12J Investing provides a unique tax based regime designed to stimulate economic growth by getting companies & individual to invest in a wide range of private companies, and get excellent tax benefits for doing so. Government identifies one of the major challenges to the growth of small and medium sized businesses and junior mining exploration is access to equity funding. Section 12J is subject to the provisions of the Income Tax Act No. 58 of 1962 (the Act) and allows companies or individuals to write off 100% of their investment against their taxable income in the year that they invest in these companies.
Section 12J VCC’s
There is strict criteria to be met before SARS will approve a Venture Capital Company as a Section 12J VCC. This criteria includes being FSB regulated and a registered financial services provider. A SARS approved Section 12J VCC (Venture Capital Company) is an investment holding company whose shareholders / investors are individuals, funds, trusts or companies with an aim of investing within the South African market. VCC’s are intended to be marketing vehicles that attract retail investors by providing access to a range of companies which have the potential for large growth but need funds to unlock the potential growth. The VCC aims to make money by investing in these smaller trading companies and raises the funds required by the smaller trading companies by 12J Tax Reliefs
The 2008 South African Budget Review found that one of the main challenges to the economic growth of small and medium-sized businesses was access to equity finance. Through Section 12J, the South African Government aims to stimulate the economy and promote investment in South African private companies, whilst providing tax benefits to investors. For investors with a higher risk appetite, or who have maxed out their Retirement Annuity, Pension Fund and Tax Free Savings Account contributions, a Section 12J Investment into a SARS approved Venture Capital Company (VCC) is the perfect way to allocate capital in a tax free way in order to maximise your tax deductions. The tax rebate is up to 45% for individuals, funds and trusts and 28% for companies. This rebate is in the form of a reduction of the taxpayer’s taxable income by the amount invested into the VCC and is claimed in the first year of the investment and except in the case of Venture Capital Shares held by a taxpayer for longer than five years, the deduction is recouped (recovered) if the taxpayer disposes of the Venture Capital Shares to the extent of the initial VCC investment (under the general recoupment rules of section 8(4) of the Act)).
Who Qualifies As An Investor
- Any taxpayer qualifies to invest in an approved VCC.
- Qualifying investors can claim income tax deductions in respect of the expenditure actually incurred to acquire shares in approved VCCs.
- 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. EXTERNAL GUIDE VENTURE CAPITAL COMPANIES GEN-REG-48-G01 REVISION: 6 Page 5 of 9
- No deduction will be allowed where the taxpayer is a connected person to the VCC at or immediately after the acquisition of any venture capital share in that VCC.
- On request from SARS, the investor must verify a claim for a deduction by providing a VCC Investor Certificate that has been issued by an approved VCC, stating the amount of the investment and the year of assessment in which the investment was made.
- Except in the case of Venture Capital Shares held by a taxpayer for longer than five years, the deduction is recouped (recovered) if the taxpayer disposes of the Venture Capital Shares to the extent of the initial VCC investment (under the general recoupment rules of section 8(4) of the Act)).
- Standard income tax and CGT rules apply in respect of VCC shares.
Contact us today for a complete list of approved Section 12J VCC’s
Who Qualifies 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 requested from SARS to support this requirement);
- The company must be an unlisted company (section 41 of the Act) or a junior mining company; A junior mining company may be listed on the Alternative Exchange Division (AltX) of the JSE Limited;
- During any year of assessment, the sum of the “Investment Income” derived by the company must not exceed 20% of its gross income for that year of assessment;
- 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, stock broking, 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.
- There are no special tax rules for investee companies. The standard tax rules will apply.
Investee’s are invited to contact us for assistance