Section 12J market update

Given the poor performance of traditional investments in the South African market, financial advisors have unashamedly encouraged the majority of their clients to invest offshore.

There is, however, one exception to the rule, and that’s where clients were faced with income or capital gains tax liabilities. For both these scenarios, taxpayers have increasingly looked to invest in Section 12J investments, given that they can write off 100% of their investments against their taxable income.

As a result, interest in Section 12J has grown exceptionally each year, with the current financial year being no different. Taxpayers during the past financial year invested approximately R1.6 billion across the top 20 Section 12J investments, bringing the total market to over R10 billion.

The R1.6 billion invested is less than 50% in comparison to last year’s R3.6 billion total investment. The significant drop in total investments is most likely due to Treasury’s introduction of an annual maximum deduction limitation of R2.5 million for individuals and trusts and R5 million for corporates.

Although the total annual investment amount has declined, the total number of investors have significantly increased. From Jaltech’s fundraise of approximately R200 million, Jaltech experienced a 300%+ growth in the number of investors and a 200%+ growth in the number of supporting financial advisors.

When reviewing the market, Section 12J investments this past tax year were divided amongst the following dominant sectors:

39% was invested in property backed investments. This is a significant drop from last year’s 58%. A common view on the reasons for this decline, centre around the current negative market sentiment around property.

In percentage terms, private equity and venture capital investments have grown significantly, making up a combined market share of 30%, up from 22% in the last financial year. An explanation for this growth in market share, is that investors are searching for higher returns, due to the underperformance of traditional markets.

When one looks at a more granular level, it’s clear that more investors are avoiding investing in Section 12J investments which charged performance fees based on the net investment amount (the net investment amount is the amount invested less the SARS refund) and in many instances, investors have diversified their investments across multiple Section 12J investments.

If I was to make a prediction, I would anticipate private equity focused Section 12J investments to continue to take significant market share and, as investors are becoming more familiar with Section 12J, we can expect a further shift towards investments, which have displayed good performance results and where investor returns are not eroded due to high performance fees.

The annual investment limit may have allowed SARS to recover significantly more tax revenue from taxpayers, however, the limit has resulted in far less capital being made available to SMEs that would have been benefactors of the additional capital invested.

Notwithstanding the annual limit, the Section 12J incentive has grown into a 10 billion Rand investment class, which is completely supported by the private sector, both from an investor/funder perspective and from an asset management perspective. One would hope that Treasury views the latest developments positively and takes active steps to extend the current sunset date of 30 June 2021.