Latest Section 12J Amendments

Following the release of the finalised taxation law amendment bill (TLAB) yesterday, Treasury has introduced two significant amendments to Section 12J of the Income Tax Act.

The most notable amendment is the confirmation of a cap/limitation on Section 12J investments of:

1. R2.5 million per annum for individuals/trusts; and
2. R5 million per annum for corporates:

The cap means that South African taxpayers can invest any amount into a Section 12J investment, however, they will only be entitled to claim a deduction to the maximum of the relevant cap in any year of assessment. Given that the majority of Section 12J investors invest below R2.5 million, this amendment will not impact most investors.

In addition to the above, unexpectedly, Treasury introduced an amendment to the timeframe which a Section 12J investment has to deploy the funds they have raised into qualifying companies. A Section 12J investment now has 48 months (previously 36 months) to invest 80% of the funds raised. 

While this amendment does provide more time for Section 12J investments to achieve compliance, it may adversely impact an investor’s return. An extended deployment period may exacerbate this issue and investors could:

1. see a lower return from their investments, given that the Section 12J investments now have a longer time period in which to deploy funds; and
2. be required to hold their investments for longer than expected due to the investment taking longer to generate the anticipated returns.

Investors should, therefore, be mindful of the total percentage of capital invested by the Section 12J investment, before making an investment. Identifying Section 12J investments that demonstrate a strong pipeline and a track record of deployment, may mitigate the likelihood and adverse effects of delayed deployment.

These amendments are deemed to have come into effect on the 21st of July 2019.