How section 12J investments complement the business rescue process Submission Details
Author: Luxury Brands from Luxury Brands.
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For editors, additional information on Section 12J
The South African Revenue Services introduced the Section 12J tax incentive scheme in 2009 to stimulate job creation, small business development and economic growth. It allows South African taxpayers to deduct 100% of their investments into qualifying VCCs from their current taxable income. The following example illustrates the position at end-February 2019:
A taxpayer who earned R2 million in the 2019 tax year would be liable for R900,000 in taxes. If this taxpayer invested R1 million in a qualifying section 12J VCC he or she could reduce their tax liability by R450,000.
The main motivation for investing in a section 12J VCC is the ‘up to’ 45% reduction in tax payable in the tax year the investment is made. Looking at the recent past, a basic analysis suggests that an individual taxpayer who opts for an upfront reduction in his or her taxes coupled with a five year section 12J investment could outperform another who takes the tax hit in the current year and instead invests in the market. (The same rationale applies for section 12J investments made by companies or trusts, though the tax concession for a company is limited to the top company tax rate of 28%).
Analysts warn that investors should seek out VCCs with the potential to deliver long term financial value on the back of high-quality investments rather than focusing on the upfront tax benefit. Before investing they should consider the minimum investment term of five years; the cost structure applied by their preferred investment vehicle; and the quality of its underlying investments. They should also be aware of the additional tax implications triggered upon exiting the investment.
Upon exiting the investment, the base cost for the taxpayer’s capital gain calculation is set to ‘zero’ to compensate for the initial tax benefit. The capital gains tax liability on the Section 12J VCC investment is thus higher than that for investments made outside of this arrangement.
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