Section 12J: tax-effective investments with community upside

Section 12J investment

Section 12J: tax-effective investments with community upside

Section 12J investments come into sharp focus near the end of the tax year as a way of reducing your tax liability. However, any investment requires due diligence regardless of how attractive the prospect of saving tax in the short term, and Section 12J investments are no exception.

Section 12J investment deductions incentivise taxpayers to invest in venture capital companies that fund small- and medium-sized enterprises with long-term growth potential (usually in the renewable energy, hospitality, manufacturing and agriculture sectors). This section of the Income Tax Act was introduced specifically to stimulate overall economic growth and create job opportunities.

Are Section 12J investments right for YOU?

Due to their venture capital nature, Section 12J investments are relatively higher risk and less liquid than other possibilities, so they are not suitable for everyone. However they may apply if you:

  • have a high marginal tax rate, and
  • have already contributed the maximum to your retirement funding options (retirement annuities, provident or pension fund).

Fast facts

  • Section 12J companies earn fees for managing your funds – generally upfront, annual and performance fees.
  • The minimum Section 12J investment is usually R100,000.
  • On redemption, the full proceeds are subject to capital gains tax. In addition, the full Section 12J investment contribution is only tax deductible if you retain it for a period of five years. If you hold it for less than five years, your tax refund will be recouped.

Do’s and don’ts around Section 12J investments

Don’t make a section 12J company investment purely for tax reasons. Ignore the tax factor initially, and evaluate your selections based solely on the merits of the underlying investments.

Do understand the fee structure and ensure that the fees are reasonable (particularly the performance fee component).

Do ensure that the investment has an effective exit strategy.

 

Morné Bezuidenhout CFP® is a wealth manager at Netto Invest.

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