Tax incentives in the pipeline for VCC investors

According to the Draft Taxation Laws Amendment Bill published in June 2011, a new venture capital company (VCC) regime will apply from 1 January 2012, should the draft amendments be implemented.

In terms of these amendments aimed at revising Section 12J of the Income Tax Act, a taxpayer who invests in a VCC will generate an upfront deduction for the investment made. This is in stark contrast with other private equity investments, which are non-deductible for tax purposes.

Section 12J currently has very restrictive criteria: the deduction ceiling is R750 000 and only investments in natural persons qualify for the deduction. A relaxation of these restrictions has now been tabled and it appears that investors pooling their funds by way of an equity investment in a VCC, will in future qualify for a tax deduction of the full amount. The current prohibition against investments in franchisees will also be dropped.

This tax deduction will make an investment in a VCC far more attractive in future. It should be noted that only the following will qualify for the tax deduction:

• VCC investments in qualifying small business and junior mining companies;

• investments in venture capital companies which form part of a group of companies, or which are listed on the JSE.

Certain anti-avoidance criteria will also be added to Section 12J, e.g. only pure equity investments will qualify for the deduction. It must therefore be clear that the investor bears the economic risk and loss associated with the profit model of the VCC. In addition, the investor may not be a connected person in relation to the VCC.

For more information, contact Sonja Frank of Exceed Trust on tel. 021 8828140 or e-mail sonja@exceed.co.za.