INVESTING
31 January 2020
DINO ZUCCOLLO AND JONTI OSHER Co-Heads - Section 12J, Westbrooke Alternative Asset Management
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ollowing a significant take-up in 2016, Section 12J (12J) investments managed by established, reputable asset managers are fast becoming a standard allocation in client’s portfolios. Key to this is that a 12J investment is 100% tax deductible in the year of investment (provided that a client holds his/her shares for a minimum period of five years) as well as the attractiveness of the underlying investment. Since July 2019, there is a limit to the amount that a taxpayer may invest in a 12J company, of R2.5m per individual/trust per annum and R5m per company per annum (the 12J deduction was previously uncapped). Certain larger 12J managers have welcomed this change, pointing out that it highlights the increasing popularity of the asset class and is likely to open up 12J investments to a wider base of investors. Financial advisers, in particular, have been quick to recognise the attractiveness of 12J investments (which include a 100% tax deduction, an uncorrelated underlying investment, attractive returns, and the ability to stimulate the SA economy and create jobs). Some of the most popular uses of 12J investments for the upcoming February 2020 tax year include:
Financial advisers’ top Section 12J investment strategies
• An alternative / complementary investment alongside a retirement annuity (RA): When compared to a RA, a 12J investment has a larger annual investment cap (R350 000 per annum for RAs), can be exited after a minimum five year lockup period (RAs require the investor to be over 55) and provide the investor with the potential to make an uncorrelated, private-equity style underlying investment that may pay an annual dividend (whereas RAs are limited by regulation 28). The tough local investment environment and associated appetite for alternative investments has further increased interest among wealth advisers. • A tax-efficient annual investment for high-income earners: High-income earners such as lawyers, accountants, bankers, doctors, entrepreneurs, etc. can work with their wealth managers to efficiently manage their investable assets and (if required) a portion can then be invested in 12J companies at the end of each tax year. • The Naspers / Prosus share split: On 25 March 2019, Naspers announced its intention to list its international internet assets separately through a European-listed entity named Prosus. Investors were given the option to take up an allocation of either Prosus shares or to receive
additional Naspers shares. Many financial advisers recommended that their clients take the option of receiving Prosus shares, which resulted in these clients triggering a capital gains tax event equal to approximately 10% of their initial Naspers’ shareholdings at the time. Financial advisers can make use of 12J investments as a mechanism to shield this adverse tax consequence for their client’s tax years ended 29 February 2020. • Other capital gains tax events: In addition to the Naspers event, many financial advisers have successfully used 12J investments to shield onceoff capital gains tax, including sales of properties, shares, businesses and other assets. Capital gains tax events are subject to a 40% inclusion rate for individuals, and an 80% inclusion rate for corporates and certain trusts – as such, investors are able to invest less than their cash proceeds while still effectively shielding their tax using 12J. Financial advisers should conduct an extensive due diligence on the range of 12J managers in the market (including an analysis of each manager’s track record, skill and experience in managing third party capital) prior to advising their clients to invest.
Foreign residency: Unlock more benefits than just emigration
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oreign residency and citizenship tax efficiency, investment and business by investment (RCBI) opportunities, improved lifestyles, programmes have become education options and greater freedom increasingly popular in South Africa of movement. in recent years, as people look for a “There is a common misconception second residency or citizenship for that individuals invest in RCBI personal and business reasons. But few programmes with the sole intention people and advisers are aware of the full of enabling their families to emigrate. range of lifestyle, business, investment While this is a requirement of certain and tax benefits to be gained when the programmes – the UK and US, for programmes are utilised correctly. example – in most instances this is The ‘citizenship by investment’ not the case. Most people who invest industry started in 1984, when the in government-authorised RCBI Caribbean nation programmes do so to of St Kitts & benefit from the flexibility A HOST OF Nevis launched its and freedom they provide programme. But it and to receive additional COUNTRIES only really started benefits that are not OFFER gaining traction with currently available to RESIDENCY AND them,” Mertens adds. the introduction of the first European Portugal is popular CITIZENSHIP BY citizenship with many South Africans INVESTMENT programme, in looking for a path to Cyprus, in 2011. Today, a host of European Union residency – and countries offer residency and citizenship ultimately, citizenship – for themselves by investment, including Portugal, and their families. Portuguese residency Mauritius, Malta and Gibraltar. unlocks visa-free mobility across Tim Mertens, Chairman of Sovereign the entire European Schengen area, Trust SA, says Portugal and Mauritius and offers an excellent quality of life are emerging as two of the most with relatively low tax burdens and popular destinations for South Africans investment barriers. While there are not only looking for a so-called ‘Plan B’, several routes to obtain Portuguese but also looking to benefit from greater residency, real estate investment remains
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one of the easiest, with a minimum investment of €350 000. Mauritius is wooing a growing number of local investors through its relatively close proximity to South Africa, attractive tax regime and laid-back lifestyle. Occupation and residence permits are freely available to foreigners wishing to work, invest, live or retire in Mauritius. Part of the attraction of Mauritius for foreign investors has always been its simple taxation system: company, personal income, capital gains and dividend incomes are all taxed at a rate of 15%, with further tax concessions available. Mauritian tax residents are taxed on Mauritius-sourced income only, and there is no capital gains tax, no property tax and no inheritance tax. In addition, there are no foreign exchange controls. South Africans are among the
leading foreign buyers of property on the island, says Mertens. Setting up a business there is quick and easy, and there’s already a sizeable community of South African expats, making it familiar and easily accessible. “The most important thing is not to make life-changing decisions based on a friend’s recommendation. You have to take advice from the experts, who can unpack the various country and investment options available to you based on your specific needs. That way, you can end up unlocking a range of benefits you didn’t know were even possible,” says Mertens.
Tim Mertens, Chairman, Sovereign Trust SA
