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Treasury (through multiple amendments to Section 12J of the Income Tax Act) is incentivising South African taxpayers to invest in the local economy, via a tax deduction on the investment amount, provided the investment is made into an approved Section 12J Venture Capital Company (Section 12J VCC).

The benefit to the investor for making the investment in a Section 12J VCC, is a return on the investor’s full investment and a tax deduction on the amount invested.

Tax Deduction

Tax Deduction in the hands of the Investor

The investor will receive a tax deduction of 28% (for companies) and up to 45% (for individuals and trusts) on the full amount invested in The Silo 12J Fund during the year of the investment. However, the investment in The Silo 12J Fund must be held for a minimum period of 5 years in order for the tax benefit conferred at the date of investment to be permanent, i.e. should the investor elect to sell its investment prior to the 5 year period, the tax deduction would need to be repaid. Notwithstanding the limitation, the investor will be entitled to receive dividends during the 5-year period.

Tax saving and the effect on a R10 000 000 investment is shown below:

DescriptionIndividuals/Trusts*Corporates
Initial InvestmentR 10 000 000R 10 000 000
Tax relief (in the tax year of initial investment)(R4 500 000)(R2 800 000)
Net Investment (risk capital)R5 500 000R7 200 000
Effective tax relief45%28%

*For example, if an individual in the highest tax bracket invests R10 million into The Silo 12J Fund, the individual will receive a tax credit of up to R2 800 000 at the end of his/her financial year. What this means is that the investor’s risk capital will only be R7 200 000 and the investor’s return will be based on the full R10 million invested.

DescriptionIndividuals/Trusts*Corporates
Initial InvestmentR 10 000 000R 10 000 000
Tax relief (in the tax year of initial investment)(R4 500 000)(R2 800 000)
Net Investment (risk capital)R5 500 000R7 200 000
Effective tax relief45%28%

*For example, if an individual in the highest tax bracket invests R10 million into The Silo 12J Fund, the individual will receive a tax credit of up to R2 800 000 at the end of his/her financial year. What this means is that the investor’s risk capital will only be R7 200 000 and the investor’s return will be based on the full R10 million invested.

Ring-fence the investor’s exposure

With the aid of ENSAfrica, The Silo 12J Fund has incorporated a legal framework, which ensures that each investor or group of investors can ring-fence their full economic value associated with their specific investment. This is achieved through strict provisions contained in the Memorandum of Incorporation, which makes provision for the issue of a specific class of share to each investor or group of investors.

Qualifying investments

An investor looking to make use of The Silo 12J Fund to structure its investments and thereby benefiting from the tax benefits must consider the qualifying criteria in order to ensure that its investment/s qualifies in accordance with Section 12J, the qualifying criteria are as follows:

  • The investment must be an equity investment in a South African resident company.
  • The company’s tax affairs must be in order.
  • The company must be an unlisted company (section 41 of the Act) although a junior mining company may be listed on the Alternative Exchange Division (AltX) of the JSE Limited.
  • The sum of the “Investment Income” derived by the company must not exceed 20% of its gross income for that year of assessment.

The company must not carry on any of the following impermissible trades as defined in the Income Tax Act:

  • financial services activities,
  • financial or advisory services,
  • casinos and other gambling related services,
  • activities relating to alcohol, tobacco products or ammunition,
  • immoveable property unless in the hospitality sector which includes (student residence, hotels, lodges etc).

If you are unsure if your investment opportunity qualifies please contact us and one of our experts will provide you with some guidance.

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