SECTION 12J OF THE INCOME TAX ACT NO. 58 OF 1962: SARS IS NOW PREPARED TO DEDUCT ALL YOUR TAXABLE INCOME: PART ONE
One of the significant hurdles facing South Africa’s burgeoning small and medium-sized businesses is the access to equity finance. To assist in alleviating such difficulties, the government, in conjunction with the South African Revenue Service (“SARS”), has implemented an appealing tax incentive for investors in these enterprises through a venture capital company (“VCC”) regime. The legislation is based on the success of the venture capital trusts implemented so effectively in the United Kingdom more than a decade ago.
What are Venture Capital Companies?
A VCC is a company designed to provide individual and corporate investors with access to a range of companies which have the potential for large growth but are in need of funds to realise these ambitions.
The VCC raises the funds required by the small and medium-sized businesses by issuing equity shares to investors in return for capital. The capital raised is then allocated by the fund manager of the VCC to venture businesses with the most favourable prospects.
Not all VCCs are created equal, with companies’ objectives, strategies and methodologies varying from company to company. Some might be investment club-type entities in which a small group of individuals pool their resources to invest in a portfolio of businesses; others are highly sophisticated entities run by professional asset management companies.
In order for a company to apply for a VCC status, an application must be made by the company and sent to SARS for approval. The following supporting documents must accompany such application:
- a tax clearance certificate to substantiate that the company’s tax affairs are in order;
- a copy of the CoR 14.3 registration certificate in relation to the company and issued by the Companies and Intellectual Property Commission (“CIPC”) confirming the company’s registration number;
- a copy of the memorandum of incorporation of the applying company to confirm that the sole object of the company is the management of investments in qualifying companies; and
- a copy of the Financial Services Board license certifying that the VCC is licensed as a financial services provider.
SARS will assess the application to determine if the company meets the preliminary requirements and if the application is successful, a VCC approval letter will be sent to the applicant by SARS at which point the company may commence trading as a VCC.
For any advice in setting up a VCC or any related tax matters, VDMA has a wealth of experience in corporate tax expertise and an in-depth knowledge of corporate law, willing to assist you with the relevant business transactions every step of the way.
SECTION 12J OF THE INCOME TAX ACT NO. 58 OF 1962: SARS IS NOW PREPARED TO DEDUCT ALL YOUR TAXABLE INCOME: PART TWO
Recently, section 12J of the South African Income Tax Act No. 58 of 1962 (“section 12J”) was amended, demonstrating the Treasury’s commitment to stimulating investment across the venture capital industry. The section has since made itself somewhat of a buzzword towards the end of last year, gaining significant traction among individuals and businesses alike, desirous of both reducing their tax liability whilst seeking attractive return on investments in an uncertain and at times, volatile South African market.
The key taxation amendment is that the total asset limit for qualifying investee companies has been increased to R50 million. Previously the venture capital company (“VCC”) tax regime allowed VCCs to invest in companies with a maximum book value of R20 million. This amount was seen to be too low and one of the principal reasons why the section 12J incentive was not taken up to any significant degree was largely due to a VCC’s investment assets needing to be of a certain size in order to appeal to fund managers. The level of risk involved in such small investments was perceived as being too great and thus kept most investors away.
An Overview of How it Works.
Under section 12J, the entire amount invested into the South African Revenue Service-approved (“SARS”) VCC will be deductible from the investor’s taxable income in the year that it is made, and shall remain tax-free for so long as the equity remains invested in the VCC and for at least five years. VCC investors enjoy an immediate tax deduction equal to 100% of the amount invested in the VCC with no annual limit nor lifetime limit. The tax relief is available provided that the VCC investor subscribes for equity shares, as opposed to buying them second hand from other VCC investors.
By way of an example, the table below illustrates the effect of the upfront income tax relief on an investor. It assumes that the investor subscribes for shares in the VCC in an amount of R100,000. Although individuals are taxed at a progressive rates of income tax, it is assumed for the purposes of this example that the individual is in the 40% income tax bracket.
|Individual/ Trust Investor||Company Investor|
|Cost of the VCC investment|
|Subscription in VCC shares||R100,000||R100,000|
|Income tax rate||40%||28%|
|(Less) tax relief||(R40,000)||(R28,000)|
|Net Cost of the Investment||R60,000||R72,000|
|Actual Value of Investment||R100,000||R100,00|
What the above example illustrates is that individuals, trusts or companies will be entitled to an immediate tax rebate for the total amount of income tax payable for the particular financial year. An allocated initial capital investment of R100,000 would instead cost the individual or company R60,000 and R72,000, respectively, but would amount to an actual investment value of R100,000.
Section 12J has been heralded as a progressive step towards jumpstarting the supply of private sector venture funding in South Africa by incentivizing local and international investors through such appealing tax deductions. Section 12J is available for any taxpayer, including but not limited to individual trusts and corporate entities, to invest in an approved VCC, making the investment particularly attractive to those who have incurred capital gains tax during the year.
There are now SARS-approved VCCs in sectors including renewable energy, hospitality, agriculture, mining, general growth capital, and technology.
Time may be running out for investors to take advantage of the section 12J tax benefits. SARS has introduced section 12J with a sunset clause that takes effect on 30 June 2021, meaning the VCC scheme only applies to shares acquired on or before the stipulated 30 June 2021 date.