As a startup shareholder I have invested R1 million in a locally-based...

As a startup shareholder I have invested R1 million in a locally-based company in which I own 20%. The company pays me a salary every month, on which I am taxed. I am therefore effectively being taxed for investing my money in an entrepreneurial business, even when the company is not earning any revenue. Is there a way to somehow avoid this personal Income tax?

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On the specific of the enquiry, SARS is of the following view:

  • As far as a share investment of R1 million is concerned, the return on this investment will take the form of dividends which are currently exempt from Income Tax.
  • As far as providing services to the company is concerned, this will be remunerated by a salary, which is subject to Income Tax.

In other words, Income tax is based on services rendered to the company is separate from exemptions related to the initial investment.

Tax relief for investing – Venture Capital Companies

In the 2008 Budget Review it was announced that access to equity finance by small and medium-sized businesses and junior mining exploration companies is one of the main challenges to the economic growth of these sectors.

Setting aside tax consequences, equity offers some key advantages for small businesses. Equity finance allows for small businesses to weather downturns. Equity also allows small business to use excess cash for reinvestment rather than being forced to use that cash for debt servicing.

It has been said that equity is patient capital. In order to assist small and medium-sized businesses and junior mining exploration companies in terms of equity finance, a tax incentive is offered to investors in such enterprises through Venture Capital Companies (“VCCs”). As an investor and shareholder you hold equity in the company are e subject to this exemption. However, earning a salary is separate from an equity stake.

The VCC is intended to be a marketing vehicle that will attract retail investors (such as yourself). It has the benefit of bringing together small investors as well as concentrating investment expertise in favour of the small business sector.

Please refer to the Income Tax Act of 1962, Section 12J for more information regarding Venture Capital Companies. For more information about please visit www.sars.gov.za or email vcc@sars.gov.za (Venture Capital Companies Office).

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