BUSINESS NEWS - Section 12J, one of the most talked about tax incentives in recent years, remains open to investors, but time may be running out to take advantage of this attractive opportunity, says Jonathan Whittaker, Head of Distributions at TBI Investment Managers (Pty) Ltd
Introduced in 2009, the incentive encourages investment in South African SMEs and entitles investors to deduct the expenditure incurred against their taxable income. The annual allowable deduction is currently capped at R2.5 million for individuals and trusts, and R5 million for corporate investors.
“For the astute investor this offers attractive additional tax relief, as many investors simply rely on the deductions from their Retirement Annuity contributions, capped at R350,000 per annum,” says Wynand Marais, CEO of Ora Capital Limited.
When investing in a SARS approved Section 12J Company, the investor is issued with a tax certificate to substantiate their claim for a deduction. Investors should remain invested for at least five years to avoid a recoupment of the tax relief they claimed.
The 12J Company could follow a range of investment strategies, from hospitality to IT start ups. Ora Capital Limited, for example, focuses on cash flow generative operating rental businesses.
Sunset Clause
When it was originally introduced, the Section 12J incentive included a sunset clause, which is currently scheduled for 30 June 2021. Thereafter any new or additional investments into a 12J Company will not be tax deductible.
The incentive is currently under review to determine its effectiveness and whether it will be extended beyond the June 2021 deadline. The 12J Association of South Africa noted that the sector has seen phenomenal growth over the last 4 years, growing from R1 billion in 2015 to almost R8.3 billion by February 2019, and has already deployed over R3 billion into more than 250 local SMEs and start-ups.
“It’s clear that this is a valuable policy that gives SMEs access to much needed capital, stimulating economic growth and job creation,” says Marais.
That being said the current deadline means that prospective 12J investors only have 16 months left to take advantage of the incentive and claim a deduction against their taxable income. When deciding on which 12J Company to invest in, investors should consider the company’s investment strategy and ability to deploy the funds raised timeously, the experience of the management team, fees that are charged and the exit strategy after five years.
“For the right investor, a Section 12J investment serves a valuable role, providing much needed tax relief and diversification to their overall investment portfolio,” Whittaker concludes.
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