Do your investments save you tax?

It is nearly the end of the 2020 tax year, and taxpayers should consider their options timeously. While retirement annuities and pension funds are the most popular tax investment options, for some investors there is a new opportunity that may be more attractive and tax efficient.

With the introduction of Section 12J of the Income Tax Act, National Treasury – in conjunction with the South African Revenue Service (SARS) – has given taxpayers a very attractive concession by allowing them to deduct from their personal taxable income any capital that is invested in a Section 12J fund.

Unlike pension fund deductions, 12J deductions are not limited to 27.5% (or R350 000) of taxable income, but to R2.5 million per tax year. In practical terms this means that should investors invest an amount equal to their taxable income, they are not liable to pay any tax in the financial year under consideration.

The only prerequisite is that registered 12J funds may only invest in South African small-to-medium sized enterprises (SMEs) and hotels. Popular investment theory has it that this type of investment is more risky than pension funds, and for this reason National Treasury rewards investors’ risk by way of a tax deduction.

Since 2015, the Section 12J industry has grown in leaps and bounds, with an estimated R7 billion under management by the industry. On a whole, these Section 12J funds make a very positive impact on the struggling South African economy and have created employment opportunities numbering in the thousands.

‘’In recent years, pension funds and other institutional investments on the Johannesburg Stock Exchange (JSE) have had a tough time of it, with yields struggling to beat inflation,’’ says James Rothmann, CFO of Anuva Investments, one of the registered 12J funds based in Cape Town. ‘’Should 12J investors diversify their portfolio, they mitigate much of the inflationary risk.’’

Rothmann cites the example of an investor with a taxable income of R2.5 million. In this case the investor’s tax liability would be R967 821. By investing R1 million in a registered 12J fund, the tax liability would reduce by R450 000 to R517 821.

Says Rothmann, ‘’Investments should be kept in the fund for a period of five years. Should the investment be sold off after five years, the investor is liable for capital gains tax on the full amount. In the case of the example we cited, should the R1 million investment be sold, the effective capital gains tax before deductions amounts to only R180 000. ‘’

The example shows that – without any growth – the investor will realise a profit of R270 000 from the original nett tax saving. Of course, the investor also has the choice of not selling the investment and then save the R180 000 in capital gains tax.

Investors have to ensure their 12J fund of choice has a heathy history and wide portfolio and has been active in the industry for a number of years.

Anuva Investments manages a diversified portfolio of SMEs which includes a manufacturer of Angora mohair socks (Cape Mohair), the old Early Bird electronics company that can fix any appliance (now Mastercare), and a mobile phone service provider (NuMobile).

At the end of 2019 Anuva added a hotel portfolio in conjunction with Flyt Property. It affords investors the opportunity to diversify into sectional title hotel apartments (Aparthotels) and to realise their full 12J deductions.

Investors also have the option of funds with an agricultural focus. Here, the underlying assets include an intensified blueberry farming business near Worcester and medicinal agritech near Stellenbosch.

Section 12J is subject to a sunset clause and will expire in its current form in June 2021. ‘’Investors are therefore urged to act quickly in order to take advantage of this benefit in the current (2020) tax year. Click here now to invest.

For more information, visit the Anuva Investments website at www.anuvainvestments.co.za or send an email to queries@anuvainvestments.co.za.

For the Anuva Private Equity LTD and Cultura Investments LTD please go to www.anuvainvestments.co.za

For an s12J event on the 12th of February in Cape Town please click here

For an s12J event on the 20th of February in Johannesburg please click here