We’ve had a few questions from clients on section 12J investments and whether it’s something that should be considered. Some advisors and tax consultants seem to be selling this as the next best thing.
WHAT IS A SECTION 12J INVESTMENT?
Section 12J refers to a section in the Income Tax Act, which intends to stimulate investments in venture capital by allowing tax deductions. In a nutshell, it’s an investment structure that provides very attractive tax benefits, as any amount invested in such a structure is 100% tax deductible. You can add all forms of taxable income: Capital gains, salary, bonus or interest earned to your taxable income from which the investment amount can be deducted.
Although this sounds wonderful, the investment structure comes with pitfalls and complications. We highlight a few below:
- 12J investment structures must invest in SARS approved, venture capital companies.
- Venture capital investments are risky. Venture capital provides new or expanding businesses with funding in return for owning a piece of the company and its future profits. These are usually unknown start-up companies.
- You are locked in for a minimum of five years.
- You are liable for Capital Gains Tax (18%) on the full investment on exit OR if distributions are made during the five-year period you pay Dividend Withholding Tax (20%) on the full distribution.
HOW IT WORKS
Not every investor who wants to save tax should use these investments.
IS THIS FOR YOU?
Section 12J investments make sense if:
- You have already made full use of tax deductions offered by retirement investments and tax-free savings accounts;
- You are an experienced investor who understands the risks of venture capital funds;
- You have a long-time horizon;
- Your already have sufficient diversification and investments offshore;
- You have triggered a large capital gain due to the sale or exit of a business or asset;
- You have identified an experienced manager in this very technical and specialized field.
We recommend seeking independent financial advice before making an investment into a 12J structure. We have analysed many Section 12J investments and can help you to decide whether it is suitable for you.
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