Financial advisers’ top Section 12J investment strategies

Following 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:

• 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.

DINO ZUCCOLLO, Co-Head - Section 12J, Westbrooke Alternative Asset Management

JONTI OSHER Co-Head - Section 12J, Westbrooke Alternative Asset Management