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Praise For New South African Venture Capital Tax Incentives

by Lorys Charalambous,, Cyprus

04 August 2014

The Southern African Venture Capital and Private Equity Association (SAVCA) has welcomed the enhancements to South Africa's venture capital tax regime that are to be implemented by the South African Revenue Service (SARS), and that should boost small business access to funding.

Under the two proposed changes to the tax code for venture capital companies (VCCs) – investment vehicles through which a number of investors can fund a portfolio of business interests – there will be a higher investee company (a business in which the VCC may invest) asset threshold and a permanent tax deduction, so as to increase the appeal of venture capital as an investment asset class.

The South African Government first implemented a VCC tax regime from January 1, 2009, since when investors can claim income tax deductions for expenditure in acquiring VCC shares. The new changes will come into effect on April 1, 2015.

"The original tax concessions in the VCC regime were intended to promote access to equity finance by privately owned businesses, but the take-up of the allowance has been limited," said SAVCA CEO, Erika van der Merwe. "Our industry and its partners have been working closely with Government on enhancing these provisions, and the recently released Draft Taxation Laws Amendment Bill demonstrates the National Treasury's commitment to stimulating investment across the venture capital industry."

The first taxation amendment is that the total asset limit for qualifying investee companies has been increased to ZAR50m (USD4.7m). "Previously the VCC tax regime allowed VCCs to invest in companies with a maximum book value of ZAR20m," explained Rick Basson, co-founder of Broadreach Capital, a SAVCA-member firm. "We believe that was too low and one of the principal reasons why the incentive was not taken up to any significant degree."

"A venture fund and its investment assets need to be of a certain size in order to appeal to fund managers," he continued. "Quite simply, it was not economical for fund managers to set up funds to invest solely in assets of that size, and the level of risk involved in such small investments kept most investors away."

The second amendment relates to the deduction available to an investor subscribing for shares in a VCC. At present, this deduction is immediate and for the full amount of the investment made – however, it is recouped and becomes taxable if the investor sells the VCC shares at any time.

The improvement to this provision is that SARS will now allow the investment deduction to be permanent, as long as that investment is held for a five-year minimum period. There will be no reversal of the deduction on eventual disposal of an investment in a VCC, provided this holding period requirement is met.

Jeff Miller of Grovest, another SAVCA member, commented that he had "no doubt that, with the allowance now becoming a permanent deduction, this will attract a large flow of investment into our fund, as individuals and trusts with high taxable income will want to take advantage of this new tax-efficient asset class."

TAGS: individuals | South Africa | tax | investment | small business | business | tax incentives | corporation tax | venture capital | tax breaks | individual income tax | Africa | Tax

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