Content in This Guide
- Should Your Registered Business Submit A Tax Return?
- Different Types Of Businesses
- Different Forms Of Business Tax
- Small Business & Tax
- Tax For Part-Time & Contract Workers
What is business tax?
Business tax refers to a tax levied by the South African Revenue Services (SARS) on the profits made by companies. Small Businesses are required to follow the same tax processes as medium or large businesses, but, small businesses often experience the tax process as stressful.
The complex and strict nature of tax returns is often intimidating and quite a burden to small business.
The information in this guide is aimed at alleviating tax-related stress for you and your small business.
Should Your Registered Business Submit A Tax Return?
The Small Business Corporation (SBC) tax rates for the financial years ending on any date between 1 April 2016 and 31 March 2017 are as follows:
- 0 – 75 000 – 0% of taxable income
- 75 001 – 365 000 – 7% of taxable income above 75 000
- 365 001 – 550 000 – 20 300 + 21% of taxable income above 365 000
- 550 001 and above – 59 150 + 28% of taxable income above 550 000.
If your business is not yet generating an income, you must still register your business as a tax payer and submit a zero return.
Related: Entrepreneurs And Tax: 101
Different Types Of Business Entities
There are various types of business entities all of which will have a unique way of dealing with tax; here are the main types:
1. Sole Proprietor
A sole proprietorship, also known as a sole trader, is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business.
The sole proprietor accepts all risks and rewards of the business, occasionally having to supplement the business’s profits with personal funds.
However, the SARS recommend that you register your business as a tax payer. Businesses with a turnover of under R100 000 usually do not pay tax, but it should still be registered with SARS.
A partnership is the business relationship that exists between two or more people who have come together to carry out a trade, business or a profession.
A partnership is also not considered a separate legal person or taxpayer, which means each partner, is taxed on their portion of the profits.
3. Close Corporation (CC)
A CC is similar to a private company and is a legal entity, which means it is a taxpayer in its own right.
The minimum number of people in a CC is one and the maximum is 10.
From a tax perspective, SARS treats a CC like a company.
4. Private Company
SARS treats a private company as a separate legal entity and it must be registered as a taxpayer in its own right.
Related: Tax Basics For Business Owners
It has separate rights and duties from its owners. The owners of this type of business are shareholders and they don’t necessarily have to manage the company, in order to own it.
A ‘co-operative’ is defined as any association of persons registered under Section 27 of the Co-operatives Act 91 of 1981 or Section 7 of the Co-operatives Act 14 of 2005.
Different Forms of Business Tax
Small Business Tax
Small Business Tax is typically the best route for a smaller company, as it’s frequently taxed on the basis of a progressive rate system.
This means that tax is calculated at a rate of 0% on the first R 75 000 of taxable income, 7% on taxable income in excess of R 75 000, 20 300 + 21% of taxable income above 365 000 and a rate of 59 150 + 28% of taxable income above 550 000.
Corporate Income Tax
Corporate Income Tax is a tax implemented on businesses resident, incorporated under the law and managed in the Republic of South Africa. The rate for Corporate Income Tax is 28%.
Micro businesses with a turnover of less than R1 million per annum qualify for Turnover Tax, which reduces and simplifies its tax compliance and administrative procedures.
To do a quick test to see if you qualify for turnover tax, click here.
For more information on turnover tax, click here.
Dividends Tax is a tax charged at 15% on shareholders when dividends are paid to them. For more information on Dividends Tax, please visit here.
Small Business & Tax
How to Register For Income Tax
Once you, as a taxpayer, launch your business you should register with your local SARS office in order to receive an income tax reference number.
Income tax requires registration with the Companies and Intellectual Property Commission (CIPC).
Once you’ve registered for income tax you can then register for Value-Added Tax (VAT) or Pay-As-You-Earn (PAYE), without going through a lengthy registration process. Registering for income taxes allows you to access eFiling.
Corporate Income Tax was recently refreshed, offering you a new Income Tax Return for Companies (ITR14), which aims to improve efficiency and compliance. To find out more about the new enhanced ITR14 and what you must do, click here.
Employers are required to deduct employees’ tax (Pay-As-You-Earn) from the earnings of employees and pay it over to SARS on a monthly basis.
