12J FAQs

What is Section 12J?

One of the main challenges to the economic growth of SMEs is access to equity finance. Through Section 12J, the South African Government aims to stimulate the economy and promote investment in South African private companies, whilst providing tax benefits to investors. Section 12J is designed to encourage individual and corporate investors to invest in a range of smaller, higher-risk trading companies by investing through approved VCCs.

Description Individual/Trust Company
Investment R1 000 000 R1 000 000
Income Tax Rate 45% 28%
Tax Relief R450 000 R280 000
Net cost of investment R550 000 R720 000

How does a section 12J investment work?
  • The Investor (a South African taxpayer) buys Ordinary Shares in the Company, which is a SARS approved Section 12J VCC.
  • The VCC issues Ordinary Shares to the Investor and provides the Investor with a share and tax certificate.
  • The Investor claims the Section 12J deduction from SARS.
  • The VCC allocates capital (equity finance) to a Qualifying Company.
  • The Qualifying Company issues Qualifying Shares to the VCC.
  • The Qualifying Company pays dividends to the VCC.
  • The VCC pays dividends to the Investor.
How do I claim the tax deduction?

If you are a provisional tax payer, you reduce your estimated income when you submit your first, second or third provisional tax return. If you are a PAYE employee, you claim the deduction by answering “yes” to the question about VCC investments in your ITR12 return and specifying your VCC investments. On request from SARS, you must verify a claim for a deduction by providing the tax certificate issued by the VCC. This certificate states the amount of the investment and the year of assessment in which the investment was made.

I am a salaried employee. Can I contribute to a section 12J VCC as a payroll deduction?

This is currently not catered for in the legislation and, because tax is deducted from your salary, you will have to claim the section 12J deduction in your ITR12 return. You will then receive a refund on the tax that was previously deducted from your salary.

Who can invest in a section 12J VCC?

The section 12J deduction is available to any South African registered taxpayer. Therefore, the Investor can be a natural person, trust or other entity and need not necessarily be a resident. The deduction is not available to a person who is a connected person in relation to the VCC.

What's the catch?

You must remain invested for at least five years. If you dispose of the investment within five years, SARS will recoup the tax deduction.

Can I make withdrawals from my investment?

Refer to the previous question. If you make a withdrawal within the first 5 years, SARS will recoup the tax deduction you claimed when you first made the investment.

How much can I invest?

The minimum investment in our section 12J VCCs is R1,000,000. There is no legislated cap on the maximum amount you may invest in a VCC, although practically you would limit the investment to your aggregate taxable income for the year of investment.* A Section 12J deduction that exceeds an Investor’s taxable income does not give rise to an assessed loss that can be carried over to following years.

When can I invest?

You can invest at any time but bear in mind that the section 12J tax dispensation ends on 30 June 2021. This sunset clause was added to allow the Department of National Treasury to review the efficiency of the dispensation and to make a decision as to the extension (or removal) of this period. Should this period not be extended (or removed), no deduction will be allowed in respect of shares acquired after 30 June 2021. However, existing Section 12J VCCs will continue to carry on business, but new shares issued will not be eligible for a tax deduction.

What fees do I pay?

0% Most investment companies charge a once-off capital raising fee and an annual management fee for their services. These fees range from 0.5% to 3%. We derive our income from fees levied on the underlying investee companies and not on investor capital. Therefore, if you invest in one of our VCCs, you do not pay any fees.

Are there any risks?

Yes. There are generally two types of risk associated with a VCC investment:

 

  • Investment risk – The qualifying companies in which a VCC can invest are usually small or new companies with a higher risk profile than larger, established or listed companies. However, because of the section 12J deduction, the capital at risk is reduced by the investor’s applicable tax rate, thereby lowering some of the investment risk. Our investment process is governed by an investment committee who carefully selects the VCC’s investment opportunities. Our mandate is to invest in companies with a repeatable and scalable business model. Through active involvement in the investee companies, we aim to mitigate some of the common risks associated with venture capital investment. Section 12J further provides that a VCC may not invest more than 20% of all investor-acquired funds in a single investee company. This ensures a diverse spread of investments to mitigate risk.
  • Liquidity risk – Due to the minimum investment period of 5 years, your capital is tied up until this period expires and, even after the 5-year period has expired, your VCC shares are not readily marketable. We aim to have internal resources available to buy back shares from investors wishing to dispose of their investment at the end of the 5-year period. Although we do not guarantee the liquidity of your VCC shares, we do not envisage that there will be any material obstacles should you wish to exit.
Do dividends tax apply?

Yes, if the investor is an individual or a trust.
No, if the investor is a South African company.

Do I pay capital gains tax (CGT) when I dispose of my investment?

Yes.
CGT will be payable on the sale of VCC shares. Where an investor claimed the section 12J deduction, the base cost of the VCC shares will be zero.

Can I borrow to fund an investment in a VCC?

Yes.
If an investor uses a loan or credit to finance the investment, the deduction is limited to the amount the taxpayer has transferred into the VCC, and not the total balance of the loan or credit. If an investor invests in a VCC using a loan or credit, the following requirements apply:

  • The Investor must genuinely be at risk should the VCC lose value or be liquidated.
  • Any portion of the loan must be owed by the investor on the last day of the year of assessment.
  • The loan must be repayable within five years.
  • The loan may not have been granted directly or indirectly by the VCC itself.
Can my investment be used as security to borrow money?

Yes.
Because the investments in our VCCs are valued throughout the investment period, lenders are able to determine the collateral value of the investment should you want to pledge your investment as loan collateral.

Disclaimer

The content provided on this page is neither a prospectus nor is it an invitation to the public to subscribe for securities, and should not be construed as investment, tax, B-BBEE, legal, accounting and/or any other advice. For advice on these matters and before making any investment decision, we recommended that you consult your preferred relevant advisers. This page does not contain all the information that you may require, nor is it intended to replace any form of financial, legal or technical due diligence. Investments made into a venture capital company (VCC) are equity in nature (shares) and shares are classified as financial products. The value and price of VCC shares can increase as well as decrease over time, depending on the value of the underlying securities, market conditions and other factors. It is possible for an investor to lose some, or all, of the money they have invested. All returns provided are estimates and past performance is not an indication of future performance. There are no guarantees in place when investing in VCC shares. The investor carries the full investment risk and does not have a claim against the VCC, the Investment Manager or the Investment Committee in the event of the realization of this risk. The VCC remains the owner of the underlying investment shares to a maximum of 69.9% in the underlying investment. While all efforts have been made to ensure the accuracy of the information provided on this page, it has not been independently verified, and neither the VCC nor the Investment Manager gives any guarantee, representation or warranty, whether express or implied, in relation to the accuracy or completeness of the information, or that reasonable care has been taken in compiling or preparing the information.