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For every R100 invested in a Section 12J company, an investor (individuals, companies and trusts) can reduce their tax by up to R45, making the net investment only R55.
There are more than 140 registered Section 12J companies in South Africa.
Westbrooke Alternative Asset Management is responsible for almost half of the capital invested in Section 12J funds.
Zuccollo answered 12 of the most common questions investors ask about the Section 12J tax incentive.
How does Section 12J help me to save tax?
Individuals, companies and trusts can benefit from up to 45% immediate tax relief, reducing the cost of the investment while providing downside protection and enhancing overall returns.
Investments must be held for at least five years.
The Section 12J asset class is particularly attractive to those taxpayers who have incurred capital gains tax, as the 40% inclusion rate for individuals allows investors to invest less than the total cash realised on a capital gains event.
However, a Section 12J investment carries a base cost of zero and therefore on exit from the investment, the investor will be liable for capital gains tax on the full proceeds.
Is this investment right for me?
If you are a South African taxpayer, you could consider a Section 12J investment as your taxable income can be offset by this investment.
Section 12J investments range from lower risk asset-backed investments to higher risk venture capital investments, and it is, therefore, necessary to assess your risk appetite.
What are the risks?
As with any private equity style investment, an investment in a Section 12J company carries risk.
It’s essential, therefore, to assess the investment strategy of the Section 12J company to ensure you understand the associated investment risk as well as the expertise and track record of the asset manager.
Which Section 12J investment should I pick?
This is dependent on your desired risk/reward profile.
Investors may also elect to invest in diversified Section 12J portfolios to spread risk.
What is the minimum investment?
From what can be seen in the market, Section 12J investments start at around R100 000.
What returns can I expect?
This depends on what fund you have invested in and the skill of the managers.
Investors in lower risk strategies can expect to earn investment returns of 15% to 25% and investors in higher-risk strategies can potentially expect investment returns of 40% per year or more.
Section 12J is considered a private equity style investment which carries different levels of risk depending on the underlying investment strategy and there is the potential to lose your initial investment.
Can I use debt or gearing to invest in a Section12J company?
Yes, you may utilise a loan or gearing to invest in a venture capital company as long as you comply with Section 12J(3)(a) of the Income Tax Act.
When and how do I claim my tax deduction?
An investment into an approved Section 12J company is 100% tax deductible in the tax year you invest.
Investors can claim the tax relief by either reducing their estimate of taxable income when submitting provisional tax returns or by obtaining a tax refund through the annual income tax assessment.
To benefit this year, your investment needs to be made by 28 February.
What is the annual limit per investor for investment into a Section 12J company?
There is no annual limit, but investors should not invest more than their taxable income.
What is the term of my investment?
The minimum term of the investment will be five years.
However, certain funds might carry a more extended minimum investment period.
What if I invest, and then I die or emigrate?
On death during the five year investment period, your investment will be treated as if you had sold your shares and Sars will recoup the tax benefit unless you explicitly state that you have left your Section 12J investment to your surviving spouse in your will.
Should you emigrate within the five years, your investment will be treated as if you had sold your shares and Sars will recoup the tax benefit.
What are the fees?
Fees in Section 12J investments are not legislated so check this carefully when you invest.
For more detail listen to the interview in the audio below (and scroll down for quotes from it).
It was introduced in 2009, but until 2015 nothing really happened…— Dino Zuccollo, Westbrooke Alternative Asset Management
It’s important to invest with an experienced, tried-and-tested manager…— Dino Zuccollo, Westbrooke Alternative Asset Management
There’s a minimum period, but there’s no maximum…— Dino Zuccollo, Westbrooke Alternative Asset Management
A Section12J company can be any type of business, with five exceptions…— Dino Zuccollo, Westbrooke Alternative Asset Management
We want to remove as much risk as possible… have a Section12J fund with a clear mandate… it’s able to mitigate a lot of the risk… there is liquidity risk…— Dino Zuccollo, Westbrooke Alternative Asset Management
We normally take R500 000 as a minimum investment.— Dino Zuccollo, Westbrooke Alternative Asset Management
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