How to slash your tax bill, generate steady returns in SA’s high-growth renewable energy sector

A special venture capital vehicle, called a 12J, is a tax-efficient investment opportunity for high income earners. The Bright Light Solar 12J has the added advantage of underlying investments in renewable energy roll-out in South Africa. In this interview, Bright Light Solar’s Kevin Shames explains the nuts and bolts of the investment opportunity – which opens in February but will close as soon as the capital target has been reached. This is an opportunity exclusively for BizNews community members. – Jackie Cameron

For the full details on this investment opportunity exclusive to the BizNews community, contact Bright Light Solar here.

Kevin Shames on 12J companies and the opportunities for investors:

A Section 12J company refers to a company that is created in line with Section 12J of the income tax act. There’s a whole lot of specific requirements that a venture capital company has to comply with. One of which, for example, is the only thing you can do in a venture capital company is invest in underlying – what are referred to – qualifying companies. That’s all you can do, you can’t do anything else. The qualifying companies that we have chosen to invest in are all based in renewable energy assets.

The exciting part about why we have created it within the Section 12J framework, is that investors get to invest in this investment opportunity – in this company – and they get to deduct 100% of the cost of their investment, as a deduction against their taxable income in the year in which they invest. Therefore, what it means – if you are a marginal taxpayer – effectively, Sars is contributing 45% of your investment capital, into this investment. -which you have to hold for at least five years.

On how you get your returns back:

So the returns are comprised of a number of different streams. The first one – I guess the headline grabbing one – is the fact that you get this tax deduction in the year in which you invest. Let’s say you are a marginal tax payer, earning just under R1,6 million in the current tax year and you invest, let’s say R1 million, you would only then pay tax on R600,000 – being the R1,6 million, less your R1 million  investment. The first return stream that you would get, is a saving in that tax year of 45% of your investment capital. In our example, you’re investing R1 million, so you’re going to save R450,000 in tax.

That is your return stream number one. The second return stream is we then pay semi-annual dividends from the first year. That is for as long as you remain invested. I do want to stress, this is up to a 25-year investment. Just in terms of Section 12J,  you have to remain invested for at least five years. So if you want to exit from month 61, you are able to. But you are also able to stay invested for a full 25-year period and receive the dividend stream over that period.

The third income stream that you would get – is in the event that you choose to sell your investment from month 61 onwards – you would then get that return of capital when you choose to sell it, less Capital Gains Tax with a base cost of zero. So, there is Capital Gains Tax payable at the end. Those three income streams combined then provide you with the IRR that you would get as an investor over time.

On the minimum required to take advantage of this opportunity:

There is no minimum, but it is better suited to high-income earning marginal tax payers. We calculate the returns assuming that the investor is a marginal tax payer, taking into account that 45% tax saving. If, for example, you are an investor at a 30% tax bracket, then clearly your return is going to be lower, because you’re only getting a 30% tax saving instead of that 45%. We do then calculate – anyone who wants to calculate- based on their individual tax bracket, we will then provide that to an investor. I’m very happy to provide that. But it is geared mainly towards the high net worth investor that is a marginal tax payer.

On how investors are safeguarded:

We are heavily regulated. We are regulated both by the FSCA – the Financial Sector Conduct Authority – as we as being regulated by Sars, in terms of Section 12J. The investor capital is segregated from the manager, so we have an independent administrator that acts as custodian over that money. The only way we able to then utilise the investors money, is when we have a signed investment committee authorisation – which is chaired by our lead independent non-executive director – approving an investment which is then sent to our administrator, and the administrator then pays away in that acquisition of equity in those underlying qualifying companies.

On what individuals need to do to invest in this opportunity:

First of all, they need to be comfortable with it. Following these interviews and the documents that they have, if they have any questions, we urge them to get hold of me or any one of our team, and we will ensure that we will resolve any questions that they might have. If they are then comfortable with the investment, the investment opportunity opens on the 1st of February and we are capping this capital raise at R50 million. As soon as we then hit that R50 million capital target, we are not allowed – in terms of our prospectus – to accept any further money. As soon as we then hit that R50 million cap, we will then close any further investment opportunity and advise anyone that invests after that, that unfortunately, we are full.

For the full details on this investment opportunity exclusive to the BizNews community, contact Bright Light Solar here.

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