Kevin Shames | Non-Executive Director | Bright Light Solar VCC | mail me |
In June 2009, The Income Tax Act was amended to make provision for investors to be incentivised to invest in Venture Capital Companies (VCCs).
The legislation allows investors to claim a deduction for the full cost of an investment into an approved VCC against their current taxable income.
How it works
By way of example, if an investor was earning R2m in the current financial year and he elected to invest R500,000 into an approved s12J investment.
The tax payable would be calculated on R1.5m (being R2m less his investment of R500,000), thereby gaining an immediate benefit of 45% of the R500,000 investment.
This deduction can be utilised immediately in the August provisional payment, as long as it is accompanied by an investor certificate.
Types of companies
The legislation allows investment into small and medium sized companies as well as junior mining companies and seeks to provide these companies with much needed equity finance.
The section is broad but specifically excludes investments into trade in immoveable property (except hotels), financial services, casinos, manufacturing of liquor, tobacco products and arms and any trade mainly carried on outside South Africa’s borders.
The legislation is subject to a sunset clause meaning that it will end on 30 June 2021. The purpose of this clause is to allow SARS to re-evaluate the effectiveness of this legislation and to decide whether to extend it or not.
Taxpayers
All taxpayers qualify for the deduction including individuals, trusts and companies.
Individuals earning in excess of R1.5m and trusts will gain a 45% benefit but will be taxed on the dividends received, whereas companies will receive a 28% benefit but not be subject to dividends withholding taxes. Investors are required to hold the investment for a minimum of 5 years in order for the upfront tax benefit to become permanent.
Activity
60 companies have thus far been approved by SARS, although most of these are inactive. The biggest VCC to date has attracted over R1 billion in subscriptions and many more are expected to enter the space following the raising of the marginal tax rate to 45% in the February 2017 budget.
VCCs are regulated by both the FSB (as Financial Services Providers) as well as SARS.
Bright Light Solar VCC is a company that provides fully installed solar solutions to Sectional Title Bodies Corporate, commercial and industrial buildings in return for the signing of long term power purchase agreements.
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Brilliant initiatives here!
Great tax kickbacks too, only wish there was better clarity and guarantees on returns and less upfront fees charged by the people in charge.
Zane, we agree wholeheartedly. Bright Light does not charge any capital raising fee, no asset under management fee and no directors fees. We only charge a performance fee of 17.5% of net income. These fees are significantly lower than the industry norms.