Venture capital investors

Significant tax benefits on offer for venture capital investors

Anuva Logo-Black.png

In July 2009 the South African Revenue Services (SARS) introduced section 12J of the Income Tax Act to encourage ordinary taxpayers to invest in small, medium and micro-sized enterprises (SMMEs). Section 12J allows taxpayers to deduct 100% of their investments into qualifying venture capital companies (VCCs) from their current tax obligations as a reward for the ongoing economic benefits that these investments are expected to deliver. The uptake of this allowance was initially slow; but has gathered pace as more section 12J compliant VCCs come to market. 

Thousands of taxpayers now invest via VCCs to utilise their section 12J tax allowances and curb their ever-increasing tax liabilities. “The VCC structure enables the tax administration of section 12J investments,” says Neill Hobbs, CEO at Anuva Investments. “Our role is to ensure full compliance with the tax legislation, including registering with SARS, identifying and investing in qualifying SMMEs and providing our investors with the necessary documentary support”. Each of these compliance aspects must be met by both taxpayer and VCC for the duration of the investment.

The section 12J allowance is ‘paid’ to investors upfront by way of a reduced tax liability in their current tax year. For example, a taxpayer who earned R2 million in the 2018 tax year would be liable for R900,000 in taxes. If this taxpayer invested R1 million in a qualifying section 12J VCC he or she could reduce their tax liability by R450,000. 

SARS has plenty of terms and conditions to prevent abuse of this allowance. Principal among these are that the capital amount remains invested for at least five years and that upon exiting the investment the base for the taxpayer’s capital gain calculation is set to ‘zero’ to compensate for the initial tax benefit. It still works out as very tax efficient compensating the investor for growing the economy. The capital gains tax liability is greater than that for investments made outside of the section 12J arrangement, but looking at the overall tax events that happens over the life of the 12J, it is still more efficient.

Making section 12J work for you

The main motivation for investing in a section 12J VCC is the ‘up to’ 45% reduction in tax payable in the tax year the investment is made. Looking at the recent past, a basic analysis suggests that an individual taxpayer who opts for an upfront reduction in his or her taxes coupled with a five year section 12J investment could outperform another who takes the tax hit in the current year and instead invests in the market. (The same rationale applies for section 12J investments made by companies or trusts, though the tax concession for a company is limited to the top company tax rate of 28%).

The above analysis cannot stand without a serious disclaimer. “One would have to run thousands of simulations to model all possible outcomes of section 12J versus non-12J returns, producing different results each time – potential investors should therefore work with their advisor and complete an analysis based on their unique financial and tax circumstances,” says Neill Hobbs. “We strongly support that high net worth investors who are top marginal taxpayers and invest amounts of R1 million or more should achieve significantly better returns over five years from a section 12J solution, all else being equal”.

Although you can save up to 45% of the initial investment via the upfront tax allowance the underlying section 12J investment must maintain (or grow) in value for you to realise the full tax saving. Investors should thus consider both the cost structure applied by their preferred investment vehicle and the quality of its underlying investments before getting involved. Anuva Investments Ltd (Anuva) charges a once-off 2% ‘capital raising’ fee and a 2% per annum ‘management fee’ on capital invested with an investment minimum of R1 million. It has a solid four year track record with early investors benefitting from three consecutive profitable years, with a R14.1 million profit and R10.5 million dividend distribution in FY2018.

This profit was generated from a diversified portfolio that includes investments in traditional services business like Mastercare - a national domestic services firm that provides assessment and repair services to households and domestic insurance companies; the companies Mastercare Mobile Coastal and NuMobile Gauteng who provide services to enable communication between employers and employees as well access to the internet and information for families and students living in more inaccessible areas; Cape Mohair who manufacture medical socks for diabetics, as well as attractive design and sports socks. 

Having supported and mentored many of their portfolio companies, the outlook for 2019 should be exciting.

“Anuva is an extraordinary opportunity that creates long term shareholder value by skilfully combining capital with carefully selected SMME opportunities under the guidance of an expert investment and management team,” concludes Neill Hobbs. “The return on offer from our investment activities should be enough motivation for a potential investor – the generous tax allowances offered under section 12J simply act as an additional ‘nice to have’ incentive”.

comments powered by Disqus

RW1
R1

This edition

Issue 401
Current


Archive


Leadership_Mag Honouring influential and innovative women in leadership https://t.co/EBhvlQcxMu https://t.co/8t61Lyd3wo 5 days - reply - retweet - favorite

Leadership_Mag Are plastic alternatives a blessing or a curse? https://t.co/Lnsz4d5Bqv 12 days - reply - retweet - favorite