In order to encourage individuals and businesses to invest in Venture capital companies so that these venture capital companies can invest in SMMEs with high growth potential the Section 12J of the Income Tax Act was introduced in 2009.
Access to capital is one of what we describe as TOP 3 business killers here at BONMAS CONSULTING. The other 2 business killers are: access to market and Good business leadership with clear vision and strategies to guide business through the changing landscapes.  We believe that a lot can still be done on the Section 12J to benefit more businesses and grow the economy. Today will discuss how you can benefit for Section J as a taxpayer. Quick Overview·         For every R100 that you invest in a Section 12J Venture Capital Company, you can reduce your tax by up to R45 whether you are an individual, business or trust.·         As a result if you are an SMME or an Individual that is investing in Section 12J companies you may end up paying ZERO rand in taxation.·         The aim is to encourage investors to participate in the capitalisation of these businesses, which will stimulate economic growth and create jobs.·         Generally SMMEs and Individuals that falls into the top tax bracket are the ones that are likely to benefit from this as most Venture Capital Companies requires atleast R100 000 or more often R500 000 for one to invest.·         Investors must also be in a position to tie up their money for at least five years. If they sell their shares before then, they have to pay back the deduction
Section 12J and SMMEs:·        Businesses can benefit up to 45% in immediate tax relief for investing.·        The Section 12J asset class is particularly attractive to those taxpayers who have incurred capital gains tax·        Businesses in South Africa are generally 28%  of their net income to SARS as income tax and in addition to they pay capital gain tax for any gain they make when selling their assets. Thus the by investing a portion of their profit Section 12J companies your business may get a tax relief of 45% which is more than the 28% of the normal tax rate and pay zero rand in taxation.·         Let’s say the profit of your small business is R1m causing your Tax Expenditure to be R280 000  and leaving you with R720 000  to reinvest into your business and distribute to shareholders. You can instead invest R630 000 of your net profit into a Section 12J company and get R280 000 tax break then pay zero in tax while your money is generating interest.
NB: Don’t get caught up in investing in a Section 12J investment simply because there is an attractive tax benefit associated What is the minimum investment?·        From what can be seen in the market, Section 12J investments start at around R100 000.What returns can you expect?·        This depends on what fund you have invested in and the skill of the managers.·        Investors in lower risk strategies can expect to earn investment returns of 15% to 25% and investors in higher-risk strategies can potentially expect investment returns of 40% per year or more.·        Section 12J is considered a private equity style investment which carries different levels of risk depending on the underlying investment strategy and there is the potential to lose your initial investment.When and how do you claim your tax deduction?·        An investment into an approved Section 12J company is 100% tax deductible in the tax year you invest.·        Investors can claim the tax relief by either reducing their estimate of taxable income when submitting provisional tax returns or by obtaining a tax refund through the annual income tax assessment.·        To benefit this year, your investment needs to be made by 28 February.What is the annual limit per investor for investment into a Section 12J company?·        There is no annual limit, but investors should not invest more than their taxable income.What is the term of my investment?·        The minimum term of the investment will be five years.·        However, certain funds might carry a more extended minimum investment period.Conclusion·         I Trust the information above will be helpful to assist you on all information regarding the section 12j investment tax break


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