Section 12J - understanding Section 12J tax benefit

Understanding Tax Benefits
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Any investment made of up to R2.5 million per individual and R5 million for a company is fully deductible in the year in which the investment is made. This means that for an individual paying the highest rate of tax (45%) they basically get to invest 55% of their own money and instead of paying the other 45% to SARS they get to keep it in the investment. If they have already paid tax to SARS this 45% can be claimed back from SARS and will be refunded within 8-10 months of the tax year end (29 Feb 2020).

How does this enhance returns?

We invest in businesses that buy and lease assets to established small to medium sized enterprises allowing them to rent the assets they need to continue growing their business in a cost effective and administratively efficient manner.

Examples of the types of assets we invest in are:

  1. Commercial fleet vehicles (bakkies or trucks) which are used by logistics companies or rental agencies (e.g. Avis)
  2. Outdoor media assets – billboards etc which are used by media companies
  3. Ride hail vehicles – Regular passenger vehicles that are rented out to Uber drivers.

The benefits of investing into an operating asset:

Here is a comparison between two scenarios –

  • Getting a R1 million bonus, paying 450k to SARS and investing the other 550k into a unit trust targeting 10% and holding for 5 years (no dividends drawn throughout).
  • Getting a R1 million bonus, not paying anything to SARS and investing the full R1 million into Sunstone Capital which is a moderate-low risk fund targeting a 7.5% dividend yield and including capital gains tax implications at the end.
  Year 1 Year 2 Year 3 Year 4 Year 5
Sunstone Capital 75 000 75 000 75 000 75 000 813 000
Unit Trust (at 10%)         885 781
IRR - Sunstone 18%        
IRR - Unit Trust 10%        

NB: If you include capital gains tax implications n the unit trust calculation, the yield drops down to 8.46%

Key take home points:

  1. The S12J deduction has the most value when done by an individual who has attracted the highest marginal tax rate in that year 
  2. Most S12J’s assume you are taking the 45% tax benefit and that your risk capital is only 55% (100-45%). this is what returns are based on – in the event that you are in a lower bracket it will impact your rate of return (feel free to contact us to understand the effect on investment)
  3. S12J is an effective way to deal with large capital gains or other tax events that take place in the year of assessment, however, investment into a S12J can’t be used for historical tax events.
  4. Any SA taxpayer can benefit from a S12J tax deduction (individuals, companies and trusts)

Should you wish to secure a spot in SA's first of a kind fractional share 12J offering made possible through the partnership between EasyEquities and Sunstone Capital, follow the button below.

 

View  Sunstone IPO

Read:
SME's - the backbone of emerging markets

Avi-Gordon-Sunstone-1

Avi Gordon
Fund Manager - Sunstone Capital

 

Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by an employee of Sunstone Capital, an authorised FSP (FSP no 48870), as general market commentary, and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.

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