Section 12J: The brighter side of the Sunset Clause 

This content is brought to you by 12Cape

On Wednesday, Minister Tito Mboweni announced that Section 12J of the Income Tax Act relating to the venture capital company (VCC) incentive will not be extended beyond 30 June 2021. As this news spells the imminent end of a generous and innovative tax incentive to create jobs, it also provides much needed clarity for Section 12J funds (VCCs) and their qualifying companies.

Last chance: For investors, it means that investments in approved VCCs before the 30th of June 2021 will be 100% deductible from their taxable income, but not thereafter. In practical terms, individual investments before Sunday the 28th of February 2021 can be offset against their taxable income for this tax year, and investments made after this date but before the sunset date can be offset against their taxable income – for the last time – for the year ended February 2022.

History: Government introduced the venture capital company tax incentive in 2009 to encourage the growth of SMEs and employment. Taxpayers investing in a venture capital company are allowed an upfront deduction for their investment, whereas most equity investments are not tax deductible. In its assessment, the National Treasury determined that the incentive did not sufficiently achieve its objectives of developing small businesses, generating economic activity and creating jobs but instead, provided a significant tax deduction to wealthy taxpayers. The results showed that R11.5bn had been invested in Section 12J Funds over the period (on which a 100 per cent tax deduction was applicable), which led to the employment of 8,239 people. The incentive will therefore not be extended beyond its current sunset date of 30 June 2021. While this outcome is disappointing for investors, it was not totally unexpected in the context of the trade-off between short term resource requirements and longer term outcomes targeted by the regime. The clarity of the announcement is however welcomed.

Deductions end, investments continue: In light of the announcement, 12Cape says its investment model remains unchanged. 12Cape and it’s Latitude Aparthotels was created with Section 12J capital and would not have existed without it. The model being proven and successful means that it is a natural time to replicate and scale it with larger institutional capital allocations. It is for this reason that 12Cape is working with institutional investors interested in an investment case which rests on independent global structural trends* to generate attractive risk adjusted returns to shareholders over long periods, without having to rely on a tax incentive. This is not the only example of how “12J” catalysed foreign direct investment, with concomitant job creation and other positive spin-offs. 12Cape expects more such investors on the basis of a robust investment case proven by 12J capital over time.

Read also: Global growth, locally

Investors can still deduct 100% of their investment in 12Cape Limited from their taxable income for the tax year ended 28 February 2021 by investing before 17.00 on the 28th of February 2021 – online subscription forms available at www.12cape.com.

Investment Case in a nutshell: (1) Foreign income from Aparthotels in a global destination city (Cape Town) with limited space. Pre 2020, international tourist arrivals in Cape Town grew by 10% (real) per annum. Post 2020, expect the opportunity to be even bigger as the global “remote working” trend becomes permanent, with Cape Town as an ideal remote working destination for the European market. This is already happening. (2) Aparthotels is a fast growing global form of accommodation with a low market share. The 12Cape owned Latitude Aparthotels demonstrates this with high occupancies (82% median occupancy for 2020). (3) The best hotels are in the best places where supply is limited. Global prime property values grow in tandem with the number of wealthy people over long periods. Our investors participate in this growth without the requirement of large sums of money. (4) Our shareholders own the growing Latitude brand.

(Visited 1,420 times, 6 visits today)