Simpler tax relief for supporters of entrepreneurs
Business Day Live – 27 FEBRUARY 2014, 05:44
THE government has committed to helping venture capital thrive in South Africa by easing tax regulations.
Rules related to access to foreign capital are also to be eased to enhance support for entrepreneurial development.
Much of this reform relates to section 12J of the Income Tax Act, which permits investors to write off 100% of their investment in a South African Revenue Service (SARS)-approved venture capital company against their taxable income.
“Because the requirements to qualify for such relief are stringent and limiting, there has been limited uptake of this relief,” Graham Viljoen, a director in Webber Wentzel’s corporate tax practice, said on Wednesday.
“To date, only a handful of companies have been fully accredited as venture capital companies by SARS.
“The limitations of this provision have been acknowledged by government and, following consultation with interested parties, government will propose amendments,” he said.
• making deductions permanent if investments are held for a certain period of time;
• increasing the total asset limit for qualifying investee companies from R20m to R50m, and from R300m to R500m in the case of junior mining companies;
• waiving capital gains tax on the sale of assets; and
• making the relief available to a greater number of forms of businesses.
Mr Viljoen said an increase in the asset limit would be a welcome change for venture capital funds.
“This will be made even more attractive if it is coupled with a capital gains tax exemption on disposals. The expanding of permitted business forms will also go a long way to assisting with generating further interest and use of the venture capital provisions,” Mr Viljoen said.
“The venture capital sector in South Africa, although small, is growing and it’s important government supports the sector to promote the entrepreneurial landscape in South Africa. The proposed changes should assist in doing this.”
Subject to appropriate tax treatment, amendments are to be made to South Africa’s intellectual property rules too. The budget review says: “In further support of entrepreneurial development, we propose to provide tax relief to organisations involved in small enterprise development through grant-making.
“As a complementary measure, grants received by small and medium-sized enterprises would be tax exempt, regardless of the source of funds.”
“These options may include tax relief through the public benefit organisation channel or a more dedicated tax provision,” Finance Minister Pravin Gordhan said on Wednesday.
Malcolm Segal, executive consultant to the South African Venture Capital Association, welcomed the tax relief but said bureaucratic hurdles also needed to be addressed.
A new foreign member funds regime was also proposed to simplify foreign exchange rules to promote South Africa as a centre for financial services such as fund and asset management.
Foreign member funds based in South Africa would not be subject to the same macroprudential limits as other institutional funds.