Podcast: Getting to grips with S12J

Simon Shares

Dual CEOs at Investec (JSE codes: INL / INP)?
Market sells off and rebounds (a bit) and we’re in correction territory (down 10%).
The falling property stocks of Resilient, Nepi Rockcastle, ForstressB & Greenbay (JSE codes: RES, NRP, FFB & GRB) continue to trade down at the low levels they hit when Viceroy concerns initially hit the market in early January.
Capitec* still under fire from Viceroy and share likely to be subdued for a while.
Brimstone (JSE code: BRN) has sold down their stakes in both Tiger Brands (JSE code: TBS) and Life Healthcare (JSE code: LHC). Now what will they do with the R750million cash?
Stress-free tax year
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- JSE Power Hour: Kick off 2018 with ETFs and tax-free investing

Section 12 J (S12J)

Introduced in 2009 this enables a tax payer to invest into a startup (via the S12J fund, Section 12J Venture Capital Companies (VCC)) and claim it as a deduction on their tax return effectively reducing ones income by the amount invested. An important point is that the investment has to be held for 5 years or income becomes taxable.

In theory nice but with some buts;

Firstly investing in startups is high risk – of course it is.
That said you can invest in lower risk and more mature companies, know what you’re investing into.
Exiting at the end of five years may be a challenge. How does one sell a stake in a startup? They could list but if not liquidity is going to be a potential problem. Check how the fund plans to manage this and how it has worked in the past.
Check the numbers very carefully. I’ve seen a lot S12J companies working the returns off R550k when you made a R1million investment. The theory is that they include the R450k tax saving into the return. Sure, but where did the R450k go?
Know what you’re investing into. This is much harder then listed investments as they’re startups and we have limited information and hence valuations are hard.
Get to grips with all the fees, all of them, in lots of detail.
Quality and track record of the VCC managers.
Bottom line is that there are good and bad in S12J. Make very sure you know which you’re getting into.
Lastly, saving tax is never a good enough reason on its own for an investment.

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