Section 12J – How to reduce your exit tax

*This content is brought to you by Jaltech

1 March marked the end of the 5-year investment term for numerous Section 12J investors. Although these Investors enjoyed an enormous tax benefit when investing, they now face the prospect of paying capital gains tax on exit on their entire investment amount, regardless of whether they made a profit or not.

Jonty Sacks, partner at Jaltech Fund Managers explains that, “Investors should have been made aware of Section 12J exit tax at the time of investment. However, there are two ways to reduce the exit tax, one would be to invest in a retirement annuity and the other would be to invest a portion of the Section 12J capital they receive on exit in a Section 12B solar investment. This move has the potential to eliminate the investor’s Section 12J exit tax liability, completely.”

Section 12B solar investment

A Section 12B investment, similar to a Section 12J investment, allows taxpayers to reduce their taxable income by 125% of the amount invested. 

By way of illustration, if an investor in the top tax bracket invests R1 million, the investor will be able to reduce his/her taxable income by R1 250 000. This enhanced deduction will result in the investor saving R562 500 in tax. 

Because Section 12J exit capital gains tax is calculated by adding 40% of the investment proceeds to an investor’s taxable income, an investor can reduce their taxable income by investing in a Section 12B solar investment. 

Comparative analysis

Below is a comparison illustrating a scenario where an investor (in the highest tax bracket) exits a Section 12J investment versus exiting a Section 12J investment and rolling over the capital into a Section 12B solar investment:

Interestingly, given the large upfront tax benefit associated with Section 12B investments, the investor in the above example would only need to invest R320 000 of the R1 million returned in order to avoid paying capital gains tax on exit. This is because the R320 000 would be tax deductible at 125% which will allow the investor to deduct R400 000 from his or her taxable income resulting in a tax reduction/credit of R180 000 which equates to the capital gains tax due on exit. 

Taking the above into account, exiting Section 12J investors would benefit greatly from investing a portion of their Section 12J capital into a Section 12B investment and avoid paying capital gains tax on exit.

Chris McCormick – Jaltech Fund Managers

Early bird webinar: Section 12B solar tax incentive round two

Join Alec Hogg and Jonty Sacks on the 25th of April 2024 at 12h00, where they will break down the ins and outs of the highly popular Section 12B solar investment incentive and introduce Jaltech’s fourth Section 12B solar investment. 

To register, click here. If you can’t make the webinar, register and we’ll send you the recording. If you want to meet sooner, click here to schedule a meeting.

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