One of the main challenges to the economic growth of small and medium-sized businesses and junior mining exploration is access to equity finance.
To assist these sectors in terms of equity finance, the government has implemented a tax incentive for investors in such enterprises through the Venture Capital Company (VCC) regime.
The VCC is intended to be a vehicle to 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 taxpayers) can claim an income tax deduction in respect of the expenditure incurred in the subscription for equity in a VCC shares.
The VCC legislation is subject to a 12 year sunset clause i.e. it ends on 30 June 2021. This will allow for review of the efficiency of a regime and a decision will then be made as to whether it should be continued.
What does this mean for the Investor in Alumni?
The full amount invested in Alumni 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 Alumni will, therefore, obtain a 45 % tax incentive (for an individual taxpayer at the maximum marginal rate) at the time of investment.
If the investment in Alumni is held for a minimum period of 5 years the tax benefit conferred at the date of investment will become permanent, i.e. NO recoupment of the tax benefit in the hands of the investor when the investment in the Alumni is subsequently realised.
Alumni are able to invest in companies with total assets up to R50 million (previously R20m). Alumni are able to consider investments in larger, more established companies, significantly expanding the investment universe and reducing investment risk.
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.
Requirements to be met by Section 12J companies
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 investee company must, immediately after the issuing of the qualifying shares, hold assets with a book value not exceeding: R500 million in any junior mining company; or 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.