Section 12J legislation was introduced to encourage local direct investment in early stage businesses, a tax incentivised Venture Capital Company (VCC), driving the development of a local entrepreneurial culture and resulting in employment, wealth creation and additional tax revenue.
The tax incentivised Venture Capital Company (VCC) was implemented to give small and medium-sized enterprises access to equity finance.
The South African Revenue Service (SARS) foregoes otherwise payable income tax now, in return for future income tax payments from the investee company, capital gains from the VCC on exit, and dividends tax or capital gains tax from the investor when funds are paid out.
Last year Fairtree launched Fairtree Capital Hospitality (“Company”), a Section 12 J registered company, which enables investors to participate in the fast growing hospitality sector whilst enjoying legislated tax breaks.
The Company’s strategy is to buy hotels positioned to benefit from the growth of international and local tourism in order to maximise growth over a 5-year term.
The Company invests in efficiently structured hotels in specific destinations, where their management strategy ensures that they operate at optimum capacity.
According to Portfolio Manager, Joe Bester the Company had significant interest at the end of the 2018 tax season and this has persisted through the current year.
Fairtree has also received an institutional allocation into its Section 12J portfolio. The Company has made four investments to date and is currently considering numerous further investments.
“This investment option has gained popularity among investors looking for attractive alternative sources of return in an uncertain economy whilst benefitting from the 12 J tax advantages if held for five years,” said Bester.
“Taxpayers who invest in a registered VCC are entitled to a 100% tax deduction on monies invested as the entire amount invested in the Company is deductible from the investor’s taxable income in the year that it is made, as long as the investment is held for five years. This will result in a potential tax saving of up to 45% for individuals, 45% for trusts, and 28% for companies (being the reduction in marginal taxes payable) on their investment,” said Bester.
“The Company uses its expertise, in association with its hotel management partner, Providence Hospitality, to reposition and restructure hotels for growth and to capitalise on the changing accommodation market,” he said.
“We see this as a real opportunity to identify properties that will benefit from Fairtree’s investment and operational expertise whilst potentially delivering a good alternative return to investors,” added Bester.
With a minimum investment of R1 000 000, potential investors will acquire an equity share in a private limited company, benefitting from one of the lowest management fees of all listed 12J structures.
“We are targeting a target growth of CPI + 5 -10% per annum, which together with the investments’ low correlation with traditional asset classes, we believe will be an attractive proposition to investors.” said Bester.