Venture capital firms take knock

The proposed amendments to the tax incentive scheme for venture capital companies are inflicting enormous damage on market sentiment towards these companies, the association representing the sector says.

The proposed amendments to the tax incentive scheme for venture capital companies are inflicting enormous damage on market sentiment towards these companies, the association representing the sector said in parliament on Tuesday.

The Southern African Venture Capital and Private Equity Association (Savca) said the Treasury’s proposals have had a “paralysing” effect in that little or no capital is being raised for the industry, which is vital for the growth of small and medium enterprises.

Savca and the SA Institute of Tax Professionals made submissions on the proposed amendments during public hearings by parliament’s finance committee.

They agreed that the incentive is being abused but said the way the Treasury proposes to deal with this abuse is too far-reaching and not sufficiently targeted. The Treasury has proposed amendments to the structure of venture capital companies in order for them to qualify for tax incentives under section 12J of the Income Tax Act.

The main proposed amendment in the draft Taxation Laws Amendment Bill is that only one class of shares will be allowed in venture capital companies and the “qualifying” companies they invest in. Currently different classes of shares are allowed.

The proposed amendments will be retrospective and noncompliant firms will have 125% of the expenditure incurred by their shareholders for the issue of shares in them being included in the companies’ income. Savca said this is a significant penalty which will make firms unviable.

Nonexecutive director Samantha Pokroy and head of regulatory affairs Shelley Lotz said Savca supported a tightening of the legislation but urged Treasury to withdraw the proposed amendments and replace them with amendments that focus on the specific abuse.

They said the incentive had proved to be “highly effective and beneficial”, with 101 schemes approved by the SA Revenue Service so far and R3bn raised and R1bn invested in underlying investments under section 12J of the act as of February 28 2018.