SARS makes tax sexy

Gavin Reardon, Founding General Partner at Kingson Capital.

SARS stimulate venture capital industry by making 12J tax incentive attractive.

Back in 2008/9, by identifying the need to assist small to medium business growth, SARS introduced the Section 12J tax incentive that formed part of the South African Income Tax Act. Back then, it was governed by relatively strict criteria that restricted the application even to the point of being unfeasible.

In April 2015, revisions were made to the tax incentive which invites any South African based taxpayer to consider a Venture Capital Company or VCC as an attractive investment model. This model allows investors to [1]‘claim amounts incurred on acquiring shares in a VCC as a deduction from income in their tax calculation in the year which the investment was made’. For funds to not be subject to recoupment by SARS, they will need to be held by the VCC for longer than five years.

Gavin Reardon, Founding General Partner at Kingson Capital, an approved Venture Capital Company, says, “The benefit of the S12J for Kingson Capital investors would mean our targeted internal rate of return (IRR) of 20% translates into a 28.15% for companies and 35.24% for individuals at the now increased marginal tax rate of 45%. Investors also benefit from a risk free portion of the net investment exposure – an impressive and attractive return based investment model.”

Another amendment made in 2015 was the R750,000 per year, per investor cap amount which has subsequently been lifted. There is now no cap on investment for investors although, with the latest amendment gazetted on 19 January 2017, no investor is permitted to be more than 20% of the total funds of any Section 12J vehicle within 36 months of the date the VCC first issued venture capital shares.

Reardon feels that, “The fact that SARS is clearly trying to motivate the VC industry in South Africa by not allowing investments to be made in certain companies stands testament to their commitment to the growth of small to medium enterprises by allowing them access to equity funding which in turn they will be able to use to create employment.”

Companies SARS will not permit S12J investments to be made in include:

- Investment Holding Companies;
- Property Holdings Companies;
- Firms of Professionals;
- Banks;
- Short-Term Insurers or Financial Service Providers;
- Any company involved in gambling, or the selling of ammunition, arms, tobacco or liquor; or any company whose trade is carried on mainly outside South Africa;

“We see the tax incentive as providing two major benefits to investors: (1) providing a capital floor to limit the downside, and (2) providing a kicker to boost overall returns”, says Ross Jenvey, General Partner at Kingson Capital.

In addition to these conditions, Section 12J VCC’s may only invest in companies whose assets, immediately preceding investment, have a book value of less than R50 million. “This affords us the opportunity to invest in more mature businesses with a track record and allows us to balance our risk-return profile”, says Jenvey

Kingson Capital has elected to focus on a niche portfolio, “With the rapid evolution of technology and Internet of Things (IoT), Kingson has undertaken to provide equity finance for small to medium sized businesses that specialise in [2]disruptive and data driven technology,” concluded Reardon.