One major differentiator between wealthy and middle class citizens is access to information. Information asymmetry in economics, is defined by Wikipedia as the study of decisions in transactions where one party has more or better information than the other.
There is a popular Bible scripture in the book of Hosea 4:6 that says that my people perish because of lack of knowledge. This scripture means that individuals with no access to information or are in possession of limited information are likely to make decisions that will lead to their demise.
There are two things that erode an individuals’ wealth, miscellaneous spending and taxation. In this context, wealthy individuals have mastered the art of tax avoidance where they pay the least possible tax required. Whilst majority of individuals are aware of the tax deduction on payments towards a retirement fund of up to 27.5% and Tax Free Savings Accounts, there is little knowledge regarding an investment that allows individuals to claim the full capital contributions invested in a company and investment returns thereof.
Section 12 J Venture Capital Companies (VCC’s) the darling of the South African Revenue Services, is a mechanism that allows investors in SMME’s to receive a 100% tax break on any shares purchased in those entities. This venture allowed for SMME’s to raise capital in industries that historically struggled with capital financing and also create microeconomic downstream effects such as economic growth and employment.
Though, important to note is that the investment period has to be 5 years and more and the minimum investment in such entities is between R 100 000 and R 1 000 000. In the context of South Africa, this type of investment is deemed exclusionary with the median salary at R 21 430 as expressed by Statistics South Africa’s Q2 results in its 2018 Quarterly Employment Survey (QES).
To curb this, platforms such as Easyequities has partnered with a Section 12J VCC in order for ordinary citizens to purchase shares at any amount in these companies. The intention of this partnership is for individuals to raise a pulled minimum investment amount of R 100 000 that will be invested in these entities. If the capital raising fails and does not reach the desired R 100 000 the funds will be paid back to the investor.
However, just like with any other investment there are risks and limitations. According to MD of Brenthurst Wealth and Moneyweb contributor Brian Butchart, investments in a Section 12J VCC are not the Holy Grail of creating wealth. He further asserts that potential investors need to weary of the industry, longevity and the experience of the management in the respected VCC’s.
He further asserts that investments in Section 12J VCC’s are “no way a total tax free ride”. Important to note is that the tax benefit is due to the investor in the year of which the investment was made. To add on, an investor will be liable for withholding tax when receiving dividends and CGT through the sale of shares.
Further issues have been highlighted regarding these companies ranging from the competence of the asset managers, registration, compliance with the FSCA, the fee structure of the funds and so forth.
One important point to consider is the liquidity of the companies once an investor opts to sell the shares. Are the companies liquid enough to payout the cash?
With innovation comes change, with any investment comes risk. Investors need to take any investment decision with a pinch of salt. Financial planners will all employ different strategies regarding wealth creation. Investors need to educate themselves on new investments and re-visit their risk appetite.
There is no Silver Bullet when it comes to investments we take the wins with the losses.