Section 12J tax incentive investment cap highlights the popularity of a growing asset class

National Treasury appears certain to retain changes to the Section 12J tax incentive, which allows South Africans to write off 100% of the investment against their taxable income whilst simultaneously benefiting from attractive returns, creating jobs and stimulating the economy. The change means that individuals and trusts will now only be allowed to invest R2.5 million per annum and corporate investments will be capped at R5 million per annum (previously these amounts were uncapped).

Dino Zuccollo, fund manager at Westbrooke Alternative Asset Management, SA’s largest S12J fund manager comments, “The introduction of the new investment cap highlights the popularity of a growing asset class which is becoming mainstream amongst many South African investors. Section 12J remains an attractive incentive for those who want to reduce their taxable income, but smaller providers may struggle to raise sufficient investor capital as the caps require capital to come from a wider ‘retail’ investor base. At the same time, S12J providers need to comply with the many aspects of Section 12J, as non-compliance would effectively negate a large portion of the Section 12J tax deduction. SARS penalties, for example, could be as high as 125% of capital raised.”

Westbrooke is therefore cautioning financial advisors and investors to do their homework on the asset manager and their investment strategies prior to investing.

“Ensure that the asset manager is capable of raising sufficient capital to make sizeable underlying investments. According to the South African Venture Capital and Private Equity Association (SAVCA), the minimum sustainable and economic fund size for a small Section 12J manager is approximately R200m. Investors should consider whether the manager has a history of successfully deploying funds raised in line with the 12J legislation and whether it has extensive operational and compliance structures in place which are capable of handling the larger number of investors as a result of the new investment cap.”

Zuccollo believes that the larger, more established Section 12J providers with a track record of raising scalable funds still provide a compelling investment opportunity for taxpayers while reducing their tax liability. “As the largest S12J asset manager, Westbrooke has a skilled team, a strong value proposition and the scale necessary to negate any additional risk from the recent amendments to the law.”

It is believed that significantly less than 2019’s approximately R4.5 billion will find its way into Section 12J investments in 2020, which will reduce private sector investment into SMMEs (the original intention of Section 12J was to boost the local economy and create jobs).

“In addition, the changes may be effective in curbing abusive structures which have crept into the industry. We are working with National Treasury and Parliament regarding these changes and are hoping to initiate a conversation regarding the potential extension of the Section 12J incentive in the coming months,” he says.

Zuccollo believes that since both retirement annuities (RAs) and Section 12J are effective annual investment options which allow individual taxpayers to reduce their income tax or capital gains tax liabilities, they should be considered in conjunction as part of a balanced and well diversified annual investment portfolio. When compared to RAs, Sectio 12J investments provide a shorter investment horizon (minimum 5 years), a larger annual cap, the potential to receive semi-annual dividends and the ability to invest in an alternative underlying investment as opposed to the more traditional asset classes into which RAs typically invest,” Zuccollo adds.

Investments

Westbrooke is offering three investment strategies for 2020:

• Alternative rental income assets (Westbrooke Aria and Aria Plus)
• Student accommodation (Westbrooke Stac)

Westbrooke’s minimum investment size is R250 000 and offers close on 25 February 2020.

The above does not provide all information material to an investor’s decision to invest including, but not limited to, risk factors. The information is not intended as, and does not constitute, investment, legal or tax advice or an offer to sell any securities to any person or a solicitation of any person or any offer to purchase any securities. This is for information purposes and returns are not guaranteed. The targeted returns indicated are indicative in nature and are based on the performance of Westbrooke’s previous S12J investment strategies. The value of all investments and the return may fluctuate. Investment in financial products is subject to risk for the investor and investors are advised to be aware of these risks prior to investing.

For more information about Section 12J go to www.westbrooke.co.za/s12j