WHAT IS SECTION 12J
One of the main challenges to the economic growth of small and medium-sized businesses and junior mining exploration is access to equity finance.
To assist these sectors in terms of equity finance, government has implemented a tax incentive for Investors in such enterprises through the Venture Capital Company (VCC) regime.
The VCC is intended to be a vehicle to 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.
With effect from 1 July 2009, Investors (any taxpayers) can claim an income tax deduction in respect of the expenditure incurred in the subscription for equity in a VCC shares.
The VCC legislation is subject to a 12-year sunset clause i.e. it ends on 30 June 2021. This will allow for review of the efficiency of regime and a decision will then be made as to whether it should be continued.
What does this mean for the Investor in Rencell Limited?
The full amount invested in Rencell, to the extent it is approved by SARS as a Venture Capital Company, is 100% deductible from your income in the year in which the investment is made. This applies to individuals, companies and trusts.
An Investor in Rencell should therefore obtain a 45 % tax incentive (for an individual tax payer at maximum marginal rate) at the time of investment.
If the investment in Rencell is held for a minimum period of time of 5 years the tax benefit conferred at the date of investment will become permanent, i.e. NO recoupment of the tax benefit in the hands of the Investor when the investment in the Rencell is subsequently realised, provided Rencell ’s approval by SARS as a Venture Capital Company has not for any reason been withdrawn.
Rencell is able to invest in companies with total assets up to R50 million (previously R20m). Rencell is able to consider investment in larger, more established companies, significantly expanding the investment universe and reducing investment risk.
An overview of how it works
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.
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.
Who qualifies to be an Investor?
Any 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 to 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.
What supporting documents will the Investor receive from the VCC?
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.
An Investor in Rencell will obtain a 45 % tax incentive (for an individual tax payer at maximum marginal rate) at the time of investment
There is no recoupment of tax incentive at the time of realisation of investment in Rencell if the investment is held for a minimum period by the Investor of 5 years.