In 2009 Government implemented a tax incentive for investors in privately owned entrepreneurial businesses in South Africa to assist small and medium sized enterprises (SMEs) with access to equity finance. Individuals, companies and trusts (any SA taxpayer) investing through approved section 12J venture capital companies can deduct the full amount of their investment from taxable income in the tax year that the investment is made.
Venture Capital Company (VCC)
South Africa’s local small and medium enterprises, which are catalysts for growing the local economy, generating revenue and subsequently creating sustainable jobs that have a positive implication for the lives of South African taxpayers. To assist these sectors in terms of equity finance, Government has implemented a tax incentive for investors in these enterprises through a venture capital company (VCC) regime.
VCCs are intended to be a marketing vehicle that will attract retail investors. An investor is any taxpayer who qualifies to invest in an approved VCC. They have the benefit of bringing together small investors as well as concentrating investment expertise in favor of the small business sector. There are no special tax benefits for the VCC itself, only standard tax rules will apply.
A company must meet all of the following preliminary requirements to be able to get a SARS approved VCC status:
- The company must be a resident;
- The sole object of the company must be the management of investments in qualifying companies (i.e. investees);
- The company’s tax affairs must be in order; and
- The company must be licensed in terms of section 8(5) of the Financial Advisory and Intermediary Services Act, 2002.
Section 12J of the Income Tax Act
Section 12J is a provision in the Income Tax Act that was introduced in 2009 introducing South African tax incentive and to address one of the main challenges to the economic growth and maintain employment. The use of this incentive is growing quickly: The tax year ended February 2017 saw more section 12J tax vehicles registered than the cumulative total since its introduction in 2009
The tax incentive essentially provides South African taxpayers with a 100% tax deduction on the amount invested into Section 12J VCCs. This allows any South African taxpayer (individual, company or trust) to claim tax relief of up to 45% on their investment amount, thus reducing their capital at risk to a minimum of 55% of their original investment amount.
Recently National Treasury implemented a number of amendments to narrow the scope for potential abuse which is effective form 1 January 2019. The tighter legislation has led to greater certainty and has been a positive development for compliant VCCs. An External Guide will also help taxpayers to know further information about Venture Capital Companies (VCC).
