A source of funds for smaller com­pa­nies

Finweek English Edition - - Alternative Investments -

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

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