25 February 2016
- A welcome reference by the Finance Minister to reduce the regulatory burden for business investors;
- SAVCA hails the intention by National Treasury to evaluate the workability of aspects of the Section 12J Venture Capital Company Regime;
- The hike in capital gains tax for companies will have implications for investor returns upon the disposal of assets; future adjustments in this tax regime ought to factor in the inhibiting effect it could have on the willingness of investors to take on the risk of allocating capital to growth assets.
The stated intention by Government to reduce the regulatory burden for business investors, as announced by the South African Finance Minister Pravin Gordhan in the 2016 Budget Speech, will help attract foreign and local investment into the South African economy – including investment by private equity and venture capital.
According to Erika van der Merwe, CEO of the Southern Africa Venture Capital and Private Equity Association (SAVCA), this was one of the positive elements of the annual fiscal policy statement, whose clear overall intent was to boost investor confidence in the South African market.
“From the perspective of the private equity and venture capital industry, we welcome measures to ensure that appropriate regulation is in place; that is, regulation that provides peace of mind to investors into private equity and venture capital funds — while not being unnecessarily onerous and impractical.”
Also encouraging was the assurance provided that National Treasury will examine measures to encourage venture capital funding for small businesses, through an assessment of its Section 12J Venture Capital Company (VCC) Regime. The VCC incentives were introduced in 2008 to provide tax relief for investors into venture capital and SME investments.
“Following the well-received engagement by SAVCA with National Treasury in 2015, relating to the Section 12J incentives and their workability, we are pleased to note that Government has acknowledged that certain provisions in the legislation may be deterring potential investors,” van der Merwe says.
According to Samantha Pokroy, a SAVCA director and CEO of Sanari Capital, although there has been a positive uptake of the VCC regime since the amendments to the incentive became effective in January 2015, certain practical constraints remain, which SAVCA and its member practitioners have brought to the attention of National Treasury.
Pokroy says that SAVCA and its members hope to see further amendments to the legislation, particularly in the following areas:
- Allowing for transferability of tax benefits on an apportionment basis if investors dispose of their holdings within the stipulated five-year period, to enhance liquidity in the asset class.
- Clarification of certain clauses in Section 12J that are open to interpretation, which could expose the VCC to unintended breach in compliance. Clarification will aid in fund managers’ engagement with prospective investments.
- Waiving Capital Gains Tax (CGT) on the disposal of assets in the VCC. Currently CGT is paid in the company in addition to Dividend Withholding Tax, which dilutes the VCC incentive. That is, a “double tax” is paid as compared to investing via traditional fund structures or in direct investments. Some technical matters referring to calculation of base cost also need to be addressed.
- Expanding permitted business forms as this enables more traditional fund management structures.
- Amendment to the connected person test. The connected person test applied at each subscription complicates capital raising as no single investor may hold 20% or more of the equity – making it a challenging balancing act to raise sufficient capital. Whilst this regulation helps avoid abuse of the vehicle, SAVCA proposes that the connected person calculation be back-ended (i.e. measured after three years) to allow the VCC to raise the capital in tranches.
- Salaried executives have less incentive to invest due to the delay and complication in filing and receiving their returns (as compared to provisional tax payers). This complicates capital raising, linking it largely to the tax year end. SAVCA proposes certain measures to enable tax deductions from PAYE, enabling immediate benefit from the tax-deductible investment for salaried individuals.
The commentary in the Budget Review opens the door for SAVCA to continue to engage and support National Treasury in this regard, Pokroy says.
“We see this piece of policy as one leg of a broader government programme to enhance policy for venture capital and SME investing in South Africa. We were equally encouraged by Minister Pravin Gordhan’s mention of one of the key workstreams to promote inclusive growth, being the establishment of a new fund to invest in and develop SMEs; as well President Zuma’s State of the Nation address regarding finalisation of the Department of Science and Technology’s Sovereign Innovation fund, a public-private funding partnership aimed at commercialising innovations.”
Pokroy says that “private equity and venture capital plays a critical role in helping to formulate effective and useful policy in partnership with government, and in drawing on its investment expertise and experience to raise and deploy investment funds for the purpose of inclusive growth and economic prosperity”.
Van der Merwe goes on to note that the announcement of increased capital gains tax rate for companies will have implications for investor returns from the disposal of assets.
“The tax hike highlights the difficult balancing act faced by the fiscal authorities, in ensuring that sufficient tax revenue is raised without inhibiting the risk-taking and growth-generating activities of business owners and investors. We trust that any future adjustments to the capital gains tax rate will take into account that these actions mean that there is reduced incentive for investors to allocate capital to growth assets.”
The Southern African Venture Capital and Private Equity Association (SAVCA) is the industry body and public policy advocate for private equity and venture capital in Southern Africa, representing about R170 billion in assets under management, through nearly 150 members. SAVCA promotes Southern Africa private equity by engaging with regulators and legislators on a range of matters affecting the industry, providing relevant and insightful research on aspects of the industry, offering training on private equity and creating meaningful networking opportunities for industry players.