Any risk-averse investors will be keenly interested in venture capital as an addition to their investment portfolios. The low-yielding BOND market, fully priced property market and volatile stock market have resulted in private equity becoming the flavour of the month. According to Neill Hobbs of Hobbs Sinclair, astoundingly, many investors and investment managers are unaware or unsure of the law around an extraordinary opportunity introduced by National Treasury in 2009 under Section 12J of the Income Tax Act.
Now SARS’s policy of boosting small-to-medium business has been encouraged by way of a Venture Capital Company (VCC) tax incentive. South African tax payers who invest via this equity finance vehicle receive a 100% tax deduction on funds invested. For high threshold taxpayers, that’s an upfront 40% return on investment or, calculated over an investment period of five years, a guaranteed 8% ROI before any gains via the VCC. What’s more, the investment is not subject to Income Tax recoupment on disposal of shares after 5 years but will only be subject to Capital Gains Tax.
Hobbs comments that what seems too good to be true is a welcome solution for established companies which are well managed and have a proven track record but are under-capitalised. Hobbs adds that although investors perceive that they have a loss of control over the capital invested, they must remember that in order to qualify the VCC must be FSB regulated, with the managers accountable to shareholders and SARS. What is critical to the success of a VCC is the risk assessment and ongoing risk management. Hobbs says, “With a CA on board to secure the opportunity, assess and manage the risk, complete due diligence, and report accurately on the performance of the investment, investors have ease of mind knowing that the CA has board representation, and acts as the guide to the owners, opening the door to equity and managing the process.”
To date, there are nine registered VCCs in South Africa, of which three are registered to Hobbs Sinclair in the startup phase. Hobbs advises that although there are certain limitations in place, the investor who takes up this opportunity and is bold now will gain in the short term as more investors awaken to the opportunity.
Hobbs lists suitable investors as:
- small investment groups who have a high tax threshold and who don’t mind a bit of risk
- salaried corporate executives who are looking to reduce their tax burden – (notably a deduction in respect of Retirement Annuity is limited whereas investment into a VCC can be 100% of taxable income)
- companies investing in new initiatives or making acquisitions – the tax advantage here is that investment into a VCC is fully deductible from income tax
- BEE deals which benefit via the tax incentive through BEE parties who own a majority of the shares, enhancing the value of any target company they invest in.
Still sounding too good to be true, Hobbs concludes, “The positive cash flows that result from a well-structured VCC investment are matchless. The investor can potentially receive a full tax deduction on the funds invested and receive substantial dividends from his investment on an ongoing basis. An investment in 12J carries no personal tax risk for the investor. It is simply not possible to be penalized for taking advantage of this government opportunity.”
Partner, Hobbs Sinclair Chartered Accountants