It’s that time of year when tax-payers, especially those who have a high-taxed income and investable cash, shop for an investment vehicle for their lump sum investments. In the past RAs have been the most common option due to their tax benefits, but since extended limitations have been put in place, i.e. investment into a RA is limited to 27.5% of taxable income at a maximum of R350 000.00 per annum; a new tax-smart alternative has emerged.
Government’s Section 12J incentive is finally receiving the interest it deserves. That’s according to Neill Hobbs, founder of one of South Africa’s first Section 12J Venture Capital Companies, Anuva Investments. Hobbs says that investments into a Section 12J VCC are a tax-efficient supplement to an investment portfolio. Unlike a retirement annuity, investment into this relatively new tax-effective structure (such as Anuva Investments) is (a) unlimited in the amount one can invest, and (b) you don’t have to wait until you are 55 years of age to get returns. Furthermore, if you hold the investment for more than five years, you will pay capital gain only on disposable dividend; unlike an RA, that stipulates that any returns above the threshold are taxed as regular income.
“This is particularly attractive to tax-payers who are looking to maximise their deduction come tax year-end. Salary earners are able to get a refund on all PAYE,” says Hobbs. He warns, however, that an investment into a Section 12J vehicle must fit into your investment portfolio as it falls into the high-risk bracket and it is illiquid for a minimum of 5 years. 12J is also suited to tax-payers who have realised a capital gain during the year; if they invest 40% of that capital gain into a 12J Fund, they will pay no Capital Gains Tax at all.
The government’s 12J incentive is targeted at people who are in a high income tax bracket and have cash to invest, and is also appealing to corporate executives who are cashing in their share options. Not only does this type of investor suit this fund, but often has a lot to offer a 12J Fund in terms of dealings and investment experience. Unlike most structured investments, a significant investor in 12J is in a position to have input into how the fund is managed. Generally these funds are in the hands of a small group of investors making decisions on behalf of the businesses. Through 12J, wealthy business people can invest financial and intellectual capital into SMMEs and, according to Hobbs, this is exactly what government had in mind to boost and support that sector.
Although defined as high-risk, there are many checks and balances in place. The fund is accountable to the FSB and must have an FSB-approved fund manager and compliance officer. The directors must take up professional indemnity insurance and SARS continues to oversee the VCC.
Anuva Investments, who are the first VCC fund to announce their results, paid an impressive dividend of 24% to shareholders and year-to-date has yielded 4% with an anticipated additional 4% for 2017. Hobbs identified the Anuva VCC strategy as investing into promising, well-managed small-to-medium companies which are securely established and have a proven track record but are under-capitalised.
About Anuva Investments
Anuva Investments is an FSB-regulated and FAIS Act-compliant Venture Capital Company, formed in 2014 by a combined team of tax and investment specialists. Anuva invests in small and medium-sized companies where the opportunity exists to significantly enhance profitability through a management involvement process. Higher-risk investments are balanced by investments into well-established businesses with proven profitability and stable cash flows.
The positive cash flows that result from a well-structured VCC investment are matchless. The investor can potentially receive a full tax deduction on the funds invested as well as substantial dividends from the investment on an ongoing basis. An investment in 12J carries no personal tax risk for the investor.
Landline: 021 683 0500
Neill Hobbs: firstname.lastname@example.org
Neill Hobbs CA (SA) RA
Director at Hobbs Sinclair