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Part two: All you need to know about Section 12J

Ventureburn will be kicking off its first webinar series at the start of September 2020. Held in partnership with Kalon Venture Partners, a registered Section 12J Venture Capital Company, these informative webinars will offer insight into everything you need to know about Section 12J. 

Ventureburn will be hosting its first-ever webinar series focusing on Section 12J

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In continuation of our series focusing on Section 12J and preparation for the webinar series, venture capitalist Clive Butkow of Kalon Venture Partners shares the answers to the most frequently asked questions regarding Section 12J. 

A Section 12J investment provides the investor with a unique opportunity to invest in a tax-deductible investment vehicle. 

Who can benefit from a Section 12J investment?

 Any South African taxpayer is allowed to benefit from a Section 12J tax deduction. Therefore, anyone who pays tax in South Africa (i.e. foreign or local companies, individuals, and trusts) may invest in a Section 12J VCC and claim the deduction.

When do I claim the Section 12J investment as a tax deduction?

 The tax deduction is claimed in the same tax year as when the investment into the Section 12J VCC is made.

 Are Section 12J VCCs utilised as a vehicle to raise funding?

Section 12J VCCs are outstanding vehicles for fund raising activities for project developers, as investors will receive an almost immediate return on their investment through the tax deduction.

 How much is an investor allowed to invest into a Section 12J VCC?

 A retail investor may invest up to R2.5 million per annum whereby a company can invest up to R5-million. However, an investor will maximise his or her returns by investing up to his/her taxable income for that tax year in the case of an individual or trust or his or her current and future taxable income in the case of a company. Kalon Venture Partner’s minimum investment during February, 2020 was R 110 000. 

 Is an investor allowed to use debt funding to invest in a Section 12J VCC and still claim the investment as a tax deduction?

 The answer is yes. However, the investor should be liable for settling the outstanding debt regardless of whether the returns generated by the investment are adequate to settle the repayment of the debt.

 What are the perceived limitations associated with a Section 12J VCC investment?

 There are two perceived limitations from an investor’s perspective:

  •  An investor must hold his/her shares in a Section 12J VCC for a minimum period of five years to retain the tax deduction of the initial investment amount. If the investor disposes of his/her shares prior to the five-year period, the initial investment amount will be recouped, and the investor will be required to pay back the full tax saving with no additional interest or penalties.
  • The investor’s base cost for Capital Gains Tax (CGT) purposes will be zero when the investor exits the Section 12J VCC, which means that an investor could potentially pay CGT on the initial investment amount plus growth on the investment.

How do investors exit their investments in Section 12J VCC?

 Numerous options will allow an investor to realise his/her investment in a Section 12J VCC.

 Two of the more common options are:

  • The investor could sell the shares in the Section 12J VCC to a third party, or
  • Section 12J VCC acquires the shares from the investor from the proceeds on the disposal of the underlying investment.

What are the typical fees charged by a Section 12J VCC?

 VCC’s typically charge the following fees (or a combination of the following fees):

  • A Capital raising Fee
  • An Administration Fee
  • A management or performance fee, based on the performance against a benchmark. 

Kalon Venture Partners charge a 2.5% per annum administration fee and a 20% performance fee. 

There are close to 200 registered Section 12J Companies in South Africa currently and it is important to choose the right company with which to partner.

This content has been created in partnership with Kalon Venture Partners, a registered Section 12J Venture Capital Company.

Read more: Part one: All you need to know about Section 12J
Read more: New Section 12J impact study shows scheme has been a success says association
Read more: Experts raise concern over new Section 12J rule that limits deductions for investors

Featured image: Pixabay via Pexels

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