Section 12J was introduced in 2009 already, but, following changes to legislation in 2014, it has started gaining momentum. This section now allows for a 100% write-off of any investment in an approved Venture Capital Company (VCC) in the year of the investment. If the shares in the VCC are disposed of within 5 years, the amount of any tax benefit must be recouped and added back to normal taxable income. After 5 years, the full proceeds from the diposal of shares in the VCC will be subject to Capital Gains Tax.
Why was Section 12J introduced by SARS?
The SA Budget Review in 2008 found that one of the main challenges to the economic growth of small and medium-sized businesses was access to equity finance. Through Section 12J, the South African Government aims to stimulate the economy and promote investment in South African private companies, whilst providing tax benefits to investors. The legislation is based on the success of the Venture Capital Trusts implemented in the United Kingdom more than a decade before the implementation of similar legislation in SA.
Who can claim the Section 12J tax benefit?
Any taxpayer who invests in an approved VCC is eligible to claim 100% of their investment. This includes individuals, trusts and corporate entities such as companies and CCs.
What is a Venture Capital Company (VCC)?
A VCC is a company created to provide investors (individuals and corporates) with access to a range of companies which have the potential for large growth but need funds to unlock the potential growth. The VCC aims to make money by investing in such smaller trading companies. The VCC raises the funds required by the smaller trading companies by issuing equity shares to investors and the money is then allocated to those trading companies that the management of the VCC judge to have the best prospects.
What companies qualify to be a VCC?
Only investments in approved VCCs are eligible for a tax deduction. SARS have laid down strict cretiria for a VCC to be approved – these include being registered with the Financial Services Board and also being a Financial Services Provider. It is also considered best practice for VCCs to also register with the South African Venture Capital and Private Equity Association (SAVCA). All approved VCCs are listed on the SARS website here.
VCCs invest in potential growth companies on behalf of investors. These companies are referred to as investees and SARS has also set strict criteria for companies into which Section 12J approved VCC’s can invest, including:
- The company’s tax affairs must be in order (a tax clearance certificate must be requested from SARS to support this requirement);
- The company must be an unlisted company (section 41 of the Act) or a junior mining company; A junior mining company may be listed on the Alternative Exchange Division (AltX) of the JSE Limited;
- During any year of assessment, the sum of the “Investment Income” derived by the company must not exceed 20% of its gross income for that year of assessment;
- The company must not carry on any any impermissible trades – these include financial services activities, financial or advisory services, casinos and other gambling related services and activities relating to alcohol, tobacco products or ammunition
Any limitations contained in S12J?
There are no limits to the amounts which can be invested by a taxpayer in a VCC. A sunset clause has been legislated to end the tax benefits of S12J on 30 June 2021. However, investors will continue to receive the tax benefit on any funds invested in a registered S12J company prior to 30 June 2021, even if the five-year investment period ends after that date. There is speculation that the current regime may be extended beyond June 2021, but we need to wait to see what government decides at that stage.
Advice on investing in a VCC
As with any other professional investment companies, VCCs often charge fees for their services. These fees usually cover various aspects such as the salaries of professional managers (who select the best investment growth opportuntities in private companies) and administration which ensures that all conditions of the S12J investments are met. Ensure that the fees you are paying are reasonable. As with any other investment, an investment in a S12J company carries risk. Investors should therefore assess the investment strategy and mandate of the S12J company in order to ensure they fully understand the associated investment risk.