

If you are an individual who would like to invest in a Section 12J VCC, we strongly advise seeking expert assistance from one of our financial planners in Johannesburg. These investments must take place before the end of February to get rebate for this tax year. Furthermore, there is a sunset clause which expires at the end of June 2021 which may not be extended by the South African government.

We have the necessary expertise to guide you in the right direction, by assessing available VCCs for you to safely invest your money in, for medium and long-term rewards for you and the South African economy.

Contact us for more information.

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