Background

One of the main challenges to the economic growth of small to medium-sized businesses is access to equity finance.

  • To assist these sectors in terms of equity finance, government has implemented a tax incentive for investors in such enterprises through a Venture Capital Company (VCC) regime.
  • The VCC is intended to be a marketing vehicle that will attract retail investors. It has the benefit of bringing together small investors as well as concentrating investment expertise in favour of the small business sector.
  • With effect from 1 July 2009, investors (any taxpayer) can claim income tax deductions in respect of the expenditure incurred in exchange for VCC shares.
  • The VCC regime is subject to a 12-year sunset clause i.e. it ends on 30 June 2021. This will allow for review of the efficacy of the regime and a decision will then be made as to whether it should be continued.
  • The full amount invested in MeTTa is 100% deductible from your taxable income in the year in which the investment is made. This applies to individuals, companies and trusts.
  • An investor in MeTTa will therefore obtain a 45 % tax break (for an individual tax payer at maximum marginal rate) at the time of investment.
  • The investment in MeTTa needs to be held for a minimum period of time of 5 years as for the tax benefit conferred at the date of investment to become permanent, i.e. NO
  • recoupment of the tax benefit in the hands of the investor when the investment in the MeTTa is subsequently realised.
  • The funds within MeTTa are able to be invested into companies with total book value of R50 million). Due to MeTTa investing within numerous funds and into an significantly expanding investment universe, the diversification allows investment risk to be mitigated somewhat.

Section 12J is subject to the provisions of the Income Tax Act No. 58 of 1962 (the Act). Section 12J was introduced to cater for the deductions in respect of expenditure incurred in exchange for the issue of venture capital company shares.

  • Qualifying investors (MeTTa Capital investors) will invest in approved VCC’s in exchange for the issuance of Venture Capital shares and investor certificates. MeTTa Capital’s investors can claim a full tax deduction of their investment within MeTTa Capital.
  • The approved VCC’s MeTTa Invests within will, in turn, invest into qualifying investee companies in exchange for qualifying shares.
  • Any taxpayer qualifies to invest in an approved VCC.
  • Qualifying investors can claim income tax deductions in respect of the expenditure actually incurred (Investment amount into MeTTa).
  • Where any loan or credit is used to finance the expenditure in acquiring a venture capital share and remains owing at the end of the year of assessment, the deduction is limited to the amount for which the taxpayer is deemed to be at risk on the last day of the year of assessment. EXTERNAL GUIDE VENTURE CAPITAL COMPANIES GEN-REG-48-G01. REVISION: 6 Page 5 of 9
  • No deduction will be allowed where the taxpayer is a connected person to the underlying VCC’s within the MeTTa portfolio at or immediately after the acquisition of any venture capital share in the MeTTa Capital portfolio.
  • On request from SARS, the investor must verify a claim for a deduction by providing a VCC Investor Certificate (This will be issued by the underlying funds within MeTTa) that has been issued by an approved VCC (VCC’s within the MeTTa portfolio) stating the amount of the investment and the year of assessment in which the investment was made.
  • Except in the case of Venture Capital shares held by a taxpayer for longer than five years, the deduction is recouped (recovered) if the taxpayer disposes of the Venture Capital shares to the extent of the initial VCC investment (under the general recoupment rules of section 8(4) of the Act)).
  • Standard income tax and CGT rules apply in respect of VCC shares.

The approved VCCs within each MeTTa Capital portfolio must issue investor certificates to each of MeTTa Capital’s investors. This will provide SARS with the proof it needs to allow the investor the relevant tax deduction.

  • The investee must be a company;
  • The company must be a resident;
  • The company must not be a controlled group company in relation to a group of companies;
  • The company’s tax affairs must be in order (a tax clearance certificate must be requested from SARS to support this requirement);
  • The company must be an unlisted company (section 45 of the Act) or a junior mining company; A junior mining company may be listed on the Alternative Exchange Division (AltX) of the JSE Limited;
  • During any year of assessment, the sum of the “Investment Income” derived by the company must not exceed 20% of its gross income for that year of assessment;
  • The company must not carry on any of the following impermissible trades:
  • Any trade carried on in respect of immoveable property, except trade as a hotel keeper (includes bed and breakfast establishments);
  • Financial service activities such as banking, insurance, money-lending and hire purchase financing;
  • Provision of financial or advisory services, including legal, tax advisory, stock broking, management consulting, auditing, or accounting;
  • Operating casino’s or other gambling related activities including any other games of chance;
  • Manufacturing, buying or selling liquor, tobacco products or arms or ammunition; or any trade carried on mainly outside the Republic.
  • There are no special tax rules for investee companies. The standard tax rules will apply.
  • The company must satisfy the following requirements by the end of each year of assessment after the expiry of 36 months from the first date of issue of Venture Capital shares:
  • A minimum of 80% of the expenditure incurred by the VCC to acquire assets must be for qualifying shares, and each exceeding: R500 million in any junior mining company; or o R50 million in any other qualifying company.
  • The expenditure incurred by the VCC to acquire qualifying shares in any one qualifying company must not exceed 20% of any amounts received in respect of the issue of Venture Capital shares.

The VCC must maintain a record of all its investors. A copy of this record must be submitted to SARS in February and August of each year. The records must contain at least the following details of the investors:

  • Taxpayer Reference Number
  • Name of entity
  • Physical address
  • Nature of trade
  • Contact details
  • Number of shares issued (per investor)
  • Value of shares (per investor)
  • Date of issue of shares (per investor)

The VCC must maintain a record of all its investees. A copy of this record must be submitted to SARS in February and August of each year. The records must contain at least the following details of the investees:

  • Taxpayer Reference Number
  • Name of entity
  • Physical address
  • Nature of trade
  • Contact details
  • Number of qualifying shares received (per investee)
  • Value of qualifying shares (per investee)
  • Date of receipt of qualifying shares (per investee).
  • The onus will be on the VCC to ensure that it invests in companies (i.e. investees) that meet the stipulated requirements.
  • The VCC must issue “VCC investor certificates” to qualifying investors in the year in which the investment is received.

The certificates issued by the VCC must include at least the following details:

  • The VCC reference number as issued by SARS.
  • The name and address of the VCC issuing the certificate to which enquiries may be directed
  • The date of receipt of the investment
  • The name and address of the Investor
  • The Taxpayer Reference Number of the Investor
  • The amount of the investment
  • On request from the Minister of Finance, a VCC must submit a report providing information that the Minister may prescribe
  • An investor in MeTTa will obtain a 45 % tax break (for an individual tax payer at maximum marginal rate) at the time of investment.
  • No recoupment of tax break at the time of realisation of investment in MeTTa if the investment is held for a minimum period by the investor of 5 years.