Section 12J of the Income Tax Act allows investors a tax deduction of the capital amount of their investment in a registered Venture Capital Company (VCC) from their taxable income. Yes, believe it or not, this is true! Investors are entitled to deduct 100% of their investment as a tax deduction in the tax year in which the investment is made.
SARS has followed best practice from the UK , with their Venture Capital Trust “VCT ” regime, and have introduced this tax deduction into the South African Income Tax act.
This tax deduction effectively reduces the risk in the investment to 55% in the case of a marginal tax payer, whist still enjoying 100% of the upside.
Tax deductions when it comes to investments are not normally allowed. Usually tax deductions are only allowed on expenditure used in the production of income. The Section 12J tax deduction is only allowed when investments are made into a VCC registered with SARS.
VCCs issue tax certificates to investors, entitling them to make the tax deduction from their taxable income. An investor should keep the VCC tax certificate with all their other tax documentation.
This tax deduction makes venture capital an extremely compelling investment choice.