Please note that every effort has been made to ensure that the advice given in this educational material is correct. Nevertheless, that advice is given purely as guidance readers to assist them with particular problems relating to the subject matter of the educational material, and African Venture Group will have no responsibility to any person for any claim of any nature whatsoever that may arise out of, or relate to, the contents of this educational material.
Section 12J South Africa
What is a Section 12J Company?
The South African Government has identified small and medium-sized enterprises (SMEs) as a major contributor to future economic growth. One factor that hampers the growth of SMEs is a lack of access to equity funding. In order to alleviate this problem, South African Government has added Section 12J to the South African Income Tax Act as a catalyst for equity funding for SMEs. Section 12J provides a marketing vehicle to venture capital companies due to the tax incentive.
A Venture Capital Company (VCC) is a company that accepts investments from any taxpayer (individual, trust or company). The venture capital company manages the collective investment and make investments in SMEs. The venture capital company will issue a certificate to the taxpayer for the amount of the investment.
The taxpayer is then allowed to deduct their full investment against their taxable income in the relevant tax year. The tax benefit which arises from Section 12J is thus an incentive for taxpayers to invest indirectly in SMEs.
Who are allowed to invest in a Section 12J Company?
Any taxpayer qualifies to invest in an approved Venture Capital Company.
A taxpayer can make an investment in a Section 12J company and this investment is 100% tax deductible if held for a period of 5 years or longer.
If the taxpayer is an individual with a marginal tax rate of 45% or a trust, the taxpayer can invest R1 million and will effectively be paying R550 000 (R1 million - R450 000) for the investment since the full investment amount is tax deductible in the year of investment (provided the taxpayer has taxable income of 0 000 or more).
When the Section 12J investment is realised in future, the base cost for the capital gain will be zero due to the initial benefit of 100% tax deductibility.
A company (excluding a SBC which will be taxed at different rates) can invest R1 million and effectively be paying R720 000 (R1 million - R280 000) for the investment since the full investment amount is tax deductible in the year of investment (provided the company has taxable income of R280 000 or more).
The value of investments and any income from them may go up as well as down and are not guaranteed. African Venture Group has a team of researchers and hands-on management continuously mitigation and management of risks.
Contact African Venture Group's tax department for further advice.