Investing in disruptive technology through S12J

Invest in disruptive technology through S12J

S12J Disruptive Technology

In 2009, the South African government identified small and medium-sized entities (“SMEs”) as a potential major contributor to future economic growth. One of the main challenges to the sector, however, was the limited access of SME’s to equity finance. So, to incentivise investment, and assist these sectors with equity finance, the South African government implemented a tax incentive for investors in these enterprises, through a Venture Capital Company (VCC) regime known as Section 12J.

Section 12J of the Income Tax Act incentivises taxpayers to invest in the economy via an approved Section 12J Venture Capital Company (Section 12J VCC). It allows an investor a 100% deduction against taxable income in the year of investment if that investment is for at least five years. The deduction is set to a maximum investment of R 2 500 000 for individuals and trusts, and R 5 000 000 for companies.


So, by way of illustration, let us say an investor invests R 1 million into a Section 12J VCC. The investor will receive a tax credit of R 450 000 on the submission of their tax return for the year in which the investment is made, or the equivalent depending on their tax bracket. Companies will receive a R280 000 tax credit.

And this incentive appears to be working.


Since its inception, S12J Investments have increased by over 5 X. With the total value of 1230 VC deals in 2019 exceeding R1 billion.

However, this amazing opportunity is subject to a sunset clause which is terminating on 30 June 2021, making this opportunity for the 2019 – 2020 tax year, your last opportunity to invest.


What exactly are you investing in?

For an investment to qualify under the S12J benefit, it may not involve companies that:

  • trade in immoveable property, except to trade as a hotel keeper (includes bed and breakfast establishments);
  • offer financial service activities such as banking, insurance, money-lending and hire-purchase financing;
  • provide financial or advisory services, including legal, tax advisory, stock broking, management consulting, auditing, or accounting;
  • are gambling operations including casinos or other games of chance;
  • are involved in manufacturing, buying or selling of liquor, tobacco products or arms & ammunition.

Section 12J VCC qualifying businesses are:
Technology companies, manufacturers, student residences, renewable energy companies and general SMMEs. In other words, mostly cutting edge, disruptive technologies.

Kalon’s Section 12J disruptive technology fund invests in entrepreneurs solving African problems with the potential to scale into global markets. We focus on providing smart capital, as well as on delivering smart returns using most of the capital in support of entrepreneurs who are disrupting traditional industries.


Kalon seeks out companies with high margins and unique intellectual property (IP) to invest in using a “high-touch” methodology and approach to assist these companies through hands-on involvement to help build the businesses into assets of value.

Kalon Portfolio Highlights in 2020 include:

– Ozow hitting the ZAR1 billion in GMV (Gross Merchant Value) in one month, a first for the company;
– Finchatbot raising a round of capital for their European expansion;
– Sendmarc exceeding 100 paying clients in less than a year;
– Mobiz growing revenue at a remarkable 300% in FY20;
– Flow seeing a 30% MOM revenue growth during the last few months; and
– Carscan closing numerous Proof Of Concepts, including one for a European insurance company and we are excited about the pipeline of opportunities going into 2021.

How can you get involved?

  • Kalon is hosting a free webinar on Wednesday 27 January where we will take attendees through the details and answer any questions.
  • As a taxpaying entity, an individual or a company needs to approach a VCC such as Kalon with your investment amount. The VCC would then invest this sum within their own company and issue you with a certificate for the investment.
  • This certificate allows you to deduct the full value of your investment from your taxable income in that tax year, essentially offering the taxpayer a tax-free investment opportunity.
  • When investors are paid out dividends, they are then taxed for capital gains or they pay dividends withholding tax. It is also vital to note that, when the S12J investment reaches maturity after five years and the investor withdraws from the VCC portfolio, the base for capital gain will be zero due to the initial benefit of 100% tax-deductibility.

It is important to understand that Section 12J investments are considered medium to long term investment vehicles, and it is not advisable to invest a Section 12J VCC unless you can commit to a minimum of a five-year investment. An investment will not reach its full potential in less than five years and investors will not qualify for tax-deductibility if their investment is withdrawn before the five-year period has elapsed.

Additional stipulations:

  • The S12J company may not invest more than 20% of all investor-acquired funds in any single qualifying investee company, ensuring that the incentive achieves its objective of supporting many privately-owned companies while simultaneously creating a diverse spread of investments to mitigate risk.


What to look out for:

  • Not all S12J companies are created equal. So, do your homework. S12J companies must be licensed with the Financial Services Board (FSB) and registered with the South African Revenue Services (SARS).


  • A potential risk for investors is that there may be no secondary market for their shares in the S12J company after the investment period. This risk can however be negated if the investment is professionally managed by S12J companies. There should always be a clearly defined exit strategy to create liquidity for investors.

In summary:

  • S12J Investors can claim the full amount used to acquire shares in the S12J company as a deduction from their taxable income in the year of that investment, provided the shares are held for at least five years.
  • The initial tax benefit cannot be recouped by SARS. However, after five years, the full proceeds from the sale of the shares will be subject to capital gains tax.
  • Time is running out for investors to take advantage of the S12J tax benefits. The Section 12J sunset clause is scheduled to take effect on 30 June 2021. Whether or not it will be extended, is at this point unknown. However, as an investor, if you invest now, you will continue to receive the tax benefit on any funds invested in a registered S12J company prior to June 2021, even if the five-year investment period ends after that date.
  • There is a legislated cap on the amount of funds that an investor may commit to a registered s12J company. Companies may invest a maximum of R5million. Trusts and individuals a maximum of R2.5 million per annum.
  • The full amount invested in is 100% deductible from your income in the year in which the investment is made. This applies to individuals, companies, and trusts. The total return equates to a 45% tax incentive or the equivalent depending on your tax bracket. Companies will be at 28% tax incentive.


The S12J investment option has gained significant traction in the last few years, among individuals and businesses seeking to reduce their tax liability – and find alternative sources of return in uncertain and volatile markets. But with a pending expiration date, now is the time to take advantage of the offer.