Section 12J FAQ
Everything you need to know about the 12J Fund
What are the characteristics of a section 12J company?
A Section 12J company is a venture capital company through which tax-based incentives are created in order to attract investors.
Who can benefit section 12J
Any taxpayer who is a resident of the Republic of South Africa can benefit from this tax deduction. This includes individuals, companies, and trusts.
How is tax relief obtained through section 12J?
There are two ways for an investor to claim the tax relief offered by Section 12J.
1 – By reducing their taxable income for the purposes of submitting provisional tax returns.
2 – By receiving a refund of tax through their income tax assessment.
How is the tax-deduction calculated
The tax relief is provided for South African taxpayers investing in a registered Section 12J company. The tax relief is claimed in the year the investment is made. The table below shows the effect of the income tax relief on an individual and company basis. It assumes that the initial investment is R1 000 000. The tax rates for individuals and companies are used accordingly.
|Initial Investment||(R1 000 000)||(R1 000 000)|
|Tax relief (in tax year of initial investment) *Net Investment (Risk Capital)||R450 000||R280 000|
|Net Investment (Risk Capital)||(R550 000)||(R720 000)|
|Effective tax relief *||45%||28%|
*Assuming highest marginal tax bracket for individuals/trusts
What is the minimum annual amount that can be into a section 12J VCC?
The minimum investment required is very fund-specific. Investments can vary anywhere from R10 000 – R100 000.
What is the maximum annual amount that can be invested into a section 12J VCC?
The maximum investment for an individual/trust is R2 500 000 and R5 000 000 for a company.
Can debt/gearing be used to make an investment?
A loan or gearing may be used to make an investment, subject to the provisions of s12(3)(a) in the Income Tax Act.
Into which sectors can a section 12J VCC make an investment?
A Section 12J VCC can invest in any sector except for:
- Trade in respect of immovable property, excluding the hospitality sector (eg: hotels, bed, and breakfast, etc.)
- Trade in respect of the financial services sector
- Trade being carried on in respect of advisory services including legal, tax, consulting, or accounting services
- Trade being carried on mainly outside the republic
- Any trade being carried on in respect of gambling, tobacco, liquor as well as firearms and ammunition
Can the tax relief be recouped by SARS?
Investors who dispose of their shares before 5 years from the date of the allotment of shares will be subject to tax as recoupment on the initial tax deduction.
When can the tax-deduction be claimed?
A 100% tax deduction is allowed in the same year in which the investment is made.
What documentation is needed when claiming a deduction from SARS?
A tax certificate with the details of the investment in the Section 12J investment may be required to substantiate a claim for a tax deduction.
What are the disadvantages of investing in a section 12J venture capital company (VCC)?
A disadvantage of investing in a Section 12J venture capital company is the lack of liquidity. Investments need to be held for at least 5 years in order to make full use of the tax benefit.
How does one take advantage of section 12J?
In order to benefit from the Section 12J tax incentive, one can invest in a newly registered Section 12J venture capital company or invest in an existing Section12J venture capital company.
What is the uppermost amount a section 12J VCC can invest?
There is no limit on the amount of the investments that can be made, however, the gross asset value of the investee company (the company into which an investment is made) may not exceed R50 million on the date of the investment (R500 million for mining companies). Subsequent to the date of the investment, the investee company’s gross asset value may exceed R50 million. However, the VCC is not limited to R50 million for any single investment as they may utilise several investee companies for any single investment.
Qualifying as an investee
The investee must be a company.
The company must be a resident.
The company must not be a controlled group company in relation to a group of companies.
The company’s tax affairs must be in order (a tax clearance certificate must be provided to SARS.)
The company must not be listed in terms of Section 41.
During any year of assessment, after 36 months after first issue of a share to a Venture Capital Company, the sum of the “Investment income” derived by the company must not exceed 20% of its gross income for that year of assessment.
