Please note this article was sponsored by Fairtree Capital
The main points:
- A taxpayer can make an investment in a Section 12J company and this investment is 100% tax deductible if held for a period of 5 years or longer.
- If the taxpayer is an individual with a marginal tax rate of 45% or a trust, the taxpayer can invest R1 million and will effectively be paying R550 000 (R1 million - R450 000) for the investment since the full investment amount is tax deductible in the year of investment (provided the taxpayer has taxable income of R450 000 or more).
- A company (excluding a SBC which will be taxed at different rates) can invest R1 million and effectively be paying R720 000 (R1 million - R280 000) for the investment since the full investment amount is tax deductible in the year of investment (provided the company has taxable income of R280 000 or more).
- When the section 12J investment is realised in the future, the base for the capital gain will be 0 due to the initial benefit of 100% tax deductibility.
What is a Section 12J company?
The government has identified small and medium-sized entities (SMEs) as a major contributor to future economic growth. One factor that hampers the growth of SMEs is a lack of access to equity funding.
In order to alleviate this problem the government has added Section 12J to the South African Income Tax Act as a catalyst for equity funding for SMEs. Section 12J provides a marketing vehicle to venture capital companies (VCCs) due to the tax incentive.