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Interest in Section 12J has grown each year, with the current financial year being no different, says Jonty Sacks, a partner at Jaltech.
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: property/hospitality; asset rental/renewable energy; private equity/venture capital. About 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, says Sacks.
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, according to Sacks.
"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," says Sacks.
"The above market outcome is in line with my prediction last year. If I was to make another 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."
Jonathan Whittaker, head of distributions at TBI Investment Managers, says that when it was originally introduced, the Section 12J incentive included a sunset clause, which is currently scheduled for 30 June 2021. Thereafter any new or additional investments into a 12J Company will not be tax deductible.
He points out that the incentive is currently under review to determine its effectiveness and whether it will be extended beyond the June 2021 deadline.
"For the astute investor this offers attractive additional tax relief, as many investors simply rely on the deductions from their Retirement Annuity contributions, capped at R350 000 per annum," says Wynand Marais, CEO of Ora Capital.
