section 12j FAQ
Frequently asked questions
A Section 12J company is a venture capital company through which tax-based incentives are created in order to attract investors.
Any taxpayer who is a resident of the Republic of South Africa can benefit from this tax deduction. This includes individuals, companies, and trusts.
There are two ways for an investor to claim the tax relief offered by Section 12J.
1 – By reducing their taxable income for the purposes of submitting provisional tax returns.
2 – By receiving a refund of tax through their income tax assessment.
The tax relief is provided for South African taxpayers investing in a registered Section 12J company. The tax relief is claimed in the year the investment is made. The table below shows the effect of the income tax relief on an individual and company basis. It assumes that the initial investment is R1 000 000. The tax rates for individuals and companies are used accordingly.
|Initial Investment||(R1 000 000)||(R1 000 000)|
|Tax relief (in tax year of initial investment) *||R450 000||R280 000|
|Net Investment (Risk Capital)||(R550 000)||(R720 000)|
|Effective tax relief *||45%||28%|
*Assuming highest marginal tax bracket for individuals/trusts
A 100% tax deduction is allowed in the same year in which the investment is made.
Investors who dispose of their shares before 5 years from the date of the allotment of shares will be subject to tax as a recoupment on the initial tax deduction.
A tax certificate with the details of the investment in the Section 12J investment may be required to substantiate a claim for a tax deduction.
A disadvantage of investing in a Section 12J venture capital company is the lack of liquidity. Investments need to be held for at least 5 years in order to make full use of the tax benefit.
The minimum investment required is very fund specific. Investments can vary anywhere from R10 000 – R100 000.
The maximum investment for an individual/trust is R2 500 000 and R5 000 000 for a company.
A loan or gearing may be used to make an investment, subject to the provisions of s12(3)(a) in the Income Tax Act.
A Section 12J VCC can invest in any sector except for:
- Trade in respect of immovable property, excluding the hospitality sector (eg: hotels, bed, and breakfast, etc.)
- Trade in respect of the financial services sector
- Trade being carried on in respect of advisory services including legal, tax, consulting, or accounting services
- Trade being carried on mainly outside the republic
- Any trade being carried on in respect of gambling, tobacco, liquor as well as firearms and ammunition
In order to benefit from the Section 12J tax incentive, one can invest in a newly registered Section 12J venture capital company or invest in an existing Section12J venture capital company.
There is no limit on the amount of the investments that can be made, however, the gross asset value of the investee company (the company into which an investment is made) may not exceed R50 million on the date of the investment (R500 million for mining companies). Subsequent to the date of the investment, the investee company’s gross asset value may exceed R50 million. However, the VCC is not limited to R50 million for any single investment as they may utilise several investee companies for any single investment.