Corporate Finance

YOU ARE HERE - Home >  Business >  Corporate Finance >  Benefits of Venture Capital investing

 

The myriad benefits of Venture Capital investing

By: Zane Schalkwyk, Sasfin Corporate Finance

 In a drive to increase long-term investment in both private and junior mining businesses, SARS has allowed for a deduction for investment in qualifying venture capital companies under Section 12J of the Incomes Tax Act.

 The effect of Section 12J is that it creates an opportunity through which a pool of financiers’ funds can be used to invest in private and junior mining businesses. This would facilitate growth in these sectors and create a potential source of scarce start-up funding.                        

 

How does it all work?

To qualify as an investor, one merely needs to be a tax payer with one’s tax affairs in order. 

To qualify as a venture capital company, the business must be a SA-based with the sole objective being   the management of investments in qualifying companies. The business must have its tax affairs in order and must be licensed in terms of section 7 of the FAIS Act. Once a business has been approved as a venture capital company, it needs to satisfy the following criteria at the end of each year of assessment:

  • At least 80% of the expenditure incurred by the venture capital company must be to acquire qualifying shares in qualifying companies, with each qualifying company not have a book value exceeding certain limits – R500 million for junior mining companies and R50 million for other private companies; and
  • Not more than 20% of the capital raised by the venture capital company can be used for acquiring shares in any single qualifying venture capital company.

How investors can benefit

The benefit for the investor is that taxpayers are allowed a 100% deduction in the amount spent on the subscription for shares in a venture capital company. There is no annual limit or lifetime limit on the total amount of the deduction.

 The effect of the deduction is that the net cost of investment will reduce by the effective tax rate affecting the person while the value of the investment remains the same. This is an immediate increase in the return for the investor.

 There is also no recoupment of the deduction, provided that the venture capital company shares are held for a period of no less than five years. This deters speculators and encourages long-term investing which is much needed.

Not without challenges

One of the minor drawbacks of new legislation is that it is still under assessment and will only be available until 30 June 2021, at which time the scheme will be reassessed and its merits evaluated.

 Another drawback is that it is only applicable for the subscription of new shares, meaning any “second-hand shares” acquired by investors will not attract the same deduction. The new legislation will also not be applicable to debt or hybrid instruments.