NASTASSIA ARENDSE: As part of our Investment Unusual feature, we are going to be talking about Section 12J investments.
I’m joined by Richard Asherson, who is a fund manager at Westbrooke Alternative Asset Management. Richard, thanks so much for your time this evening.
RICHARD ASHERSON: Hi. Thanks for having me.
NASTASSIA ARENDSE: We often talk about what a Section 12J company is, and which companies are investing in those particular vehicles. Maybe break it down for us in terms of when we say a 12J company, what exactly are we talking about?
RICHARD ASHERSON: Section 12J is a section of the Income Tax Act. It came into effect from July 1 2009, but really only started to pick up momentum in 2015 when two fundamental changes were made to the Income Tax Act.
The background to 12J is it’s a tax-based regime really designed to stimulate economic growth by getting investors such as individuals and corporates to invest into a wide rage of private companies and get a really nice tax benefit for doing so.
The tax benefit or the incentive that we give our investors by being an accredited 12J company is that they have the ability to write off 100% of their investment against their taxable income in the year that they invest. And as long as they hold those shares for five years, that tax benefit is permanent.
NASTASSIA ARENDSE: What’s the minimum investment amount you need to be able to put into this investment?
RICHARD ASHERSON: Westbrooke Alternative Asset Management is our fund and our minimum is R500 000 as an investment, which gives you a tax saving of just over R200 000 in that year.
NASTASSIA ARENDSE: In terms of those who can invest in a 12J company, is it individuals? Do I approach a company like yourself as Westbrooke? Whom do I approach if I feel like, hey, I’ve got R500 000 to a million to invest in something that can be supportive towards small businesses?
RICHARD ASHERSON: Of course, that’s where we come in. Westbrooke Alternative Asset Management is the leading Section 12J asset management company. It has just short of R1 billion under management. And in terms of who can invest – those are individuals, corporates and trusts. South Africans can invest into our Section 12J company. So it’s really open to everyone, the fundamental principle being that you need to have taxable income to obtain the benefit.
NASTASSIA ARENDSE: In terms of the qualifying companies or even the sector, in what kind of businesses can you invest?
RICHARD ASHERSON: There is actually a really wide range of businesses you can invest into.
Find out more about investment in Section12J funds from Moneyweb’s recent Boutique Asset Manager event.
NASTASSIA ARENDSE: Okay – what can’t you invest in? That will make it a little easier.
RICHARD ASHERSON: That’s the question. There are two limits. The first is that there’s a size limit on the companies you can invest into as an accredited 12J company. That is R50 million. So we can’t invest into businesses that have assets of more than R50 million after the date that we invest.
The second is what they call qualifying company criteria. A few of those are that they can’t be listed, they can’t be a control group company, but more importantly they can’t carry on what they call an impermissible trade.
Now an impermissible trade is really broken up into five major categories, the first being that we can’t invest into businesses that trade in respect of immovable property. So we can’t invest into bricks and mortar other than if we invest into a hotel-keeping operation. I think that’s designed really to promote tourism and leisure and obviously it’s a massive economic driver and one of the largest employers in South Africa.
The second is that we can’t invest in businesses that undertake financial services. So banking, insurance, money lending etc.
We can’t do any of the fun stuff, so we can’t invest into gambling, alcohol, tobacco.
The major one is that we have to invest into businesses that operate mainly within South Africa.
So as long as we are within those, there is quite a wide array of businesses throughout the economic ecosystem that we can invest into.
NASTASSIA ARENDSE: Richard, thank you so much for your time this evening. This is certainly a conversation I’d love to have with you some other time when we can talk about other things within Section 12J.