Cape-based investment property specialists, Flyt Property Investment, have made investment into hospitality property accessible for future projects via their Section 12J finance-facility fund, the Flyt Partnership 2022 fund. Subscription to the fund will provide investors access to the Section 12J tax-break before the 30 June cut-off, and allow them to park the funds while they wait for new projects to come on board.

The Section 12J tax incentive, which expires on 30 June 2021, could very well see South African investors suffering the “you don’t know what you’ve got, until it’s gone” blues, as last-minute realisations seem to have hit the investment arena. Investors eager to make use of the final opportunity SARS is affording taxpayers are looking to sign on any dotted Section 12J line, as the 100% tax deduction is the latest must-have item in any up-to-date investment portfolio.

Described by specialist Section 12J firm Anuva Investment’s Neill Hobbs as “hands down the best tax-saving opportunity imaginable”, the Section 12J incentive was introduced by SARS and treasury in 2009, as a means to boost investment into small-to-medium-sized enterprises and, in doing so, stimulate the economy and improve job creation. The incentive initially received little attention, as it seemed limited to the extremely wealthy and out-of-reach for average investors. However, as experts began to realise the nature and merits of the opportunity, so too did smart portfolio and investment managers and, over the last 8 years, the Section 12J sector has developed some attractive investment products. In response, property and Section 12J specialists married the handsome tax deduction with clever hospitality-suited property ownership and a new 12J asset class caught the eye of traditional investors.

However, at the eleventh hour, many Section 12J funds are pulling out all the stops to attract investors, and the scurry for last-minute offerings might result in an “anything goes” scenario, as fund managers hustle for attractive options. Ryan Flowers, Fund Manager at Flyt Property Investment, warns that investors should tread carefully as they shop for 12J investments, and make sure they are confident in the fund manager and happy with their underlying investment. The firm have sold out of their initial Section 12J hospitality property investment options leading up to the 2021 tax season deadline and have since received considerable interest in their ancillary tranche of property ownership via 12J at Cape Town’s One Thibault and The Upper East Side hotel apartments in the Woodstock area.

Flowers explains that the popularity of their offering was due largely to the finance facility offered through their Flyt Partnership Fund, which was fully subscribed and sold out of 3 developments by SARS’s February deadline. The Flyt R190 million-strong Partnership Fund provided investors with the funds to invest upfront while they waited for their tax refund. “The problem with any Section 12J investment is that you need the cash upfront to invest in order to receive the tax certificate and then the tax refund,” he points out. During a recent webinar Flowers announced that due to demand from current investors the firm has launched a 2022 Partnership Fund. “The Flyt Partnership Fund 2022 is aimed at making sure investors don’t miss out on the final Section 12J tax rebate, with a simple 5% deposit while they wait for the next Flyt project to come onboard. We enable qualifying investors to finance the portion of their 2021 income or company tax in our Section 12J fund and wait in the wings for the next exceptional Flyt property investment to become available, essentially providing a very easy way to make a 12J investment while acting as a tax cushion by shielding investors from their next tax contribution, without rushing in,” he stated.

According to the firm the Partnership Fund has, to date, saved investors R60 million in tax which has been used to acquire hospitality properties. Subscriptions to the 2022 fund will be capped at R300 million, and investors can contribute via their R2.5 million allowance for individuals or R5 million company allowance.

A date with the tax man for any Section 12J investor is a satisfying rendezvous. The morning after SMS is reason for many a refreshing smile; who would’ve thought we’d ever be saying “Thank You, SARS”? We’ve had a flurry of new, delighted investors who invested in our Section 12J offerings before 29 Feb this year contacting us, citing very pleasing tax return calculations, many reporting a few extra 0000s on this year’s refund.

If you’re not one of those ‘in the know’ – investment into a Section 12J registered fund qualifies for a 100% tax refund. So, in simple terms, 100% of what you invest is deducted from your taxable income by SARS via the Section 12J scheme.  This is one of government’s effective efforts to stimulate the SMME sector while simultaneously creating jobs. Any amounts invested into venture capital 12J companies receive 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.

The Section 12J Industry Association recently reported that, pre-COVID, the incentive has since its introduction in 2009 stimulated R9.7 billion in investment and created 10 500 jobs. At Flyt, we know for sure that our investors’ funds have not only created jobs, but, more importantly, kept people working in these hard-hitting times. Kudos to SARS, the scheme is working!

But back to the money. Let’s say you fit into the 45% tax bracket and decided to invest R1million into a Section 12J approved fund. That R1million rand is deducted off your taxable income and therefore R450 000 will be refunded to you by SARS.  Yes, initially you’re going to have to come up with the lump sum to invest and pay over your tax as you would normally do (or you can chat to us about our Partnership Fund – a solution to the capital outlay problem), but once the year is up, you’ll be one of those receiving the extra zeros on your SARS refund.  If we put it in the context of a Flyt property purchase: if you purchase a unit via a Section12J fund – let’s work on a purchase price of R1.8m – you can be refunded by SARS as much as 45% of your investment amount (depending on your tax bracket). On a R1.8m purchase, that’s R810k saving as you walk through the door.

