Section 12J – The basics – Sunstone Edu Series 1

Welcome to the first in the Sunstone Edu-Series. 

Every month we will be uploading a new piece, on Facebook, Instagram and Linkedin. The intention is to provide you with easy to understand information on various topics around Section 12J, and investing in general.

Feel free to send us a message with any topic you would like to see covered in one of the upcoming pieces. 

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Section 12J – The Basics:

What is Section 12J?

Section 12J refers to a section in the South African Income Tax Act which provides a tax incentive for individuals, trusts and companies who invest in a SARS approved Venture Capital Company (VCC). That means investors can claim a 100% deduction against their taxable income in the year in which the investment is made.

Why do section 12J investments exist?

Section 12J was introduced to the Income Tax Act in order to ease the financing challenges  that small-medium sized enterprises faced. These Qualifying Companies (QC’s) are now able to access  more readily available and cost-effective finance, allowing them to grow their businesses and in turn create jobs and stimulate growth in critical sectors of the South African economy. 

From a SARS perspective this is a valuable initiative. It is important to note that while they forfeit taxation at an investor level they still collect taxes at a QC level.. An additional benefit is that the attractiveness of section 12J has incentivised a large number of South African’s to invest their capital locally.

Where Section 12J is today?

Section 12J turns 10 years old this July. It has developed  from an incentive used to raise capital for a small number of high risk Venture Capital Companies into a mature alternative asset class, with both social and financial incentives for investors. New investors are now able to select risk and return profiles in underlying investments that are in line with their needs, while taking advantage of the tax efficiency of this investment class.  Section 12J has experienced exponential growth in the amount of capital that is invested year on year.

Current section 12J industry sectors:

  • Movable assets – Investment example is Sunstone, which invests in assets for the purpose of renting them out over the duration of an investment term to provide annual or bi-annual dividendsto investors.
  • Alternative Energy – Investments include  commercial, industrial and residential solar asset installations. 
  • Hospitality – Investments include hotels, lodges and student accommodation
  • Mining – Investments focus on junior mining assets 
  • Agriculture – Investments focus on various farms and farming projects.
  • Tech – Investments directly into tech companies.
  • General – A fund which is not mandated to a specific sector 

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Next post: Why movable assets?