Unfortunately for South Africans, after death and taxes a third certainty affecting us is our ever-increasing tax rates. With the budget speech around the corner, tax increases are again front of mind. It is no wonder then that our investment decisions are so often driven by an overwhelming desire to save taxes.
Enter Section 12J investments which were introduced over 5 years ago with the objective of creating sustainable employment and which have become a popular way for South Africans to reduce their tax bills. It allows individuals, corporates and trusts to receive a 100% tax deduction for the investment which must be held for 5 years and must meet qualifying criteria which are strictly monitored.
It is all well to receive a generous tax deduction, but due consideration needs to be given to the risk of the underlying investment/s. There is no point in getting a tax deduction if the actual investment fails. The underlying venture capital investments vary from lower risk (often backed by property) to high risk (true venture capital investing) in which the ultimate returns from the investment reflect the risk taken.
Other factors to be aware of are costs, which vary from company to company, and the fact that your capital gains base rate is zero when you exit the investment after 5 years. Individuals and trusts can invest up to R2.5m and companies can invest up to R5m.
Carrick recommends that investors obtain a thorough understanding of the structure as well as the underlying investments to avoid negative surprises. The good news is that there are some very reputable Section 12J operators in the industry with long and established track records who have raised over R6bn to date with thousands of jobs created.
In conclusion, this is a great opportunity to reduce your tax bill and earn a strong investment return providing you know and understand the questions that need to be asked when doing your diligence.
- This article reflects the private opinion of the author and should not be construed as investment advice.
Anthony Palmer CA(SA) is Head of Investment Strategy at Carrick Wealth and is a qualified Chartered Accountant with substantial experience in the financial hubs of London and Wall Street.
Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning and integrated wealth management solutions. Carrick is also licensed in Zimbabwe and Malawi, and holds three global licences in Mauritius.