With the February provisional tax period for individuals looming, news and financial websites have been rife with adverts of Section 12J investment service providers.
Adverts usually focus on the tax deductibility of up to 45%, depending on your marginal tax rate, and the targeted returns of the funds. What the adverts fail to mention is that the investment rate of these funds into qualifying companies are relatively low and that funds can remain unutilised in an interest-bearing trust account for an extended period.
The National Treasury indicate that by August 2018, roughly R4 billion had been invested with VCC’s and around R1.7 billion with qualifying companies. The difference has been attributed to the time it takes to identify the right investments.
The tax incentive was initially set up in 2009 to encourage job creation, small business development and economic growth, as in developed countries like the US and UK. This is a noble ideal and the incentive aims to connect investors with qualifying investment companies that require capital to achieve the goals set out with its creation.
In keeping with our mission of consistently implementing unique collaborative property-based solutions in line with current property trends, Property Assist has taken a closer look at the structure and how to apply our property origination expertise and property investment framework to this structure.
Application of 12J to property investment
Section 12J (1)(b) prohibits immovable property investments made by a Section 12J Venture Capital Company, unless the immovable property is utilised in a “trade carried on as a hotel keeper”.
Taking the above into consideration, if structured in the correct manner, the following property related investments opportunities can effectively attract the tax rebate associated with Section 12J:
Hotels, student accommodation, lodges, guesthouses, and serviced apartments.
During our procurement process, we have come across various such opportunities that will be structured for investment by an approved Section 12J Venture Capital Company, with the same benefits of our other property investment opportunities, but with the following differences:
* Investment terms will be for longer periods than our recovery type solutions
* The current owners are still assisted and may obtain a shareholding in these qualifying investment companies
The other advantage is that our property investors will view the property investment opportunities before investment in the 12J Venture Capital Company, who will then in turn invest in the qualifying investment companies, without their capital not deployed for an extended period.
Whilst a tax incentive certainly de-risks an investment, no investment should ever be made based on that premise alone.
Qualifying investment companies with a property asset base is usually also lower risk than companies who might not own such property.
Should you be interest in such opportunities please call our office for a personal discussion regarding 12J VCC investment in property related opportunities.