INTRODUCTION

The term “Section 12J” refer to Section 12J of the South African Income Tax Act, 196 (Act No. 58 of 1962). Section 12J came into effect on the 1st July 2009 and was created specifically for the purpose of inviting investors to participate in the capitalisation of promising small and medium size qualified enterprises in the Republic of South Africa.

Taxpayers who invest in a Venture Capital Company (VCC), through the acquisition of shares in the VCC, in return are entitled to a 100 % tax deduction of these monies invested, subject to the provisions of Section 12J, thereby achieving an immediate return on investment of up to 45 % (being the reduction in taxes payable).

The venture Capital Company is intended to be a marketing vehicle that will attract retail investors. It has the benefit of bringing together small investors as well as concentrating investment expertise in favor of the small business sector.

PORTFOLIO MANAGEMENT

INVESTMENT OPPORTUNITIES

SMME'S INDUSTRY DEVELOPMENT

SECTION 12J - CONCEPTS EXPLAINED

Venture capital is financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from affluent investors, investment banks and any other financial institutions.

It is type of investment capital where the venture capital firm invests in a new or fast growing business or start-up that has the potential for significant returns.

Small and start-up businesses are not large enough to access the global capital markets available to large, established corporations. Many of these businesses still need sizeable  amounts  of  capital  to  scale their businesses into meaningful entities.

Venture capital firms fill this gap between proven idea and scale by investing in these companies.

SECTION 12J - PARTICIPATING IN THE INVESTMENT

1.  Investor acquires shares in a 12J compliant VCC

2. The VCC will provide the investor with a certificate which will allow the investor to claim a tax deduction on the expenditure incurred in acquiring the VCC shares.

3. The VCC will, in turn, invest and acquire shares in qualifying companies.

4.  The qualifying companies perform in order to generate an additional return for the shareholders.

MAXIMUM TAX RATES

ENTITY

RATE OF TAX

Individuals 

Companies 

Trusts 

45%

28%

45%

 

BENEFIT EXAMPLE

No Investment into 12J

Invest R300 000

Invest R1 500 000

Taxable Earnings

12J Deduction

……………………………

Taxable Income

Tax @ 45% ……………

……………………………..

Earnings After Tax 

Tax Saving …………….

R 1,500,000.00

R 0.00

 

R 1,500,000.00

-R 675,000.00

 

R 825,000.00

R 0.00

R 1,500,000.00

R 300,000.00

 

R 1,200,000.00

-R 540,000.00

 

R 960,000.00

R 135,000.00

R 1,500,000.00

R 1,500,000.00

 

R 0.00

R 0.00

 

R 1,500,000.00

R 675,000.00

EXAMPLES OF APPLICABLE TAXES FOR DIFFERENT ENTITIES

R1 000 000 INVESTMENT

SARS

Individual

Company

Trust

WHEN INVESTING

Assume Taxable Income for year

Maximum Tax Rate

Tax liability before investment

Tax liability after investment

R2 m

45 %

R900  000 (R2 m x 45%)

          R450 000 (Only R1 m x 45%)

R2 m

28%

R560  000 (R2 m x 28%)

          R280 000 (Only R1 m x 45%)

R2 m

45%

R900  000 (R2 m x 45%)

         R450 000 (Only R1 m x 45%)

 

WHEN RECEIVING DIVIDEND RETURN

Dividend withholding Tax

Gross dividend return

Dividend withholding Tax

Net dividend return

20%

R85 000

(R17 000)

                          R68 000

0%

R85 000

(R0)

                          R85 000

20%

R85 000

(R17 000)

                          R68 000

 

WHEN SELLING THE SHARES

Proceeds from sale

R2 M

R2 M

R2 M

Base cost

R0 (SARS rule)

R0 (SARS rule)

R0 (SARS rule)

Max effective capital gains tax rate

18%

24.5%

36%

Capital gains tax

(R360 000)

(R448 000)

(R720 000)

Net Proceeds

R1 640 000

R1 552 000

R1 280 000

WHO QUALIFIES TO BE AN INVESTOR

  • Any taxpayer qualifies to invest in an approved
  • Qualifying investors can claim income tax deductions in respect of the expenditure actually incurred to acquire shares in approved VCC’s.
  • The approved VCC must issue investor certificates to its investors which will provide SARS with the proof when the investor claims the relevant tax
  • Where any loan or credit is used to finance the expenditure in acquiring a venture capital share and remains owing at the end of the year of assessment, the deduction is limited to the amount for which the taxpayer is deemed to be at risk on the last day of the year of assessment. If the taxpayer invests in the VCC using a loan then the loan must be repayable within 5 years and the taxpayer must genuinely be at risk should the VCC lose value or be
  • No deduction will be allowed if, at the end of any year of assessment, after the expiry of a period of

36 months commencing on the first date of the issue of venture capital shares, a taxpayer is a connected person to the VCC.

  • Except in the case where a taxpayer holds venture capital shares for a period longer than five years, the deduction is recouped (recovered) if the taxpayer disposes of the venture capital shares to the extent of the initial VCC investment (under the general recoupment rules of section 8(4) of the Act).
  • General income tax and Capital Gains Tax (CGT) rules apply in respect of VCC shares. VCC shares will have a base cost of
  • Note: under no circumstances can a person request a tax directive for purposes of section 12J under paragraph 11 of the Fourth Schedule to the Act, in order to reduce his or her tax liability or accept any advice from persons who indicate that such tax directives may be.
  • The deduction that is allowed in the hands of an individual investor with regard to an investment or investments made to a SARS approved VCC, in the year of assessment in which such investment or investments are made, is not a prohibited deduction in terms of section 23(m) of the Act, as such expenditure is not related to any employment or office.

WHICH COMPANIES MAY NOT BE INVESTED IN BY A VCC?

The company may not be seen as reasonably carrying on any trade in respect of the following:

  • Immovable Property
  • Banking
  • Long and Short term Insurance
  • Money lending
  • Hire-purchase Funding
  • Financial or advisory Services
  • Legal Services
  • Stock Broking Services
  • Management Consulting Services
  • Tax advisory Services
  • Auditing or Accounting Services
  • Gambling
  • Liquor
  • Tobacco
  • Arms or ammunition
  • Trade carried on mainly outside South Africa

There are no special tax rules for investee companies. The general tax rules will apply.

WHAT HAPPENS ONCE INVESTORS HAVE PURCHASED VCC SHARES?

After 26 months – from the later of 15 January 2015 and the VCC’s date of first issue of shares – the VCC must meet the following criteria:

At least 80% of the VCC’s expenditure must be utilised in the acquisition of shares in qualifying companies with a book value of less than 50 Million immediately after the investment.

Not more than 20% of the funds received into the VCC may be utilised in one investment.

SUNSET CLAUSE

The VCC regime is subject to a 12 year sunset clause i.e. It ends on 30 June 2021. What this means is that at that point the regime will be reviewed and its efficacy in meeting the purpose of economic development and growth will be tested. A decision will then be made as to whether it should be continued.

Should section 12J not be extended this will not impact current investors. The result of such a decision will be that any new investment into VCC company after 30 June 2021 will not be allowed as a deduction from tax, but will be treated as any regular equity investment.

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