Section 12B investment playbook – How to unlock massive tax savings with a 12B investment
Section 12B investments have gained immense popularity in recent years due to the substantial tax benefits and steady income streams they offer. However, not all 12B funds are created equal. Investors must conduct proper due diligence to fully understand the associated risks and ensure that the fund aligns with their investment objectives.
Pangea Wealth is South Africa’s largest Section 12B investment advisor. At Pangea Wealth, we specialize in guiding clients through the complexities of Section 12B investments as expert financial advisors.
When evaluating a Section 12B opportunity, key aspects to consider include: the yield forecast, tax-saving potential, number and quality of projects, track record of the fund manager, fee structure, and quality of the legal documentation.
What is a Section 12B Investment?
Section 12B funds utilize Section 12B of the Income Tax Act, structured as Limited Partnerships, to allow investors to receive up to a 100% tax deduction on their solar investments. Investor capital is deployed into solar energy assets across the country. The electricity produced by these installations is sold to customers at fixed rates under legally binding Power Purchase Agreements (PPAs).
Through these structures, investors can achieve significant tax savings while also earning annual yields from the sale of electricity.
See the two Binding Class Rulings SARS issued on 12B structures here and here.
Key Considerations in a Section 12B Investment
1. Tax Deduction
Investors must understand the tax benefits available and how they work. Deductions typically range from 100% to 222%, depending on the level of gearing and deployment timing. Both the equity and debt portions may qualify for deductions, providing substantial tax relief. Importantly, solar assets must be deployed within the same financial year for the deduction to apply. Investors must understand how gearing affects the tax deduction, and how to affects their long term returns.
2. Diversification
Solar panels are typically installed on multiple offtakers’ rooftops, with the electricity sold at predetermined rates. The key risk is offtaker default ,if an offtaker stops paying, revenue is impacted. A fund with exposure to only a few projects faces a higher default risk, while a well-diversified fund (20+ projects) mitigates this substantially. Just like investing in traditional asset classes, diversification is vital, and the quality of each project matters just as much.
3. Quality of Projects
Revenue is secured through legally binding PPAs that lock offtakers into purchasing electricity for a fixed period. If the offtaker is an unprofitable or financially unstable business, the probability of default rises sharply. Therefore, it is critical that PPAs are signed with reputable, financially sound companies with robust cash flows. An agreement with Macro is much more valuable than an agreement with a newly started business with little revenue and a weak balance sheet.
4. Fund Manager Track Record
Managing solar assets and investor capital requires both technical and financial expertise. Historically, funds run by individuals with strong financial backgrounds but limited solar experience have faced the greatest challenges. Investors should favour fund managers with proven solar experience, credible delivery records, and multidisciplinary teams that have met or exceeded their past commitments.
5. Fees and Alignment of Interests
Understanding how the fund manager earns fees—and identifying potential conflicts of interest—is essential. The goal is to ensure alignment between investor outcomes and manager incentives. Misaligned incentives can lead to poor results, whereas a transparent and performance-aligned fee structure promotes positive outcomes for both parties.
The Role of A Financial Advisor
Pangea Wealth is South Africa’s largest Section 12B investment advisor. At Pangea Wealth, we specialize in guiding clients through the complexities of Section 12B investments as expert financial advisors.
Please download the fact sheet and reach out to build an optimal 12B investment portfolio.