The dos and don’ts of Section 12J investments

Section 12J of the Income Tax Act continues become the buzz investment during the last few months of the financial year.  

The reason for this is mainly because many South African taxpayers realise very late in the financial year that they have a significant tax liability.

This is typically pursuant to annual bonuses being awarded late in the financial year, which results in a higher tax liability.

In addition, many taxpayers who have realised a capital gain during the financial year, often leave paying their capital gains tax to the last minute.

Reduce tax liability

With this in mind, after investing in RAs and pension funds, Section 12J is an ideal way to significantly reduce a taxpayer’s tax liability. 

From a South African taxpayer’s perspective, Section 12J has much to offer, from investing in high-growth venture capital companies such as Kalon Ventures and KNF Ventures, to investing in more capital preservation investments, such as Zimbali Capital which invests in hospitality developments at the world acclaimed Zimbali estate or investors who are looking for investments which generate semi-annual dividends such as Infinity Anchor Fund.

Even more interestingly, you can soon invest in Titanium VC 1, a listed Section 12J company which offers returns backed by renewable energy assets. 

Unlike most traditional asset classes, investors typically take their time before investing, however, during February of each year, we see a frenzy of investors investing in Section 12J investments.

For investors who find themselves having to quickly identify a Section 12J investment/s, here are a few dos and don'ts which should assist you with narrowing down your selection.

Don’t get caught up in investing in a Section 12J investment simply because there is an attractive tax benefit associated.

Ignore the tax benefit when performing your due diligence and select the 12J company based on the underlying investments.

Do engage with the 12J company and ask as many questions as you deem necessary before making an investment.

12J companies earn a fee for managing your funds, so raise as many questions as you need to be comfortable with making the investment, such as what are the fees, how do these fees relate to the market, what percentage of capital under management has actually been invested, what is the targeted IRR, what experience does the fund manager have, et cetera.

Don’t be fooled by the fee structure - make sure the 12J company charges reasonable fees, particularly around the performance fee.

Generally, 12J companies require a small upfront fee, an annual fee and a performance fee. Avoid performance fees based on net/risk capital; 12J companies should earn their performance fee on any amount above your original investment.

Do look for Section 12J investments which have realistic and effective exit strategies.

Simply "endeavouring to dispose off underlying investments" is not an adequate exit strategy, as this will in many cases lead to a long delay before your capital is returned.

Don’t invest more than your taxable income.

Individuals will not benefit from reducing his/her taxable income below their taxable income.  

Do consult a financial advisor who has experience and understands Section 12J investments. 

The Section 12J marketplace has introduced an exciting new asset class, which has attracted over R3.7bn within a very short period of time, and the future is looking very promising, with expectations of an additional R2bn being invested by the end of February 2019. 

For all Section 12J investors, I would advise that you should consult a financial advisor, or there are a number of websites which provide information on various Section 12J investments. Additionally, there are two Section 12J investor conferences held each year for interested investors. 

Jonty Sacks is a Partner at Jaltech – Section 12J Venture Capital Company Advisory.

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