At first glance it appears that Section 12J is here to save us all a whole lot of tax… but if you dig deeper you will see that there are many rules and it’s quite complex.
Johannesburg, South Africa – Recently Helen Zille published an opinion piece about how it would be “perfectly legal” to join a Tax Revolt in South Africa, it perked our interest as the rest of South Africa but we wanted to understand what the “Section 12J” was and how it could be used.
“If you want a perfectly legal way of mobilising a targeted tax revolt, go to SARS’s own website, and look at Section 12J of the Income Tax Act,” Helen Zille was told.
I did, and then consulted actuary Derrick Hyde, a director at a company specialising in forming, administering and managing Section 12J companies, who explained an entirely legal way to get 100% of your annual income tax refunded (even if it has already been deducted from your salary through PAYE).
It works like this, Mr Hyde explained: If you invest the equivalent of your annual income in approved funds that support small enterprises by investing in venture capital, you can receive a 100% tax deduction.
Those of us who have saved small amounts of money every month throughout our working lives will have sufficient savings to use this opportunity.
Before the end of this tax year (28 February 2019), anyone who invests the equivalent of their annual salary in an approved fund to support start-ups, will get all their tax refunded — while contributing to economic growth and job creation.
At first glance it appears that Section 12J is here to save us all a whole lot of tax… but if you dig deeper you will see that there are many rules and it’s quite complex.
We spoke to Nola Rae, author of Money Wit: Money Wit: A guide to finally becoming financially savvy, to find out what this all meant.
The intention of Section 12J is to incentivise individuals or companies, by means of a tax break, to assist in facilitating economic growth and job creation in sectors of the SME market.
“But do you fully understand what is involved in investing your money in this venture. I used the word invest because that is exactly what you need to do. You need to invest your money in a compliant, registered Venture capital Company (VCC) that in turn invests the money in SME businesses, based on the VCC’s portfolio and decisions. Although you get the tax break, the money invested has not necessarily got any return guarantees.”
Rae set out pointers that all South Africans should consider.
- Venture Capital by nature has an element of risk.
- You should have free money to invest.
- The tax break that you get is a once-off amount on your upfront investment.
- There are minimum investment amounts that you need to make.
- Your funds need to be invested for a minimum of 5 years.
- If you do sell your shares, after 5 years you will be taxed on the capital growth – Capital Gains Tax will apply. Because of your initial tax break the base cost of your investment will be zero, so you will pay CGT on the full value that you are paid out.
- If you receive any dividends during your investment period, you will pay Withholding Tax.
- There are risks involved – as with any investment.
- If the VCC loses its 12J status due to non-compliance, you could be required to pay back your tax benefit.
Section 12J can work for you but you need to make an informed decision. Get all the facts and know where your money is going.
Top tips:
- Get advice from a professional.
- Investigate the VCC that you are investing in, such as; risk strategy, credibility, track record, compliancy, registration with FSB and SARS, dividend strategy.
- Understand your appetite for risk.
- Get the full picture. Evaluate the short-term benefits as well as the long-term tax and risk implications.
- Good decisions are always well informed.
Remember that Knowledge is the most powerful tool in managing your money
For more information about Section 12J, click here.
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