A source of funds for smaller companies
THE RECENTLY RELEASED draft Revenue Laws Amendment Bill 2008 sets out new tax incentives for investors in smalland medium-sized companies, where the investment is made through a venture capital company ( VCC). In terms of the proposals, individuals who buy shares in a VCC will receive a 100% deduction for the amount invested, subject to a maximum deduction of R750 000/year. The deduction will be subject to a recoupment when the shares in the VCC are sold.
Wils Raubenheimer, director of tax, audit at advisory firm Mazars Moores Rowland, welcomes this development and says it’s clearly intended to provide a source of funds for smaller companies which might otherwise have difficulties obtaining finance on favourable terms.
“The deduction will also be claimable by listed companies and their grouped subsidiaries. In that case there’s no R750 000 annual deduction ceiling but there’s a proviso that the company can’t hold more than 10% of the shares in the VCC. Private companies won’t qualify for the deduction at all.”
For an investment company to qualify as a VCC it must ordinarily have gross assets of at least R50m. If the VCC invests in one or more junior mining or exploration companies the minimum gross asset requirement will be R250m. Qualification as a VCC further depends on the investment company meeting the following requirements: • The gross income of the investment company must be derived solely from financial instruments, such as shares. At least 10% of the VCC’s gross assets must consist of shares in small companies – ie, companies with a gross asset value of up to R5m. At least 80% of the VCC’s gross assets must be invested in companies with gross assets not exceeding R10m. Raubenheimer says so-called private equity funds – those investing in private companies – will generally be reluctant to invest in a company unless it has sound growth prospects, culminating in a listing within an acceptable period.
“Unless the company is listed in due course the investor may have substantial difficulties in finding a market for his shares. The proposed tax incentives will no doubt provide a boost to private equity funds. What the incentives won’t resolve is the difficulty of finding ‘target’ companies with sound growth
Welcome new developments. Wils Raubenheimer