– Written by Ross Jenvey

Kingson is a registered Section 12 J Venture Capital (VC) Fund, but what exactly does that mean? Below is what we feel are the important facts, without needing a financial degree to understand what we’re saying!

Firstly, we believe that SARS has been very clever in the way it has structured Section 12J, which was birthed in the 2008/9 tax year. However, back then, it was very restrictive and the take-up was low. In April 2015, certain revisions meant that more than just natural persons were allowed to take advantage of the tax rebate – any South African based tax-payer with their tax affairs up to date can benefit. This includes Trusts, Companies and CC’s. Furthermore, there is no longer a R750 000 per year cap on the tax deductibility, which has made 12J investment much more appealing.

SARS is clearly trying to stimulate the fledgling VC industry in South Africa by providing this tax incentive, and therefore create employment. That would explain why we are not allowed to invest in Investment Holding Companies; Property Holdings Companies; firms of Professionals; Banks; Short-Term Insurers or Financial Service Providers; any company involved in gambling, or the selling of ammunition, arms, tobacco or liquor; or any company whose trade is carried on mainly outside South Africa.

We also cannot invest in companies that have a Net Asset Value (NAV) of more than R50 million after our capital injection. However, this gives us a lot of room to create a balanced portfolio of early-stage startups as well as more mature and profitable companies, as there are many profitable mid-sized private companies with an NAV of less than R50 million.

Another sensible provision in 12J is the fact that the tax rebate is only permanent if investors leave their capital in the investment for a minimum of 5 years. Considering that capital will be invested in illiquid investments (private company shares), and that these companies need the capital for a few years to get the most out of the capital injection, this provision from SARS is custom-made for the VC industry.

We see the tax incentive as providing two major benefits to investors: (1) providing a capital floor to limit the downside, and (2) providing a kicker to boost overall returns. We calculate that a 20% compounded return on investment can be as much as 33% for investors in the 41% tax bracket with the tax kicker.

There are other technicalities surrounding 12J, but we didn’t want to bore anybody by creating an exhaustive list. You are welcome to contact us to find out more. Happy investing!