During any year of assessment, after 36 months after first issue of a share to a Venture Capital Company, not more than 50% of the aggregate income from carrying of any trade, was derived from a shareholder of the VCC, directly or indirectly.
The company must not carry on any of the following impermissible trades:
- Any trade carried on in respect of immovable property, except trade as a hotel keeper (includes bed and breakfast establishments)
- Financial service activities such as banking, insurance, money-lending and hire purchase financing
- Provision of financial or advisory services, including legal, tax advisory, stockbroking, management consulting, auditing, or accounting
- Operating casino’s or other gambling-related activities including any other games of chance
- Manufacturing, buying, or selling liquor, tobacco products or arms or ammunition; or
- Any trade carried on mainly outside the Republic
No person who holds shares in the VCC has more than 50% participation or voting rights in the investee company. The investee company was not acquired from a person who holds shares in the VCC.
Qualifying as an investor
Any South African registered taxpayer qualifies to invest in an approved Venture Capital Company.
Where any loan or credit is used to finance the expenditure in acquiring a Venture Capital share and remains owing at the end of the year of assessment, the deduction is limited to the amount for which the taxpayer is deemed to be at risk on the last day of the year of assessment.
A deduction will be recouped in the taxpayer’s hands where the taxpayer is a connected person (i.e. someone holding more than 20% of a class of share) of the Venture Capital Company after 36 months from the first issue of a VCC share.
On request from SARS, the investor must verify a claim for a deduction by providing a Venture Capital Company investor certificate that has been issued by an approved Venture Capital Company, stating the amount of the investment and the year of assessment in which the investment was made.
The taxpayer must hold the shares in the VCC for a period of 5 years for their tax deduction to be permanent. The deduction is recouped (recovered) if the taxpayer disposes of the Venture Capital shares prior to the end of the 5 year period to the extent of the initial Venture Capital Company investment (under the general recoupment rules of section 8(4) of the Act.)
Standard income tax and CGT rules apply in respect of the disposal of Venture Capital Company shares.
Investor guidelines & restrictions
The full amount invested in a Section 12J fund is 100% deductible from an investor’s taxable income in the year in which the investment is made, subject to the regulations in Section 12J of the Tax Act. This applies to individuals, companies, partnerships, and trusts. An investor in a Section 12J fund will therefore obtain a 45% tax break (for an individual taxpayer at the maximum marginal rate) at the time of investment.
If the investment in a Section 12J fund is held for a minimum period of 5 years, the tax benefit conferred at the date of the investment will become permanent, i.e. NO recoupment of the tax benefit in the hands of the investor when the investment in a Section 12J fund is subsequently realised.
A Section 12J VCC can invest in companies with book value assets not exceeding R50 million.
Requirements of a section 12J VCC
The SARS Commissioner must approve a VCC if the:
- Company is a resident;
- The sole object of the company is the management of investments in qualifying companies
- Tax affairs of the company are in order and the company has complied with all the relevant provisions of the laws administered by the Commissioner;
- The company has an FSP license
The company must satisfy the following requirements by the end of each year of assessment after the expiry of 36 months from the first date of issue of Venture Capital shares:
- A minimum of 80% of the expenditure incurred by the Venture Capital Company to acquire assets must be for shares in Qualifying Companies (Investees)
- Each investee company must, immediately after the issuing of the qualifying shares, hold assets with a book value not exceeding R500m in any junior mining company; or R50m in any other qualifying company
- The expenditure incurred by the Venture Capital Company to acquire qualifying shares in any one Qualifying Company must not exceed 20% of capital raised in the VCC
- A maximum of 69.9% of the equity in a Qualifying Company can be held by the Venture Capital Company
Responsibilities of a VCC
The Venture Capital Company must maintain a record of all its investors and issue valid Tax Certificates to the investors to enable them to complete their tax return. A copy of this record must be submitted to SARS bi-annually and must contain the necessary details required by SARS.
The Venture Capital Company must maintain a record of all its investees. A copy of this record must be submitted to SARS bi-annually and must contain the necessary details required by SARS.