Financial PlanningInvestment

New investment caps for Section 12J tax incentive not all doom and gloom

By: Westbrooke Alternative Asset Management

National Treasury appears certain to retain changes to the Section 12J tax incentive, which allows South Africans to write off 100% of the investment against their taxable income whilst simultaneously benefiting from attractive returns, creating jobs and stimulating the economy. According to the change, individuals and trusts will now only be allowed to invest R2.5 million per annum and corporate investments will be capped at R5 million per annum (previously these amounts were uncapped).

Dino Zuccollo, fund manager at Westbrooke Alternative Asset Management, SA’s largest S12J fund manager comments, “Due to these legislative changes, it is likely that smaller Section 12J providers will struggle to raise sufficient investor capital and keep up with the various Section 12J compliance requirements as they will now need to raise capital from a wider more ‘retail’ investor base. Should this lead to non-compliance of the legislation, the Section 12J companies which they manage may be penalised by SARS (up to 125% of capital raised), which will effectively negate a large portion of the Section 12J tax deduction. Westbrooke is therefore cautioning financial advisors and investors to do their homework on the asset manager and their investment strategies prior to investing.”

“Ensure that the asset manager is capable of raising sufficient capital to make sizeable underlying investments. According to the South African Venture Capital and Private Equity Association (SAVCA), the minimum sustainable and economic fund size for a small Section 12J manager is approximately R200m. In addition, consider whether the manager has a history of successfully deploying funds raised in line with the 12J legislation and whether it has extensive operational and compliance structures in place which are capable of handling the larger number of investors as a result of the new investment cap.”

However, Zuccollo believes that the larger, more established Section 12J providers with a proven track record of raising sizable funds and successfully investing this capital through an experienced and skilled team will still provide a compelling investment opportunity for taxpayers while at the same time reducing their tax liability. Westbrooke, as South Africa’s largest S12J asset manager, is well-positioned to ensure investors aren’t taking additional risk from investing in unproven funds.

“In addition, the changes may be effective in curbing abusive structures which have crept into the industry. We are working with National Treasury and Parliament regarding these changes and are hoping to initiate a conversation regarding the potential extension of the Section 12J incentive in the coming months,” he says.

It is believed that significantly less than 2019’s approximately R4.5 billion will find its way into Section 12J investments in 2020. This will reduce the amount of private sector investment into SMMEs (the original intention of Section 12J was to boost the local economy and create jobs).

Zuccollo believes that since both retirement annuities (RAs) and Section 12J are effective annual investment options which allow individual taxpayers to reduce their income tax or capital gains tax liabilities, they should be considered in conjunction as part of a balanced and well diversified annual investment portfolio. Section 12J investments allow investors a shorter investment horizon when compared to RAs (minimum 5 years), a larger annual cap, the potential to receive annual dividends and the ability to invest in an alternative underlying investment as opposed to the more traditional asset classes into which RAs typically invest,” Zuccollo adds.

Investment performance

As South Africa’s largest Section 12J manager with an established track record, Westbrooke’s historic Section 12J funds have outperformed traditional local and international benchmarks. From 1 March 2016 till end August of this year, a basket portfolio of Westbrooke’s 2016 S12J funds (14,9%) substantially outperform the MSCI World Index (9,5%), the JSE Top 40 (5,5%) and the SA Listed Property Index (-0,9%).

Westbrooke Alternative Asset Management has a 15-year track record in managing alternative investments through its private equity and asset management businesses. Westbrooke is the only S12J fund manager to have successfully deployed over R1,3 billion in 50 Section 12J investments – about one third of the industry’s total investments.

Westbrooke offers three investment strategies for 2020

Alternative rental income assets

  • Westbrooke Aria provides growth capital to a portfolio of asset-backed rental businesses, with contractual revenue streams in partnership with experienced and reputable operators to ensure alignment of risk and reward.
  • Westbrooke Aria Plus seeks to invest in a portfolio of moveable asset rental businesses which generate predictable revenue streams alongside experienced, reputable entrepreneurs and which may take underlying equity positions. (Revenue streams are not necessarily contractual and are therefore compensated with a targeted higher annualised return).

Student accommodation

  • Westbrooke Stac invests into a portfolio of income-generating student accommodation properties in partnership with established and reputable student accommodation operators that have proven track records in the industry.

Zuccollo explains, “Some investors may be confused about which Section 12J investment to select. We also offer them the choice of income, balanced or growth portfolios which includes a combination of our investment strategies. In addition, we have created an online investor toolbox to provide a range information so that those interested can fully understand the incentive and investment strategies prior to investing. Investors will be able to deduct the full investment against their taxable income and reduce the amount of tax payable at the end of February 2020.”

Westbrooke’s minimum investment size is R250 000 and offers close on 25 February 2020.

The above does not provide all information material to an investor’s decision to invest including, but not limited to, risk factors. The information is not intended as, and does not constitute, investment, legal or tax advice or an offer to sell any securities to any person or a solicitation of any person or any offer to purchase any securities. This is for information purposes and returns are not guaranteed. The targeted returns indicated are indicative in nature and are based on the performance of Westbrooke’s previous S12J investment strategies. The value of all investments and the return may fluctuate. Investment in financial products is subject to risk for the investor and investors are advised to be aware of these risks prior to investing.

For more information about Section 12J go to

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