Profitable changes
An energy fund, an equipment rental business and a credit verification start-up — these are some of the businesses that are benefiting from investments through a venture capital tax incentive.
The SA Revenue Service (Sars) says that, following amendments that took effect in April last year, the incentive is beginning to take off. Despite this, some say further changes are needed to make it more attractive.
Under section 12J of the Income Tax Act individuals, companies and trusts can get a tax deduction if they invest in a venture capital company (VCC) that in turn invests in a qualifying small business for at least five years.
Freddie Fourie, Who Runs Brutes Air Rental Solutions, Says An Investment From Westbrooke Capital Management Will Help His Company Fund the Rental Of Compressed Air Equipment to Companies. He Is Partnering With Brutes Air Solutions, A 12Year-Old Company.
While Fourie does not want to disclose the amount invested (which is provided as the firm meets various milestones) he says just one or two jobs might be created by the investment. But he says it could help clients such as firms in the manufacturing and medical sector to increase employment.
However, FraudCheck managing director Adele Lewis says a recent R5.4m investment from venture capital company Grovest has helped the company raise its staff component from two to seven.
The investment is to fund the development of a new online platform for the threeyear-old firm, which provides corporates, individuals and small businesses with credit vetting and pre-employment verification.
Lewis says that last year, following the investment, the company’s growth in sales was up to 800% over the previous year.
Another company, Energy Capital, was earlier this year able to tap R2.6m from Broadreach Capital’s Harbour Energy 1 fund to bankroll the installation of a rooftop photovoltaic system for a business park in Pinetown, KwaZulu Natal. Energy Capital chief executive Doug Brazier says the funding created eight jobs, mainly of installers on site.
Investors generate a return by the company selling the power generated from each unit to clients. His company is looking to tap more funding from Harbour Energy for another 120 similar projects it has planned.
Sars spokesman Sandile Memela says that at the end of February, 340 investors had invested in Sarsapproved VCCs, committing a total of R631m, with six VCCs having invested R56m in 18 qualifying companies. To date 38 such funds have been approved.
The incentive came into effect on July 1 2009, but attracted few investors as many saw the requirements they needed to meet to benefit from the incentive as overly stringent.
But Memela says that since April last year, when the latest changes came into effect, the incentive has “taken off”, with 25 of the 38 VCCs having been approved since then.
The new changes allow for a higher investee asset threshold (R50m in qualifying small businesses and R300m in junior mining companies) and a permanent investment deduction.
Treasury has now proposed a further change — to amend the connected person rule for the incentive. At present investors cannot claim a deduction if they hold an
‘‘ THERE WILL ALWAYS BE SOME CONCERNS FROM INVESTORS AROUND UTILISING THE INCENTIVE, BUT IN THE MAIN THE SENTIMENT IS POSITIVE JEFF MILLER