WHAT IS SECTION 12J

How does S12J of the Income Tax Act work?

Investing in a Section 12J company allows investors a 100% tax incentive from their tax liability.

Section 12J of the Income Tax Act No. 58 of 1962 was legislated by the South African Government to incentivise South African taxpayers to invest in local companies and to receive a tax deduction of up to 100%. The entire amount that is invested can  be deducted from the investor’s taxable income.

Approved venture capital companies (VCCs) such as Optomise, provide the opportunity to invest in approved S12J compliant companies.

Once the funds have been received by Optomise, the equity finance is invested into the S12J companies and the investor is issued with an S12J tax certificate and their venture capital shares. This will include the name of the taxpayer, the year in which the investment was made, the amount of the investment made, and the tax registration number of the tax payer. The tax certificate will provide the investor with a 100% tax deduction for the funds invested for that tax year.

South Africans tax payers who are eager to invest in South Africa would be wise to investigate the S12J opportunities available to reduce their taxable income.

WHAT IS SECTION 12J

Investor guidelines and restrictions

The full amount invested with Optomise (100%) is deductible from your taxable income in the year in which the investment is made. This applies to individuals, companies and trusts.

  • 1No tax deduction will be allowed where the tax payer is a connected person to the VCC at or immediately after the acquisition of any venture capital shares in the VCC.
  • 2The investor must hold the shares in the VCC for a period of five years. If the investor disposes of the shares in the VCC before the five year time period has lapsed, there will be a recoupment of the tax saving (under the general recoupment rules of section 8(4) of the Act)).
  • 3Investors can claim income tax deductions in respect of the expenditure incurred in exchange for VCC shares.
  • 4After the investment has been made into qualifying company (QC), the total book value of assets of the QC may not exceed R50 million.
  • 5VCC’s may not invest more than 20% of all investor-acquired funds in any single qualifying investee company. This ensures that the incentive achieves its objective of supporting privately-owned companies while simultaneously creating a diverse spread of investments to mitigate risk.
WHAT IS SECTION 12J

What does an investee need to qualify as a S12J company?

Investees must be a company and must be resident in South Africa.

They cannot be a controlled group company in relation to a group of companies.

Investee company’s tax affairs must be in order (a tax clearance certificate must be requested from SARS to support this requirement).

The company must be unlisted (section 40 of the Act) or it must be a junior mining company.

During any year of assessment, the sum of the ‘investment income’ derived by the company must not exceed 20% of its gross income for that year.

The qualifying company must not carry on a trade in respect of any of the following sectors:

  • Any trade in immoveable property, except as a hotel keeper (includes bed and breakfast establishments);
  • Financial service activities such as banking, insurance, money-lending and hire purchase financing;
  • Provision of financial or advisory services, including legal, tax advisory, stock broking, management consulting, auditing, or accounting;
  • Operating casinos or other gambling activities, including any games of chance;
  • Manufacturing, buying or selling liquor, tobacco products or arms or ammunition; or
  • Any trade carried on mainly outside South Africa
  • There are no special tax rules for investee companies. The standard tax rules will apply.