Sounds like there must be a catch somewhere, I agree, but if we have to find one, it’s this: In 2017 SARS limited, a previously uncapped, investment to R2.5 million per annum for individuals and R5million for companies. A sunset clause has also been introduced, making Section 12J only available until 30 June 2021. That means investors only have 2 more tax seasons (unless the industry is successful in its rally to have the incentive extended) to benefit from the incentive.

Invest in rousing South African companies instead of paying tax – where do I sign, you say?

The rebirth of hospitality and the unquestionable tenacity of the tourism sector.

It has been a tumultuous year for the tourism and hospitality industries with each sector being dealt a less-than-favourable hand as a result of the unforgiving Corona epidemic and subsequent lockdown. As level 1 opens more doors we can take our hats off to the hotels, restaurants, wine farms, tour operators, conference venues and guest houses that have rallied against the storm, who have shown incredible tenacity despite the odds and risen from the ashes, not unscathed but willing and able to do what they can to restore and revive the hospitality sector and tourism in South Africa.

From your housekeeper to your general manager, from your travel coordinator to your tour guide, from your waiter to your busboy – each and every one of us interlinked – we share a common goal, and that is to get travel and tourism up and running again. The joint passion and resolve of our industry is what has changed the course of this unprecedented time and is ultimately the reason why we will be ready to welcome visitors both locally and internationally to our shores and through our doors again.

I, as a fellow tour operator and hospitality manager, feel privileged to be a part of this movement. As hard as the knocks have been, we hospitality professionals are ready and we are hungry to deliver exceptional service. We are ready to showcase our country again on the main stage and we are ready to show our investors and global counterparts why we are proudly South African and deserve our place as one of the top travel destinations in the world.

With this forward momentum and positivity the team at Flyt Property Investment are thrilled about showcasing our offering and have launched WINK Aparthotels, an exciting, new hospitality brand in South Africa. Our properties are perfectly positioned and offer the full spectrum of short- and long-term accommodation solutions at our aparthotels in Cape Town!

Watch this space!
#SouthAfricaistravelready

Zane De Decker, MD Flyt Property Investment

South Africa is currently enjoying the status of a Tax Haven – a bold statement, I admit, and one that some might think outrageous, but if you break down the monetary calculations of a Section 12J investment, you will realise the glaring opportunity too.

I’m still quite astounded at how many investors and financial advisors don’t fully understand the workings of SARS 12J tax incentive, which incidentally has a cut-off date of June 2021.

Think about this; 100 per cent of what you earn can be tax deductible via the 12J structure. Since the introduction of the limit to the total amount permitted to be invested annually (those in the know were taking advantage) an individual still has the opportunity to invest R5million (R2.5m this year and R2.5m in 2021) and a company is limited to R10million (R5m this year and R5m next year). So, essentially, if you are an entrepreneur who owns your own company, you can easily – and legally – enjoy a R15 million tax deduction.

Salary earners, too, need to be taking advantage of the structure. Let’s say you earn R1m per annum; you are permitted to invest the R2.5m per annum (so R5m). If you invest the R5million, you’ve created a tax loss that will shield the next R5million of your salary. In other words, you will pay no tax for the next 5 years! SARS will reimburse you your monthly tax deductions when you submit your tax return.

Beg, borrow or steal

When our clients do finally catch on to this Tax Haven window, they’re looking in all sorts of places for some money to invest. At Flyt, we have developed our Section12J product to such an extent that we offer our clients who don’t have the R2.5million (or any part thereof) available to invest, an option to borrow the funds. The tax deduction/reimbursement will take care of a large portion of the repayment after which income derived from the investment pays off the remainder of the loan.

Instead of conjuring up clever and expensive ideas of how to avoid paying tax, rather just find a decent Section 12J fund and shield it?

I find it strange that many high net-worth individuals send their money offshore to favoured tax havens such as Isle of Man or The Bahamas. Now that sounds wonderful to be sending your hard-earned cash on an island holiday, but what does it really mean? As a start, it means you’ve probably invested in a random company or fund, that you know very little about, which yields a low ROI and attracts very handsome set-up costs and ongoing management fees. This all somewhere exotic you’re hoping to go and visit one day.

BUT, more importantly, we must not forget the intention of Section 12J is to stimulate investment into certain sectors of our economy with the end goal of creating jobs. Any South African investor, especially in these trying times, who has the opportunity to invest would be missing a huge opportunity to boost the economy, be a part of the solution and take complete advantage of the short-lived tax haven status we are currently legally enjoying.