Alternative Investments: The tax advantages of investing in Section 12J companies

Alternative investments have been gaining traction among individuals and businesses seeking to diversify their portfolios and reduce their tax liabilities. One such investment option that has been making waves in South Africa is Section 12-J companies. Dino Zuccollo, Fund Manager at Westbrooke Alternative Asset Management, sheds light on the benefits and intricacies of investing in Section 12-J companies during a recent interview with CNBC Africa. Section 12-J, a provision of the Income Tax Act introduced in 2009, allows investors to receive a 100% tax deduction for the amount they invest in a 12-J vehicle in the year they invest. This means that investors can shield their taxable income, including capital gains, bonuses, and salaries, by directing the tax they would have paid to SARS into these investment vehicles. The flexibility of Section 12-J makes it an attractive option for a wide range of investors, including natural persons, companies, and trusts. High net worth individuals have historically been the primary investors in Section 12-J companies due to the efficient capital gains tax benefits it offers. Investors can leverage the 40% inclusion rate for capital gains tax events to maximize their tax deductions. However, institutional and corporate investors are also increasingly exploring the benefits of Section 12-J. While the tax advantages are significant, investors must be mindful of the investment horizon and sector restrictions associated with Section 12-J. To qualify for the tax deduction, investors are required to hold their shares in the 12-J company for at least five years. Selling shares before the end of the five-year period can result in a recoupment of the initial tax deduction claimed. Additionally, there are limitations on the sectors in which Section 12-J companies can invest. The legislation aims to promote private investment in small to medium-sized enterprises in the South African economy. Businesses that exceed 50 million rand in book value of assets or engage in certain industries, such as property trading, professional services, and alcohol-related activities, are restricted from receiving investments from Section 12-J companies. The underlying principle of Section 12-J is to channel funds into industries that drive economic growth while promoting responsible and ethical investment practices. Despite the rising popularity of Section 12-J investments, there is a looming deadline in June 2021 when the Treasury will reassess the regime and decide on its extension. Since 2014, approximately 1.8 billion rand has been raised in Section 12-J companies, with Westbrooke Alternative Asset Management accounting for a significant portion of it. The industry anticipates exponential growth in the upcoming months, emphasizing the need for the regime to demonstrate its impact on supporting small to medium-sized enterprises. While Section 12-J offers a unique investment opportunity, Zuccollo stresses the importance of incorporating it as part of a diversified portfolio. Investors should carefully assess the underlying assets of 12-J companies to ensure alignment with their risk profile and investment goals. By striking a balance between risk and return, investors can capitalize on the tax advantages of Section 12-J while safeguarding their overall investment portfolio.