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Since its introduction in 2009, South Africa’s Section 12J tax incentive has been an unmitigated success – creating jobs, stimulating the economy far more than other government incentives, and netting lucrative returns for investors.
A 2020 study showed that the total assets under management under the scheme exceeded R9-billion.
But with talk that the incentive could be sunsetted, the time is now for investors to take advantage of the opportunity while it’s still available
So what’s all the fuss about the 12J incentive?
What is 12J?
The Section12J tax deduction initially granted investors a 100% write-off for their investment in the same year – on condition that these were investments into qualifying SMMEs.
Qualifying Section 12J investments offered individuals, trusts and companies resident in South Africa a tax rebate on investments (up to 45% for individuals and trusts, and 28% for companies), if made through an approved venture capital company (VCC). The income tax relief under Section 12J was designed to be provisional and only became permanent if investors held their VCC shares for a minimum period of five years.
Since 2015, deductions have been limited to R2.5 million for individuals, while companies were limited to R5 million, per tax year.
1.It’s a low-risk way of getting into venture capital
The venture capital space is traditionally risky. Most VCs only expect one out of every 10 companies in which they invest to succeed. When a company does make it big, however, the returns are super-sized, with industry players typically referring to 10X – or a tenfold return on investment.
Making use of a 12J vehicle dramatically reduces that risk, because the investor would otherwise have been taxed on a significant portion of their investment money.
2.It makes investing more affordable
The fact that 12J is structured as a rebate means that it also reduces the cost — and increases the value — of Venture Capital-style investments.
For example, if you were to invest R1 million in a company covered by 12J, you’d get a 45% rebate. Effectively, that means you acquire shares worth R1 million in a company for an outlay of just R550 000.
3. It provides essential diversification
If 2020 showed anything, it was how unreliable traditional investment vehicles such as equities, interest-bearing instruments, and property can be. As countries around the globe shut down with the onset of the COVID-19 pandemic, stock markets crashed. And in a bid to rescue faltering economies, many governments slashed interest rates, instantly diminishing returns. South African property prices, meanwhile, have been falling in real terms for some time.
A 12J investment is less susceptible to those geopolitical shifts and provides a useful way for investors to diversify their portfolios.
4. It makes a real difference
Many high net worth individuals opt to take their money offshore to address the issue of large tax bills. Unfortunately, once that money leaves South Africa, it’s lost to the country forever.
By investing in a 12J vehicle, those individuals can ensure that their money is put to work here, benefiting the nation, without any fear of misappropriation or corruption. According to analysis by the 12J Association of South Africa, the incentive has created an estimated 5 250 permanent jobs. Over the short term, Section 12J investments also created an equal number of temporary (mostly construction) jobs. The report also indicated that Section 12J investments had the potential to create a further 30 000 jobs if the lifespan of these investments were to be extended.
At a time when jobs are desperately short supply, backing a 12J vehicle makes perfect sense for anyone seeking to make a positive impact in South Africa.
Doing your homework
Of course, investors shouldn’t just throw their lot in with any venture capital company (VCC) that has a 12J fund. They need to do their homework and identify a team with a proven track record of providing returns to investors, which has experience in the industries in which they invest, and which boasts a transparent fee structure.
Importantly, they should also share your vision and ethos, leaving you entirely confident that your money will be used in ways with which you’re comfortable.
This article was written by Bas Hochstenbach, co-founder and Partner, Entrepreneurs for Entrepreneurs Africa.
Featured image: Bas Hochstenbach, co-founder and Partner, Entrepreneurs for Entrepreneurs Africa (Supplied)