VCC’s driving SME’s

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Neill Hobbs | Founder and Director | Anuva Investments | neillh@anuvainvestments.co.za | www.anuvainvestments.co.za |


Using a concept borrowed from the UK, SARS has written Section 12J into the Income Tax Act, which offers taxpayers a 100% tax deduction in the year of investment if they invest in small and medium-sized enterprises (SMMEs) by way of subscription of shares in a Section 12J Venture Capital Company (VCC).

Why? you might ask.

It’s a well-established fact that one of the best ways to drive the economy and employment is through investment in SMMEs. Section 12J is targeted at just that type of investment by offering taxpayers a tax break in return for their investment.  Many of today’s large retailers and corporates started as a small business and their contribution to the South African economy has been paramount.

SMMEs are generally pioneers creating new landscapes or alternatively expanding on existing business landscapes. But what SMMEs have in energy and appetite for success they lack in working capital and possibly key skills and network.

Your investment is tax deductible!

With Section 12J, these businesses are able to use tax-deductible equity funding to realise goals and fund growth.

In this way, section 12J has created an extraordinary opportunity to aid SMMEs while simultaneously creating Rand value for the individual investor due to the tax saving on entry into the investment, in addition to dividends and capital growth.

Choice?

As a regular taxpayer, you simply have to identify a Section 12J investment vehicle (VCC) of your liking and invest with them to qualify for your tax break.

While this is a relatively new opportunity, a number of these tightly regulated VCC companies have already been established.

Some are focused on the true Venture Capital space, such as an investment into disruptive technology, looking for that one in ten super successful investment, while others are more risk averse and focus on saving you tax while providing a steady but predictable return on investment.

Term?

Here, the onus or choice belongs to the investor depending on their risk appetite.

Investors must be cognisant of the 5-year investment period.  If the taxpayer sells their shares prior to the 5-year period, there will be a recoupment of the tax allowance upon disposal of shares.

However, if the shares are held for a period exceeding 5 years, only Capital Gains Tax is paid albeit off a zero base.

Is it working?

In practice, the concept is really working. The growing number of jobs that are being saved coupled with an extraordinary return for many investors renders 12J certainly worth careful consideration.

Apart from the tax savings, solid return on investment is boosted by strong dividends and growth in value of the underlying investments.

Unlike a Retirement Annuity, there is no limit to a 12J investment. Furthermore, you can immediately receive dividends and only have to wait for five years before you get your money back.

Included as part of a diversified portfolio, this is a remarkable opportunity for a South African taxpayer with a high taxable income to create self-interest value and as a by-product to create broader-interest value for the country.


 

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