The Section 12J tax programme, which was introduced by the South African Revenue Service (SARS) in 2009, is set to end on the 30 June 2021.
“Essentially Section 12J is an incentive to get a country’s tax payers to invest in its own economy and in our case specifically the SMME economy because that is what makes the most jobs,” says Johannes Maree, CEO Destinata Capital. “This tax programme followed on the back of incentive programmes that were introduced in Canada, the United Kingdom and Australia which were very effective. In order to incentivise us as taxpayers, SARS has given us a 100 percent tax break on these types of investments, which is extremely powerful.”
“Let’s assume that we have an individual taxpayer who falls into the top tax bracket of 45%. If they make an investment of R1 million in a call account or on the JSE they will incur R450 000.00 tax. An investor that invests into a taxdeductible vehicle like 12J will get a million-rand tax deduction, which would mean a saving of R450 000 worth of taxes.”
Any South African taxpayer can invest in a Section 12J programme including salaried employees paying PAYE, provisional taxpayers, companies and/or trusts. Destinata Capital strives to make the 12J programme more accessible to the average South African. Typically, the companies act requires a minimum investment of R1 million in this programme. Destinata Capital has registered as a public company which allows prospectuses to be registered with the Companies and Intellectual Property Commission (CIPC) through which the R1 million minimum investment requirement is removed.
Consequently, Destinata Capital accept investments of R100 000.00. In addition, Destinata Capital offers investors the opportunity to leverage a cash portion, much like purchasing a property through a bond, to invest a larger amount of money in a Section 12J investment. Apart from the benefits received, the tax savings obtained from SARS can be used as a down payment on the loan.
Significantly, the sunset clause for these investments is the 30 June 2021 after which the tax deduction will fall away. “Practically speaking investors who have already taken part in a Section 12J investment programme will not be affected. The tax deduction still stands, and the funds still need to be managed in line with Section 12J legislation,” explained Maree. “However, investors qualify in the tax year that they make an investment and often wait until the last day of a tax year to make an investment, so they need to act a little bit sooner this tax year.”
There is an opportunity for companies and trusts to make a large S12J investment even if it pushes them to a tax loss position because they then have the opportunity to offset that tax loss against future taxable income. The benefit of the assessed loss can be worked off over a number of years.
The typical company that would benefit from this strategy is one that has identified Section12J as an investment vehicle that they wanted to make use of for a few years.
While retirements annuities also offer tax deductions the key difference is in the investment limits. A retirement annuity is limited to R350 000.00 per annum or 27.5% of your taxable income. In a Section 12J investment, an individual can contribute up to 2.5 million per annum, a trust up to 2.5 million per annum, while a company can contribute up to R5 million per annum.
Another difference is that a Section 12J investment stands for five years while a retirement investment can only be exited on retirement, unless the investor is 55 years of age.
Destinata Capital has a stringent due diligence process and focuses its investments in hotel type accommodation which is a strong asset class. “There is safety in property as you always have strong assets on your balance sheet,” explains Maree. The company also focuses on security companies as security services are an essential service in South Africa.
Destinata Capital also focus on asset rentals which give a slightly higher cash yield than property.
For more information visit www.destinataholdings.com
Johannes Maree from Destinata Capital talks to us about the S12J programme (Part One)
Johannes Maree from Destinata Capital talks to us about the S12J programme (Part Two)