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Section 12J provides an avenue for individuals and businesses seeking to reduce tax liabilities and creates a source of return in a market which is overrun with volatility and uncertainty. 

There are a few things you should know about this alternative asset class.

When the Income Tax Act was amended in 2009, S12J was introduced as a means of providing tax incentives for investors in the form of tax-deductible S12J companies. 

Investor Tax Deductions

When the Act was further amended in 2014, it greatly encouraged the registration of S12J companies. This was because the investors' tax deduction was made permanent.

The roles and objectives of S12J companies differ as well as the strategies and methodologies. This is testament to the fact that they aren’t all created equal. 

While some function as investment club entities for a group of friends to combine interests by investing together, there are others which are run by professional asset management companies.

The Financial Services Board needs to have issued the S12J company with a license and it would have to be registered with SARS. It is also recommended for them to register with the South African Venture Capital and Private Equity Association.

The S12J company uses the money invested in it by shareholders to invest in qualifying investee companies. 

As a means of supporting a variety of privately-owned companies and diversifying investments in order to limit risk, S12J companies aren’t allowed to invest more than 20% of acquired funds from investors in any qualifying investee company. 

While there are no limits enforced on the amount of money that an investor is allowed to invest in an S12J company, S12J companies may still apply a minimum or maximum investment amount for investors. 

The entire amount used to purchase shares in the S12J company can be claimed by the investors as a deduction from taxable income for the year that the investment is made. 

To prevent the tax authorities from recovering the tax benefit the shares need to be held for five years minimum. Thereafter, capital gains tax will be enforceable on the entire amount after the shares have been sold

The qualifying investee company that is invested in is determined by the strategy used by each individual S12J company. 

Whether it is a high risk start up operation, or a mature business which has a proven track record, the S12J company will choose the qualifying investee company from a sector which in line with their adopted strategy. 

Investors could run the risk of not being able to find a secondary market for the shares once the investment period has elapsed after the five year period. 

But, if it is well managed, an exit strategy is usually created by a S12J company to ensure that the shares can be liquidated.

Section 12 J Company Requirements

Being a South African entity and ensuring that trades are primarily taking place within the country are some of the requirements that need to be met by a qualifying S12J investee company. 

• The qualifying investee should not be dealing with trade in immovable property, be a financial service provider, or provide financial or advisory services. 
• It is also not allowed to be a gambling operation or involved in the manufacturing, buying or selling of liquor, tobacco product or arms and ammunition. 

Section 12 J - Sunset Clause

There is a sunset clause in place that was introduced with Section 12J. This will take effect on 30 June 2021 and might not be extended after that time. 

Thus investors are running out of time to take advantage of the tax benefits. Although, these benefits will still be received by registered S12J companies if the funds were invested before the cutoff period.

Some S12J companies may decide to charge service fees which cover the costs of having experienced managers to help ensure the growth of the investment. This is done through the careful selection of qualifying investee companies. 

They also ensure that the strict conditions which apply to the S12J investments are met in order for the tax benefit not to be forfeited. 

While you do improve your investment portfolio by investing with professional S12J companies, this does not mean that such an investment won’t have any risks. 

Therefore, it it is important for the investment strategy and mandate of the S12J company to be carefully studied so that you are aware of any potential risks with such an investment. 

Van Deventer & Van Deventer Inc. - Tax Attorneys Johanneburg

Contact us, for all your tax related issues.