The latest round of legislative amendments proposed by National Treasury and released for public comment on 8 July 2016 contains a welcome concession for taxpayers looking to invest into approved venture capital companies.
Briefly, investors investing into qualifying venture capital companies (or “VCC’s” as they are often referred to) qualify for an income tax deduction for an amount equal to their investment made. This is quite an attractive incentive and is granted by section 12J of the Income Tax Act, 58 of 1962. Currently, a number of requirements exist before an investment would qualify for the section 12J deduction. A company qualifying as a venture capital company is required to be registered in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002 and may only invest in companies that have selective and actively trading businesses in them. Other criteria exist which include pertinently that the venture capital company must have invested in at least 5 of these qualifying companies by the end of the tax year ending 3 years from the first issuance of shares by the venture capital company. Effectively therefore, the venture capital company is afforded some time to search for appropriate qualifying companies in which to invest in before the tax deduction afforded to its shareholders may be forfeited if it fails to invest in this manner.
A statutory barrier to investing into a venture capital company through which existed up to now was that shareholders in the venture capital company (and seeking to qualify for the section 12J deduction) were not allowed to be “connected persons” in relation to the venture capital company. Although a defined term, a person would typically be a “connected person” in relation to the venture capital company if it owned more than 20% of the shares of the company. Typically, a person would take the initiative of setting up a venture capital company structure, and then go in search of fellow investors to help fund the structure as well as the future underlying investments to be made within the coming 3 year period. By virtue of the founder therefore initially owning all the shares in the venture capital company, he/she would be precluded from claiming the section 12J deduction by virtue of being a “connected person” in relation to the venture capital company.
The proposed amendment to section 12J seeks to address this problem. In terms of the proposed amendment, when setting up a venture capital company structure the venture capital company is afforded at least 3 years in which to find its qualifying investments, and similarly now, at least 3 years too are afforded to shareholders to find further investors to invest into the structure together with them. The section 12J deduction, in terms of the new proposed amendment, will therefore only be reversed if the shareholders of the venture capital company are still, only after the 3 year period above, “connected persons” in relation to the venture capital company.
If accepted, this welcome change will come into operation on 1 January 2017.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)