PAYING TOO MUCH TAX?  Here’s a SARS Tax Incentive for the Franchise Sector

PAYING TOO MUCH TAX? Here’s a SARS Tax Incentive for the Franchise Sector

The Franchise Association of Southern Africa (FASA) is one of the first associations to launch a Section 12J Venture Capital Company (the FASA VCC) in the franchise sector to be utilised exclusively by accredited members. It has partnered with a financial consulting firm Jaltech to provide its members with exclusive access to an approved FASA VCC managed by experts in the industry.

Section 12J of the Income Tax Act was formed to incentivise South African taxpayers to invest in particular areas of the local economy, by providing significant tax relief on the amount invested.

What this means is that FASA will now be offering its current/new members an opportunity to benefit from the FASA VCC as an added value membership proposition.

Any South African taxpayer now has the opportunity to invest into a franchise of their choice through the FASA VCC and claim a tax deduction of between 28% (for companies) to 45% (for individuals and trusts) on their investment in the franchise.
The table below illustrates an example where the purchase price of a franchise is R3 million.

 

Description Individuals Corporate
Initial purchase price R3 000 000 R3 000 000
Tax relief (in tax year of initial investment) (R1 350 000) (R840 000)
Net purchase price R1 650 000 R2 160 000
Assumed effective tax rate 45% 28%

 

 

Effectively Section 12J allows prospective franchisees an opportunity to invest in a franchise at a significant discount through the associated Section 12J tax deduction.

One of the biggest challenges for prospective franchisees who are considering starting or investing in any franchise, whether it be in the restaurant, retail, beauty, asset rental sector etc, is the high start-up cost associated with acquiring the rights to the franchise.

Vera Valasis the Executive Director of FASA states that “with the introduction of the FASA VCC, a prospective franchisee can now alleviate a large portion of the financial pressures of purchasing a franchise as Section 12J allows for prospective franchisees to acquire these rights at a discount.  What this now means is that a prospective franchisee would be losing out on a large sum of money if they don’t invest through the FASA VCC.”

The benefit is not only limited to potential franchisees. Franchisors looking to expand their existing stores can use the same structure to invest in new stores and receive the associated tax deduction.

The introduction of Section 12J will allow franchisors to reach economies of scale sooner and allow for more competitive pricing, greater brand awareness, and eventually larger market share should they take up the opportunity to structure future business through a Section 12J VCC.

If you are looking to purchase a franchise or most businesses under the value of R50 million, feel free to contact Jaltech at info@jaltech in order to see whether your investment qualifies for a Section 12J deduction. Visit Jaltech for more info.

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