Government has identified small and medium size (SME) business growth and development as fundamental challenge to economic growth in South Africa and specifically the lack of access by SME’s to equity finance. To support this government has implemented a tax incentive for investors in such enterprises through a Venture Capital Company (VCC) regime. The VCC is intended to be a vehicle that will attract retail investors. It has the benefit of bringing together small investors as well as concentrating investment expertise in favour of the SME business sector.
Investors (any taxpayer) can claim income tax deductions in respect of the expenditure incurred in exchange for VCC shares. The VCC regime is subject to a 12 year sunset clause i.e. it ends on 30 June 2021. This will allow for review of the efficacy of regime and a decision will then be made as to whether it should be continued.
The full amount invested in Lucid is 100% deductible from an investor’s taxable income in the year in which the investment is made. This applies to individuals, companies and trusts. An investor in Lucid will therefore obtain a 45% tax break (for an individual tax payer at maximum marginal rate) at the time of investment.
If the investment in Lucid is held for a minimum period of 5 years, the tax benefit conferred at the date of investment will become permanent, i.e. there will be no recoupment of the tax benefit in the hands of the investor when the investment in Lucid is subsequently realised.
Lucid is able to invest in companies with total assets of up to R50 million (previously R20m). Lucid is able to consider investment in larger, more established companies, significantly expanding the investment universe and reducing investment risk.
Section 12J is subject to the provisions of the Income Tax Act No. 58 of 1962 (the Act). Section 12J was introduced to cater for the deductions in respect of expenditure incurred in exchange for the issue of venture capital company shares.
HOW IT WORKS
Qualifying Investors will invest in approved VCC’s in exchange for the issue of Venture Capital Shares and investor certificates. Investors can claim tax deductions in respect of their investments in an approved VCC. The approved VCC will, in turn, invest in qualifying investee companies in exchange for qualifying shares.
- Investor commits capital into SARS registered 12J Company.
- VCC Company issues shares and investor certificate.
- Investor received 100% tax deduction upfront.
- Lucid Ventures invests in qualifying investee companies.
- The investee company issue shares to the VCC.
Any South African registered taxpayer qualifies to invest in an approved VCC.
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.
No deduction will be allowed where the taxpayer is a connected person (ie someone holding more than 20% of the issued share capital) of the VCC
On request from SARS, the investor must verify a claim for a deduction by providing a VCC Investor Certificate that has been issued by an approved VCC, stating the amount of the investment and the year of assessment in which the investment was made.
Except in the case of Venture Capital Shares held by a taxpayer for 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)).
Standard income tax and CGT rules apply in respect of VCC shares.
The approved VCC must issue investor certificates to its investors. This will provide SARS with the proof it needs to allow the investor the relevant tax deduction.
- The Investee must be a company;
- The company must be a resident;
- The company must not be a controlled group company in relation to a group of companies;
- 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);
- 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 of the following impermissible trades:
- Any trade carried on in respect of immoveable property, except trade as a hotel keeper (includes bed and breakfast establishments);
- Financial service activities such as banking, insurance, money-lending and hire purchase financing;
- Provision of financial or advisory services, including legal, tax advisory, stock broking, management consulting, auditing, or accounting;
- Operating casino’s or other gambling related activities including any other games of chance; Manufacturing, buying or selling liquor, tobacco products or arms or ammunition; or
- Any trade carried on mainly outside the Republic.
- There are no special tax rules for investee companies. The standard tax rules will apply.
The company must satisfy the following requirements by the end of each year of assessment after the expiry of 36 months from the first date of issue of Venture Capital Shares:
A minimum of 80% of the expenditure incurred by the VCC to acquire assets must be for qualifying shares, and each investee company must, immediately after the issuing of the qualifying shares, hold assets with a book value not exceeding R50 million in any other qualifying company.
The expenditure incurred by the VCC to acquire qualifying shares in any one qualifying company must not exceed 20% of any amounts received in respect of the issue of Venture Capital Shares.
A maximum of 70% of the equity in a qualifying company can be held by the VCC.
The VCC must maintain a record of all its investors. A copy of this record must be submitted to SARS in February and August of each year. The records must contain at least the following details of the investors:Taxpayer Reference Number, name of entity, physical address, nature of trade, contact details, number of shares issued (per investor), value of shares (per investor) and date of issue of shares (per investor).
The VCC must maintain a record of all its investees. A copy of this record must be submitted to SARS in February and August of each year. The records must contain at least the following details of the investees: Taxpayer Reference Number, name of entity, physical address, nature of trade, contact details, number of qualifying shares received (per investee), value of qualifying shares (per investee) and date of receipt of qualifying shares (per investee).
The onus will be on the VCC to ensure that it invests in companies (i.e. investees) that meet the stipulated requirements.
The VCC must issue “VCC investor certificates” to qualifying investors in the year in which the investment is received. The certificates issued by the VCC must include at least the following details: The VCC reference number as issued by SARS, the name and address of the VCC issuing the certificate to which enquiries may be directed, the date of receipt of the investment, the name and address of the Investor, the Taxpayer Reference Number of the Investor, and the amount of the investment.
On request from the Minister of Finance, a VCC must submit a report providing information that the Minister may prescribe