Investment in s12J carries no personal tax risk

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According to Neill Hobbs of Hobbs Sinclair Chartered Accountants, SARS's policy of boosting small to medium businesses has been encouraged by way of a venture capital company (VCC) tax incentive. South African tax payers who invest via this equity finance vehicle receive a 100% tax deduction on funds invested.

For high threshold taxpayers, that is an upfront 40% return on investment or, calculated over an investment period of five years, a guaranteed 8% ROI before any gains via the VCC. What's more, the investment is not subject to income tax recoupment on disposal of shares after five years but will only be subject to capital gains tax.

Hobbs comments that what seems too good to be true is a welcome solution for established companies which are well managed and have a proven track record but are under-capitalised. Although investors perceive that they have a loss of control over the capital invested, they must remember that in order to qualify the VCC must be FSB regulated, with the managers accountable to shareholders and SARS.

Hobbs lists suitable investors as:

• small investment groups who have a high tax threshold and who don't mind a bit of risk;
  
• salaried corporate executives who are looking to reduce their tax burden (notably a deduction in respect of retirement annuity is limited whereas investment into a VCC can be 100% of taxable income);
  
• companies investing in new initiatives or making acquisitions - the tax advantage here is that investment into a VCC is fully deductible from income tax; and
  
• BEE deals which benefit via the tax incentive through BEE parties who own a majority of the shares, enhancing the value of any target company they invest in.

"The positive cash flows that result from a well-structured VCC investment are matchless. The investor can potentially receive a full tax deduction on the funds invested and receive substantial dividends from his investment on an ongoing basis. An investment in s12J carries no personal tax risk for the investor. It is simply not possible to be penalised for taking advantage of this government opportunity," Hobbs concludes.