Move over section 12J, the investment incentive that was unceremoniously dumped by the National Treasury after raising billions of rands of new investment into venture capital backed companies – there is a new incentive in town: s12B, and it looks to be even more attractive for taxpayers, with the added benefit of tackling the loadshedding crisis while simultaneously enjoying a juicy tax break.
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S12J was introduced in 2009, as part of the Income Tax Act, and came to an end in June 2021. During this period, approximately R12bn was invested into this opportunity. The provision allowed investors to deduct the full amount of their investment in a qualifying venture capital company (VCC) from their taxable income in the year in which the investment is made. In other words, if you invested R100,000 in a qualifying VCC, you were able to deduct R100,000 from your taxable income for that year.
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One of the key advantages of s12J was that it incentivised investors to support small and medium-sized businesses, which are the engines of job creation and economic growth. By investing in a VCC, not only did investors receive their tax deduction and return on capital, but they also helped to create jobs and stimulate economic activity in South Africa.
S12B, on the other hand, is a tax allowance which, with effect from 1 March 2023 to February 2025, allows investors a tax allowance of 125% of funds invested into energy generating assets. This allowance was announced by the Minister of Finance in his latest budget speech, with the sole intention of incentivising the public sector to invest in solar energy solutions to assist with the critical energy issues that Eskom is facing. This incentive has already stimulated the demand for solar energy assets and, by doing so, is creating new jobs a plenty, and is sure to make a meaningful impact on the “loadshedding” that we, as South Africans, currently endure daily.
While both s12J and s12B were designed to promote investment, there are some key differences between these two tax incentives that investors should be aware of.
Catalyst asked Grovest founder and CEO Jeff Miller to explain the differences between the s12J tax allowance, which came to an end in June 2021, and the new popular s12B tax allowance.
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“S12B offers investors a much larger tax deduction than s12J,” Miller points out as the major differentiator. “S12J was limited to 100% of the investment made in a VCC, with an annual limit of R2,5m for individuals and trusts and R5m for companies. S12B allows investors 125% of the investment made, with no annual limit whatsoever for any investor.
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“S12J required investment into qualifying companies that carried on most trades, as long as it was not in financial services, fixed property (other than in hospitality) or any of the sin businesses. S12B is only allowed if the investment is made into solar energy producing assets, which lends itself to more of a low to moderate risk investment.”
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The recently launched Twelve B Green Energy Fund, a private equity partnership structure administered by Grovest, the largest 12J fund administrator in South Africa, allows investors into the fund to receive a 125% tax allowance on their investment.
So for example, if an investor invested R100,000 into the Twelve B fund, they would be entitled to deduct R125,000 from their taxable income for that year, on the basis that the solar assets start producing energy in the same tax year. If the full amount invested is not deployed into energy producing assets, the balance of the 12B allowance will be carried forward to the next year. Interest paid to finance the investment into the 12B fund is fully deductible in the hands of the investor.
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Miller is confident that the Twelve B Fund will raise and deploy R200m prior to the end of the February 2024 tax year, allowing investors to get their full 125% deduction in the current tax year.
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Their strategic alliance with Hooray Power, the pioneers of large battery storage systems in sectional title complexes, gives them the right of first refusal on all projects introduced by them. Miller is of the view that deployment and execution of the funds into energy producing assets is key.
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A material difference between s12J and s12B is the tax treatment of the investment.
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“S12J requires investors to pay Capital Gains Tax (CGT) from R1 on capital returned,” explains Miller. “S12B is far less draconian. As the structure is a partnership, the Investor pays tax in its own hands. When the solar assets are sold, there is a recoupment of the value of the assets at the sale date, which will need to be brought into the hands of the taxpayer. Investors in s12J receive dividends which, if in the hands of an individual or trust, is subject to dividends withholding tax. S12B investors in the fund receive distributions, or share of profits, which is taxed at the investor’s effective tax rate.”
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The Twelve B Fund utilises the Investment proceeds to procure solar assets comprising panels, inverters and batteries, which it deploys across various energy off takers. These off takers, which include sectional title complexes, shopping centres and commercial and industrial buildings, enter into 20-year Power Purchase Agreements (PPAs) with the fund. All off takers need first to be approved by the Funds Investment Committee.
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Miller anticipates the average investment across the various projects to be between R8m to R12m, resulting in a diversified portfolio of around 25 projects in the Twelve B Fund. “We currently have a pipeline of over R300m of projects at various stages. In April, we broke ground on our first two approved projects, one being a large printing works, and the other, a sectional title complex.”
Predictable contractual monthly cash flows allow for bi-annual distributions in March and September each year, with the first distribution to be paid in September this year.
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By incentivising investors to support these businesses, Treasury has effectively opened the door for taxpayers to create jobs, stimulate economic growth, and build stronger communities while, at the same time, getting the generous reciprocal tax benefits available and fixing our debilitating energy crisis.