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Tax ruling confirms investment potential of companies with a large capex spend

Tax ruling confirms investment potential of companies with a large capex spend
  • Jaltech well versed in managing capital for new purchases using Section 12J deduction

By Digital Makeup Inc

The South African Revenue Service’s (SARS) release of a binding private tax ruling confirms that moveable assets fall within the definition of “Qualifying Investments” in terms of Section 12J of the Income Tax Act. Binding private rulings are issued to taxpayers to provide guidance on how SARS interprets and applies the tax law to specific transactions, which in this circumstance means that companies with a large movable property capital expenditure(capex) spend (vehicles, yellow equipment, machinery) can now confidently structure their expenditure through a Section 12J Venture Capital Company (VCC) and receive a tax deduction on an investment they were going to make in any event.

One of the biggest challenges for expanding asset-leasing companies such as those which rent out yellow equipment, car or trailers, and alternative energy plants is the capital required to purchase additional assets to grow their business. Car hire companies for example need to keep buying new vehicles and solar panel rental businesses need to keep up to date with the latest offerings and technology.

What the binding private ruling now confirms is that these companies (junior miners, asset finance businesses, car rental companies) can structure their business through a Section 12J VCC and receive a tax deduction of 28% tax on capital they would have invested in any event. By way of illustration, if a company structures R10 million through a Section 12J VCC, it will receive R2.8 million in the form of a reduced tax bill. This R2.8 million could be invested in further assets to lease allowing the company to enjoy R10 million of exposure while costing a net R7.2 million.

This means that the corporates will be paying less tax and thus have additional funds to invest. In addition, the corporate will receive the full R10 million investment exposure for just R7.2 million.

Financial consulting firm Jaltech has developed a structure specifically for companies with a large capex spend that wish to utilise Section 12J to its full potential. “The strategic rationale behind utilising this alternative structure is the amplified returns for these companies via the tax deduction,” says Jonty Sacks, Director at Jaltech. “This allows the company to reach economies of scale sooner and allow for more competitive pricing, greater brand awareness, and eventually larger market share should some of the saving be passed to the end user.”

Jaltech has developed unique intellectual property in the Section 12J space which will allow these companies to focus on the day to day running of their business while Jaltech is responsible for the setup, running, and administration of the Section 12J VCC. In other words, “if the Section 12J VCC is administered correctly, the inclusion of a Section 12J VCC in a company’s business model should have very little effect on the day to day operations of its business” add Sacks

The early signs are clear that Section 12J will undoubtedly have an enormous impact on the market as over R1.8 billion has already been raised (as of February 2017) in the Section 12J sector, and industry players predict that by the end of February 2018 over R3 billion would have been raised.

The investment that is 100% tax deductibleThe investment that is 100% tax deductible

Asset Leasing Tax Structure