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Invest your Tax contribution – an investment to capitalise on

What is a Section 12 J Investment?

Designed to boost the local economy, Section 12J of the Income Tax Act stipulates that taxpayers who invest in qualifying S12J companies can deduct 100% of their investment against their taxable income in the year they invest [1]. Investors benefit from up to 45% [2] immediate tax relief, reducing the cost of the investment, providing downside protection and enhancing overall returns.

[1] Limited to R2.5m per individual/trust and R5m per company per annum;

[2] At the maximum marginal South African income tax rate;

What is a Section 12 J VCC Company?

A Section 12J VCC is a company, which has been registered as a Financial Service Provider (FSP) with the Financial Sector Conduct Authority (FSCA) and has been approved by the South African Revenue Service as a Venture Capital Company (VCC).

The sole objective of the Section 12J VCC is to manage investments in qualifying companies, which should stimulate local investment in small to medium enterprises (SMEs) and address unemployment in South Africa. This is done by providing the investor (South African taxpayers) with a tax incentive for investing in a Section 12J VCC.

Venture capital investments are pooled investment funds that manage the money of investors who seek strong growth potential over the long term. These investments are more suitable for investors in high-income brackets who are prepared to accept the risks inherent in investments of this nature.

Overview of how VCC investment works:

Investors who qualify will be able to invest in approved VCC’s in exchange for the issuance of Venture Capital Shares and investor certificates. In respect of their investments in an approved VCC, investors are able to exercise tax deduction benefits.

In turn, the approved VCC will invest in qualifying investee companies in exchange for qualifying shares.

How does the Tax incentive work?

Taxpayers who invest in a Venture Capital Company (VCC), approved by the South African Revenue Services (SARS) in accordance with section 12J of the Income Tax Act, are entitled to a full tax deduction on monies invested up to R2,5 million each tax year for individuals and trusts, and R5 million each tax year for companies, thereby achieving an immediate return of up to 45% for individuals and trusts, and 28% for companies (being the reduction in taxes payable or recoupment of tax already paid in the year of their investments).

For an individual Investor, an investment in the Company means that 45c* of every R1 invested is immediately returned (reducing tax for the next tax payment, or claiming back tax already paid), with a remaining capital exposure of only 55%* - significantly mitigating investment risk, as illustrated by the example below:

Who qualifies to invest?

This is for both natural (sophisticated investors) and juristic persons (a juridical person is a non-human legal entity, in other words any organization that is not a single natural person but is authorized by law with duties and rights and is recognized as a legal person and as having a distinct identity) with liquid capital of R 1mil or more to invest.

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