Real Estate Investor Magazine South Africa November 2019 | Page 61

I
n an industry where business growth opportunities are
widespread, it is important that one makes use of the
prevalent innovative ventures as soon as possible. Grow-
ing businesses that still need incubation until full maturity
could enjoy investing in the economy through approved
Section 12J Venture Capital Companies (VCC). A vehicle
where VCCs will manage investments in growing companies
to stimulate investment in SMMEs, with the ultimate aim of
leading to GDP growth and job creation.
According to the South African Revenue Service, “one of
the main challenges to the growth of small and medium-sized
businesses and junior mining exploration is access to equity
finance. To assist these sectors in terms of equity finance,
Government has implemented a tax incentive for investors in
these enterprises through a venture capital company (VCC)
regime.”
“Investment into section 12J venture
capital vehicles has seen a huge uptake
over the last 24 months as investors
realised the extraordinary tax incentive
offered that even property and real
estate businesses can benefit from”
Introduced in 2009 by the SARS, the incentive was initially
intended to stimulate growth in the Small Medium Micro
Enterprises sector and these investments were predominantly
limited to venture capital as well as business rescue
opportunities. The incentive has been one-sidedly viewed to
cater for the equity division, and deemed as an opportunity
to assist businesses with financial services and compliance
dealings only.
Even though the recent amendments to the legislation have
seen an increase in the number of companies registering for
VCC approval, it has not been as popular in the property sector.
In real estate and property division the property assets that
qualify are those that create jobs in the hospitality sector I.e.
hotels or managed accommodation properties.
As a result of the broadness of the SARS incentive,
companies like Anuva Investments and Flyt property
investment collaborated and launched Flyt Hospitality Fund,
which issues shares to selected qualifying developments. They
offer a property diversification from the predominant concept
of the investment fund.
It is structured as a fund that issues share to, and gives
shareholders access to, all the benefits of the property
invested into. For this particular fund a minimum investment
of R1 million is required and can be made through private
investment, trust, stokvel investment syndicate or company.
Investment into section 12J venture capital vehicles has seen
a huge uptake over the last 24 months as investors realised the
extraordinary tax incentive offered that even property and real
estate businesses can benefit from. Section 12J of the Income
Tax Act allows South African taxpayers to claim tax relief of up
to 45% on their investment amount. Investing in a qualifying
12J company requires that the company holds assets that
qualify according to the terms of the Act and an investor may
invest as much capital as they would like, into a Section 12J
VCC.
There are two perceived limitations from an investor's
perspective. An investor must hold their shares in a Section 12J
VCC for a minimum period of five years in order to retain the
tax deduction of the initial investment amount. If the investor
disposes off their shares prior to the five-year period, the initial
investment amount will be recouped and the investor will
be required to pay back the full tax saving with no additional
interest or penalties.
For Flyt Hospitality it is the same and at the end of the five-
year period shareholders can opt to remain in the structure,
and depending on performance, they can benefit from passive
income via quarterly dividend pay-outs.
Even though this investment venture seeks to assist small
and growing businesses, the reality is that this tax break’s
requirements are too high for most small business owners.
VCCs require a minimum investment of at least R100 000, more
often R500 000. Therefore, the likely investors are people in the
top marginal tax bracket of 45%, with a taxable income of R1.5
million or more a year. People who want to reduce their taxable
income after making full use of tax-efficient options like
contributions to a retirement fund or tax-free savings accounts.
As important as it is to take advantage of lucrative looking
deals, it is important that businesses scrutinise these deals
as much as possible in order to see both the positives and
the negatives about it. The cons to investing in 12J VCCs
is that:
SARS introduced section 12J with a sunset clause
that takes effect on 30 June 2021, so time may be
running out for investors to take advantage of the
s12J tax benefits. The current regime may, or may
not, be extended.
As with any other investment, an investment
in a s12J company carries risk. Investors should
therefore assess that investment strategy and
mandate of the s12J company in order to ensure
they fully understand the associated investment
risk.
Whereas the pros to it include the:
Freedom to claim back the full amount used to
acquire shares in the s12J company as a deduction
from taxable income in the year of that investment.
Provided; the period of at least five years of
investing is fully over. If not, the initial tax benefit
will be recouped by the tax authorities. However,
De-risking of your investment portfolio by investing
with a professional s12J asset management
company, the company adds much needed
diversification, tax efficiency and investments
that are not generally found in typical investment
portfolios.
SA Real Estate Investor Magazine NOVEMBER/DECEMBER 2019
59