Treasury shows its ongoing commitment to Section 12J initiative

section 12j initiative

Treasury shows its ongoing commitment to Section 12J initiative

Since the introduction of the Section 12J (S12J) tax incentive in 2009 various legislative amendments have resulted in a steady increase in investor participation. In the latest Budget S12J once again received focus and the Budget Review proposes making amendments to address some administrative and technical concerns.

S12J is an initiative that aims to encourage investment in a range of small and medium sized South African private companies that meet defined criteria. Investors are entitled to deduct 100% of their investment against their taxable income in the year of investment. Investors can participate in this opportunity by investing in Venture Capital Shares (VC Shares) issued by an investment holding company that is registered with SARS as a Venture Capital Company (VCC) in terms of S12J.

“The purpose of making further amendments to Section 12J is to address concerns raised by the market and attract further investment for small to medium sized business,” says Jonathan Whittaker, Head of Distribution at TBI, an alternative investment and fund management group.

Investment Income threshold
One of the requirements of a Qualifying Company is that investment income not exceed 20% of gross income during any year of assessment. However, South Africa’s SME environment and manner in which small businesses are organised often mean that a potentially suitable investee company earns investment income above the 20% threshold. The proposed amendments will look to address rules relating to investment income in the Qualifying Company test.

Controlled group company
Another requirement of a Qualifying Company is that it not be a controlled group company, meaning that a corporate shareholder cannot hold, directly or indirectly, 70% or more of that company. S12J does not explicitly state at what point the test should be applied, creating some practical difficulties for the VCC. The proposed amendments should address the timing of the controlled group company test.

Connected persons 
With effect from 1 January 2017 amendments were put in place that defer the connected persons test to the end of the third year of first issue of VC Shares. Originally an investor deemed to be a connected person would not be entitled to deduct the investment against their taxable income. The amendments now widen the scope to include potential penalties to the VCC and withdrawal of its approval as a VCC should it fail to take corrective steps within the notice period given. In an attempt to encourage investment into SMEs the Budget proposes that the retrospective withdrawal of the VCC’s approved status with reference to the connected persons test be reviewed.

“These proposals, aimed at addressing concerns identified by the market, demonstrate Treasury’s continued commitment to the S12J initiative,” Whittaker concludes.


Note to editors:

About TBI

Established in 1992, TBI is a South African alternative investment and fund management group holding company, with a history of superior returns.  The business consists of a number of direct investments in fund management and related associates (Awande Investment Managers, Bridge Capital and TBI Investment Managers), and three core investment portfolios which invest in:

  • Strategic investments, held through TBI Strategic Partners
  • Listed equity investments, held through an index tracker fund; and
  • Property investments held through its subsidiary TBI Properties.

The investment objective is to create sustainable growth in shareholder value, using its long-term capital to make investments with a long-term view.

The group generates its returns not only from its investments, but also from asset management fees on third party managed investment portfolios and other transactional income.  At 31 Dec 2017, the group had investable funds of R502 million, a net asset value of R398 million and, through ownership of TBI Investment Managers, investment assets under management exceeding R9.45 billion.