South African cannabis investors should urgently take advantage of the so-called ‘Section 12J’ tax break while government makes up its mind on whether to scrap the incentive.
Chairman of the 12J Association of South Africa, Dino Zuccolo told Simon of Moneyweb Radio that Treasury was considering reviewing the legislation but that the tax incentive remained in place for the time being. Section 12J of the Income Tax Act is effectively a government incentive to promote private investment in small businesses and give investors a healthy tax break at the same time.
Last year Treasury indicated it may close this tax incentive and would be gathering more information before making a final decision. Zuccolo says that in terms of the current tax year ending February 2021, Section 12J investments are secure.
Economist says Section 12J is ideal for cannabis companies
Veteran economist Chris Hart is setting up a Section 12J cannabis grow op in KZN
Investment advisor Chris Hart has been one of the early movers to use the incentive for cannabis. His Impact Investment Africa has gone the 12J route as he explains on the company’s website:
This share class (medical Cannabis) is offered via the Section 12J of the income tax act which allows the investor to deduct the full capital amount of their investment from their income for income tax assessment purposes in the tax year the investment is made. To qualify for the incentive, the investment must be made through a SARS approved and registered Venture Capital Company (VCC). The investor must be invested for a minimum period of 5 years. The investor is liable for Capital Gains Tax on the exit of the investment. The tax act specifically allows investors to gear their S12J investment. The IIM Section 12-J offering is structured in a way that gears the investment in a way that delivers a lower than most venture capital type risk-investment outcome.
Impact Investment Africa has applied for a cannabis cultivation license for Ngoye View Agriculture, a proposed community-driven grow up near Richards Bay in KwaZulu Natal.
See Smart Tax Breaks for Investors in New KZN Grow Op
Section 12J an alternative to RA’s
Zuccolo says Section 12J investment is also available for individuals and trusts to a limit of R2.5 million every year and should be seen as a viable alternative to a conventional retirement annuity policy.
Zuccolo: Make use of the SA cannabis tax 12J loophole while it lasts
“For a company, you can invest up to R5 million. If you just quickly contrast that to a retirement annuity, you’ve got a few R150 000 per annum capped for individuals, so it’s obviously smaller. But in the same vein, a Section 12J only needs to be held for five years, whereas an RA can only be commuted once you turn 55. And, of course, the big benefit to a 12J is that you get to make an uncorrelated alternative-type investment to the underlying, which is very different, of course, from your traditional equities that a retirement annuity is typically invested into.
In a nutshell, he says “you get a rand-for-rand deduction of every rand that you invest in a Section 12J company against your taxable income in the same year that you invest.
So if I earn R100 this year, and I invest R100 in a Section 12J company, effectively this year I don’t pay any tax. And then what happens in turn, is a Section 12J compliant fund manager will take your money and invest it into different areas of the South African economy. And of course, that has a whole lot of knock-on benefits, both to the investor who, as you mentioned, pays exit Capital Gains Tax, but he gets a very healthy tax break upfront.
Zuccolo says there should be clarity on the future of Section 12J schemes in the Minister of Finance’s budget address to Parliament in February 2021.