Scenario 1: A taxpayer is receiving foreign income and is a South African resident. For the 2021 financial year he might not qualify for the Section 10(1)(o)(ii) exemption and will therefore be taxed on his foreign income. If the taxpayer invests in a Section 12J investment would he be able to deduct the allowance against the foreign income? Scenario 2: If the taxpayer qualifies for the Section 10(1)(o)(ii) exemption, but his foreign income is more than R1.25m, would he be able to deduct the Section 12J allowance against the portion that is taxable in South Africa?
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
There are a number of comments we can make here, such as reference to section 80G of the Income Tax Act, the deduction cannot be taken into account when employees’ tax is determined by the employer and the consequences of realising the asset within the five year period. We accept you will consider all the issues when a tax position is taken. In any event, section 12J(2) reads as follows: Subject to subsections (3), (3A), (3B) and (4), there must be allowed as a deduction from the income of a taxpayer in respect of a year of assessment expenditure actually incurred by that taxpayer in acquiring any venture capital share issued to that taxpayer during that year of assessment. As the section 10(1)(o)(ii) exemption reduces gross income to ‘income’, the deduction will be limited, in addition to the monetary limit of R2,5 million, be limited to the taxpayer’s income amount.