Section 12J (Venture capital investments) came into operation on 1 July 2009, and in the current market environment, alternative investments are attracting a lot of attention. Venture capital companies (VCC) that operate under Section 12J of the Income Tax Act may offer the potential of attractive returns and can also under Section 12J give investors an upfront deduction of their investment in the shares of the VCC, with no recoupment if the investment is held for five years. The VCC regime is subject to a 12-year sunset clause and this will end on 30 June 2021. This will allow for the review of the efficacy of the regime and a decision will then be made as to whether it should be continued.
Any taxpayer qualifies to invest in an approved VCC. Qualifying investors will invest in an approved VCC in exchange for the issue of venture capital shares and investor certificate. The approved VCC will in turn invest in qualifying investee companies in exchange for shares. If a loan is used to finance the expenditure to acquire a VCC share and it remains owing at the end of the year of assessment, the tax 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. Except in the case of VCC shares held by a taxpayer for longer than five years, the deduction is recouped if the taxpayer disposes of the VCC shares under the general recoupment rules of Section 8(4) of the Act. The standard income tax and CGT rules apply in respect of VCC shares.
Effect of upfront income tax relief
|Effect of upfront income tax relief|
|Cost of the VCC Investment||Individual/Trust||Company investor|
|Subscription in VCC Shares||R100,000||R100,000|
|Income tax rate||45% (1)||28%|
|Less: Tax relief S12J||<R45,000>||<R28,000>|
|Net cost of investment||R55,000.00||R72,000.00|
|Initial value of VCC investment|
|Gross subscription by the investor||R100,000||R100,000|
|Issue costs (say 5%)||R5,000||R5,000|
|Initial uplift (Rand value)||R40,000||R23,000|
- Assumed maximum current marginal rate for individuals.
The MMS group has clients that are approved VCC’s. Kindly contact us should you require more information on investing in these companies