If you’re ever feeling a little hard-done-by thanks to SARS, know this: Government has done an outstanding job of encouraging investment and stimulating job creation (COVID-19 aside) by introducing some really forward-thinking tax incentives.
Delving into these incentives with a few noteworthy bean-counters has been a revelation for me as an investment specialist. I’ve been left astonished, and certainly questioned our findings as they slotted into the ‘if it sounds too good to be true, it probably is’ bracket.
As you will uncover below (if you’re like me, you may have to read a few scenarios twice and look at the pictures) we’ve taken what’s on offer and put all the possibilities in bed together. The result could be described as orgasmic, but we won’t go that far.
Good old 12J
If you haven’t heard about Section 12J investing, you’ve been living under a rock (not a lock). So for those rock-spiders out there, Section 12J of the Income Tax Act was introduced in 2009 to encourage South African taxpayers to invest in local companies and receive a 100% tax deduction of the value of their investment.
You read that correctly – 100%! That means, if you purchase a unit via a Section 12J fund, let’s work on a purchase price of R1.8 million, you can be refunded by SARS as much as 45% of your investment amount (depending on your tax bracket). On a R1.8 million purchase, that’s R810,000 saving as you walk through the door.
The investor receives a share certificate together with a tax certificate, allowing the invested amount to be deducted from the investor’s taxable income, in the year that the investment is made. To date, South Africans have invested an estimated R10 billion into the 12J sector.
VAT refund via short-term letting structure
The short-term letting aspect of our fund has been structured to claim the VAT back on the purchase price of the unit.
So, if you pay R1.8 million for your unit, the holding company in whose name the property is purchased via the Section 12J fund, will qualify for a R235,000 VAT claim, resulting in a total purchase price of R1,565,000.00. Easy as that.
13quin, the twin sister of the much talked about 13SEX (who has done the rounds in the residential property space), allows 55% of the purchase price of a commercial unit to be written off for tax purposes.
It’s broken down into 5% per year for 11 years, but, in total, this is a significant saving. Say, for instance, you purchase a unit at R1,565,000, R78,000 of that can be deducted per year for 11 years.
But if you make the most of the tax savings available when you file your tax return, legally, R78,000 per year (based on the purchase price of R1.5 million) qualifies as tax-free income.
If you’ve financed the investment via a bond, you can also throw in your interest paid on your bond. Sounds like a complicated relationship, but once you understand who fits where, the opportunity is irresistible.
Let’s assume you achieve a conservative 6.5% rental income on the unit for the first year, which equates to roughly R100,000. Now you have probably bonded the property at 70% (R1.26 million) which means an interest expense at around R90,000.
So your profit for the year is R10,000. Under normal circumstances, you would obligated to pay tax on the R10,000 profit. But of course, now in this clever Quin set up, you’ve another R78,000 to write off, which brings your ‘income’ to a R68,000 loss (without losing) and that’s just in the first year.
If you continue with the calculation at a 6% annual inflation, you essentially will not be paying tax on your property investment for 13 years. And that’s just the Mighty Quin side of things; need I remind you of the Section 12J upfront refund?
It’s an investor’s dream, look at it this way:
- firstly, up to 45% of your invested amount is an upfront tax saving;
- secondly, cha-ching, a 15% VAT refund on your purchase price; and
- finally, to sweeten the deal, 13quin gives you 55% tax-free earnings, granted over a period of time. But time flies when you are having fun.
Sounds too good to be true, right? Here’s what it will look like in the table below
|Section 12J tax saving:||R810,000|
|13quin: (over 11 years)||R860,000|
|Total tax benefit:||R1,905,000|
It’s up to us to make the most of what’s out there, make hay while the sun shines. I assume as SARS scrambles for much-needed tax revenue, these incentives won’t be on offer indefinitely.