In order to promote equity funding for SMME businesses (SMME businesses have an asset base less than R50 million) and their ability to create jobs, the Income Tax Act allows 100% tax deduction to the investor in the year of the investment. This 100% tax deduction is available to Individuals; Companies and Trust. The Rand value of this tax deduction is determined according to the tax tables (refer below) applicable to the taxpayer.

Investments made into an Authorised Financial Service Provider registered with the Financial Sector Conduct Authority (“FSCA”) and as a Venture Capital Company with South African Revenue Services (“SARS”) are allowed to issue S12J tax deduction certificates to investors for having made the equity investment.

The Venture Capital Company (“VCC”) in turn are subject to many rules in terms of S12J of the Income Tax, a few are listed below:

  • Investors are limited to invest up to 20% of the issued capital of the VCC;
  • The VCC having invested 80% of its funds into qualifying companies within the prescribed time;
  • Qualifying Companies are limited to certain trades and services and only hospitality is allowed under real estate;
  • The investor is granted 100% tax deduction in the year of investment and the tax benefit is recouped in full should the capital be refunded or equity sold before 5 years.

The investor receives a 100% tax deduction in the year of investment and will receive tax- free dividend after having subjected the dividend to 28% income tax and further 20% dividend withholding tax (companies that invest in VCC’s receive the dividend without any withholding taxes paid), therefore the effective tax rate paid by recipients of dividends such as Individual Taxpayers and Trust is 42,4%. This is advantageous for high net worth taxpayers and Trust on a 45% tax rate whilst more costly to taxpayers on marginal tax rates lower than 42,4%.

S12J Investing vs Direct Investment

Assumptions:
A qualifying company earning a 14% Pre-Tax income return on investing escalating at 6% per annum over 5 years;
1,50% per annum compliance-cost deducted from the S12J return;
No capital gain/loss after 5 years, CGT payable only on the S12J return of capital;
S12J Tax refund and CGT payment is received/paid one year after the transaction;

Applying the above assumptions, the resulting IRR return for the S12J investor exceeds direct investing in most cases other than for investors on very low tax rates. This is summarised as follows:

45% Tax Rate: – +8,5% per annum;

35% Tax Rate: – +4,6% per annum;

28% Tax Rate: +2,0% per annum;

18% Tax Rate:  – 1,3% per annum.

The tax tables for 2020/2021 are as follows:

Taxpayers with annual taxable income exceeding R300 000 benefit by utilising the S12J investment route. 

0 – 205,90018% of taxable income
205,901 – 321,60037,062 + 26% above 205,900
321,601 – 445,10067,144 + 31% above 321,600
445,101 – 584,200105,429 + 36% above 445,100
584,201 – 744,800155,505 + 39% above 584,200
744,801 – 1,577,300218,139 + 41% above 744,800
1,577,301 and above559,464 + 45% above 1,577,301                                                                                                                                                                            
Tax tables for 2020/2021 – Individual taxpayers

The S12J tax benefit after considering the CGT payable on the return of capital after 5 years is:

Tax Rate45%35%28%18%
Tax Benefits of S12J allowance8,3%5,8%4,3%2,5%
Tax Benefit of S12J allowance

Assumptions:

  • The Tax refund is received immediately on investing and the CGT is paid immediately on return of capital.

Conclusion

The benefits of investing through S12J Investment vehicles are beneficial to investors with a taxable income above R300,000.

Further benefits of Investing through Olive Venture Capital Company Limited are:

  • Diversified Investment Company selecting resilient businesses with predictable exit strategies;
  • Targeting 17% per annum return over 5 years after considering both the tax and investment returns;
  • Shariah focussed company;
  • Investor Protection with FSCA; SARS and an Independent Board and Auditors;
  • Zero Conflict of Interest in all investments made;
  • Experienced Team in the asset management of investments;
  • No Lock-In period unlike Retirement Annuities, a 5-year period is recommended to avoid any tax recoupment of the S12J allowance granted in the year of investment.

To find out more, please visit: www.olivevcc.co.za

Call our friendly team on 082 413 5248 or 084 603 4220, lets engage.