Use Your Tax Cashflow to Build Your Wealth
With current marginal tax rates of 45% for an individual and a trust, we urge you, in addition to ensuring that you maximise your Retirement Annuity Contributions, to consider the highly tax efficient Section 12J (S12J) investments, particularly if you are selling a business or assets that have resulted in Capital Gains in the 2018 tax year. The Finance Minister, Malusi Gigaba, has warned of a tough budget and these investment vehicles will allow you to save tax whilst building your investment wealth.
Salient features of a Section 12J investment:
- Up-front tax relief up to 45% for individuals in the maximum marginal tax bracket over R1.5m per annum.
- The full amount of your investment is tax deductible provided you hold the investment for a minimum of 5 years.
- At the end of the 5 years, there is no recoupment of the tax deduction.
- Capital Gains Tax is payable on the sale of the investment on the proceeds at the individual’s inclusion rate, currently 40%. Currently you may also distribute Capital Gains to the individual beneficiaries of a trust to benefit from the individual’s lower inclusion rate and possibly marginal rates if the investment is made in the trust.
- A typical investment term is 5 years (as required by S12J to retain the tax deduction), however investors can opt to stay in for as long as they prefer and continue to receive a return from the investment rather.
- There is usually no penalty charged should you need to disinvest before the 5 year period, however the early exiting investor will:
- suffer a recoupment of the tax deduction previously claimed, and
- may realise a loss on the selling price depending on the buyer making an offer.
- The payment into the investment is required before 20th February to qualify for the tax deduction for the 2018 tax year.
- There is a minimum investment amount per offering.
- All S12J Venture Capital Companies (VCC) are unlisted private companies. Investors are issued ordinary shares and are afforded all rights under the Companies Act.
- Investors are issued with S12J tax certificates in a prescribed format to assist you with the claiming of the S12J deduction when you submit your tax return.
Through our network we have reviewed various S12J offerings and have identified the following two which we think look attractive:
- A S12J VCC that installs solar projects at shopping centres, multi-tenanted buildings, large manufacturers. The investor earns approximately 25% Internal Rate of Return (IRR) net of fees over the minimum 5 year holding period. The company uses the best solar equipment available and they do significant due diligence on the installers ability to deliver the project according to strict standards. To date they have installed approximately 5 projects this year with another few to be completed by early next year. So far, all installations have been a success and performing according to budgets.
- A multi-asset, multi-strategy manager of investment funds with differing investment options depending on the investor’s risk profile. Targeted IRR’s (after costs and tax on realisation) and dividend yields make these attractive investments in their own right with investments into a portfolio of tangible high quality asset-backed companies with contractual revenue streams.
It is important to note, that as with Retirement Annuities and Tax Free Investments, your investment must be concluded and paid for prior to 28 February 2018. Both the above investments have cut off dates of 20th of February and S12J investments typically have minimum investments ranging between R100 000 and R500 000.
Please note that we do not perform a due diligence on any of these structures, however, we can refer you to our alliance partners to explore further. Kindly advise should you like to discuss these exciting offerings further.