Please note that we give you these supporting notes and guidance
Section 12 J 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, are entitled to a 100% tax deduction on monies invested, subject to the provisions of Section 12J, thereby achieving an immediate return of up to 45% (being the reduction in taxes payable) on their investment.
From 1 March 2019 R2.5m deduction per year of assessment allowable.
Example: Tax benefit of a R10 000 000 investment is shown below:
|Initial Investment||R10 000 000||R10 000 000||R10 000 000|
|Effective Tax Rate||45%||45%||28%|
|Tax Relief (in the financial year of initial investment)||(R4 500 000)||(R4 500 000)||(R2 800 000)|
|Net cost of investment||R5 500 000||R5 500 000||R7 200 000|
Note: This illustration assumes the Individual and Trusts falls entirely in the 45% income tax bracket.
INTRODUCTION INTO SECTION 12J
Getting access to equity finance for small and medium-sized businesses and junior mining exploration can be a very difficult task as they do not have a very good track record. To assist these sectors in terms of equity finance, 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 marketing 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 small business sector.
As from 1 July 2009, investors (any taxpayer) can claim tax deductions to the full amount invested into these specific VCC shares.
EFFECTS OF INVESTING IN FAIRTREE CAPITAL HOSPITALITY
The full amount invested in Fairtree Capital Hospitality is 100% deductible from your taxable income in the year in which the investment is made. This applies to individuals, companies and trusts. An investor in Fairtree Capital Hospitality 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 Fairtree Capital Hospitality is held for a minimum period of 5 years, the tax benefit will become permanent. Thus will there be no recoupment of the tax benefit in the hands of the investor when the investment in Fairtree Capital Hospitality is subsequently realised.
Fairtree Capital Hospitality is able to invest in companies with total assets up to R50 million. Fairtree Capital Hospitality 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 DOES SECTION 12J WORK?
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.
QUALIFYING INVESTOR CRITERIA
Any South African registered taxpayer qualifies to invest in an approved VCC. Qualifying investors can claim income tax deductions in respect of the expenditure actually incurred to acquire shares in approved VCCs.
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.
QUALIFYING INVESTEE CRITERIA
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.
SECTION 12J COMPANIES’ REQUIREMENTS
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.
RESPONSIBILITIES OF VENTURE CAPITAL COMPANY
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 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 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.
On request from the Minister of Finance, a VCC must submit a report providing information that the Minister may prescribe.