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What is a Section 12J?

Section 12J was added to the South African Tax Act and has been built upon from the learnings of the UK initiative. Section 12J aims to help create and secure jobs and to grow small and medium sized businesses by increasing their access to equity finance, and the transfer of skills whilst the companies are being mentored. In short, it is  a mechanism to boost the economy by providing a tax incentive for investors.

To attract investors, SARS offers taxpayers a 100% tax deduction if they invest into a recognised 12J Venture Capital Company (VCC), by way of subscription of shares in a Section 12J VCC, which in turn invests into these SMMEs.

The capital raised is used to fund local small and medium-sized enterprises (SMEs) that are believed to have long-term growth potential. The aim is to encourage investors to participate in the capitalisation of these businesses, which will stimulate economic growth and create jobs.

Investors benefit in that they can see a return on their full investment as well as a tax deduction on the amount invested, which is different from equity shares traded on the stock exchange, as Section 12J investments are essentially private equity shares. 

These usually have a much higher risk factor, but they generate a higher return. The risk, however, is significantly reduced through the upfront tax deduction, which would offset poor returns.

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How Do You Benefit?

An individual investor in the highest tax bracket invests R1 million into an approved venture capital company (VCC). The investor will receive a tax credit of up to R450,000 at the end of the financial year. What this means is that an investor will have 100% of their investment working for them, but only have risk exposure on 55% of their original investment amount.