Introduction to Section 12J
Frequently Asked Questions
What is Section 12J?
One of the main challenges to the economic growth of small and medium-sized businesses and junior mining exploration is access to equity finance.
Recently, the South African Income Tax Act was amended through the introduction of Section 12J. Section 12J of the Act offers tax relief for investors who allocate investments into qualifying and registered Venture Capital Companies (VCCs).
Section 12J represents an important step towards stimulating the supply of private sector venture funding by incentivising investors through tax deductions.
To assist these sectors in terms of equity finance, government has implemented a tax incentive for investors in such enterprises through a Venture Capital Company (VCC) regime.
Investors can claim income tax deductions in respect of the expenditure incurred in exchange for VCC shares. The VCC is intended to encourage an investment in the local small business sector.
Section 12J is subject to the provisions of the Income Tax Act No. 58 of 1962 (the Act). Section 12J was introduced to cater for the deductions in respect of expenditure incurred in exchange for the issue of venture capital company shares.
An Overview of how it works
The steps are:
1 - Qualifying Investors will invest in approved VCC’s. The approved VCC will issue Venture Capital Shares and investor certificates to the Investor.
2 - The approved VCC will, in turn, invest in qualifying investee companies.
3 - The qualifying investee company will issue qualifying shares to the approved VCC.
4 - Investors can claim tax deductions in respect of their investments in an approved VCC. SARS will request a VCC Investor Certificate.
Who qualifies to be a Section 12J Investee?
The Investee must be a company;
The company must be a resident;
The company must not be a controlled group company in relation to a group of companies;
The 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 an unlisted company (section 40 of the Act) or a junior mining company; A junior mining company may be listed on the Alternative Exchange Division (AltX) of the JSE Limited;
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 of assessment;
The company must not carry on any of the following impermissible trades:
• Any trade carried on in respect of immoveable property, except trade 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 casino’s or other gambling related activities including any other games of chance;
• Manufacturing, buying or selling liquor, tobacco products or arms or ammunition; or
• Any trade carried on mainly outside the Republic.
There are no special tax rules for investee companies. The standard tax rules will apply.
Who qualifies to be a Section 12J Investor?
Any taxpayer (individual, trust, company) qualifies to invest in an approved VCC.
Qualifying investors can claim income tax deductions in respect of the expenditure actually incurred to acquire shares in approved VCCs.
No deduction will be allowed where the taxpayer is a connected person to the VCC at or immediately after the acquisition of any venture capital share in that VCC.
On request from SARS, the investor must verify a claim for a deduction by providing a VCC Investor Certificate that has been issued by an approved VCC, stating the amount of the investment and the year of assessment in which the investment was made.
The investor must hold the shares in the VCC for a period of five years. If the Investor disposes of their shares in the VCC before the five-year time period had lapsed, there will be a recoupment of the tax saving (under the general recoupment rules of section 8(4) of the Act)).
Standard income tax and CGT rules apply in respect of VCC shares.