A business that pays salaries, wages and other remuneration to any of its employees above the tax thresholds (R54 200 for individuals under the age of 65 and R84 200 for individuals aged 65 or older) must register with SARS for employees’ tax purposes. This is done by completing an EMP 101 form and submitting it to SARS.
Once registered, the employer will receive a monthly return (EMP 201) that must be completed and submitted together with the deducted employees’ tax within seven days of the month following the month for which the tax was deducted.
Related: Register for PAYE
Further information about the deduction of PAYE can be found in the Guide for employers in respect of employee’s tax on the SARS website.
SITE (Standard Income Tax on Employees) is merely a method that means employees who earn less than a certain amount, pay income tax as a full and final liability on the information to the specific employer. SITE applies to individuals:
- Whose net remuneration does not exceed R120 000 annually
- Whom do not receive a travel allowance
- Whom do not receive any other income
Sole Proprietor & Tax
What Expenses Can A Sole Proprietor Claim Against Income?
A sole proprietor can claim all typical business expenses. The sole proprietorship itself is not separately taxed on its income. Instead, the sole proprietor reports business income and expenses on his or her own tax return.
What Are Considered As Business Expenses?
Business expenses, also referred to as operating expenses, are the ordinary and necessary expenses incurred in the operation of the business. Don’t forget expenditure must be ‘in the production of income’.
Typical overheads could include:
- Accounting and bookkeeping costs.
- Internet: Costs to run and maintain the system.
- Insurance costs.
- Licences: Those that apply to the business.
- Legal fees: Costs incurred when obtaining legal advice.
- Maintenance and repairs.
- Motor vehicle costs: Maintenance, repairs and licences (costs should be allocated separately from personal running expenses).
- Postage including stamps and mailing expenses.
- Printing and stationery: Letterheads, business cards.
- Delivery and freight.
- Depreciation: For business assets that lose value while in use by a business.
- Entertainment: Expenses – normally food and beverages paid for by the business to entertaining people important to the business, such as customers and suppliers.
- Electricity and water: Costs associated with the business’s premises and the equipment use.
- Rent/Rates and taxes: For leasing your business’s premises.
- Rent: For any leased equipment, signage used by the business.
- Research and Development.
- Security: Costs for security services such as alarm monitoring, armed response, armed guards.
- Subcontractors: Other parties that have provided services for your business related to the product, services and sales.
- Telephone and Fax/Communication: Fixed line and cellular phone costs.
Working From Home
You can claim all your business expenses but there are specific requirements for claiming a deduction for occupying a portion of your home for the purposes of trade.
This means that a portion of your home must be specifically equipped to accommodate and support your specific trade and must be used regularly and exclusively to run the business.
Your duties must also be mainly performed in that portion of your home.
What Are ‘Home Office Expenses’?
Typical home office expenses include:
- Rent on the premises
- Interest on the mortgage bond
- The cost of repairs to the premises
- Electricity, water, rates and taxes
- Cleaning costs
When you claim a deduction for these expenses, they need to be in proportion to the floor area of your home office against the total floor area of your home.
Related: Ways To Save More Tax
Keep an accurate record of all expenses, as SARS may want to check the information.
Tax For Part-Time & Contract Workers
Tax For Part-Time Workers
As long as the company who contracts you issues an IRP5 at the end of each financial year, you do not need a pay slip. But, you must invoice them each month and obviously keep a record of each invoice payment that you receive.
The invoice acts as your ‘payslip’. As you work only for one client, even though you work on a contractual basis, you are not considered an independent contractor as you do not have multiple clients.
Usually, employers are not liable to pay employees’ tax to the South African Revenue Services (SARS) in respect of payments made to independent contractors.
Related: Dealing with the Consulting PAYE
But, due to the breadth of the SARS definition of an independent contractor, employers may find that they are liable for employees’ tax payable in respect of independent contractors, and for the interest and penalties associated with the failure to pay over employees’ tax, so it is easier for the employer to pay tax on the contractor’s behalf.
If employees’ tax is deducted, then it is mandatory for the contractor to be issued with an IRP5 certificate at the end of the tax year.
But, what is extremely important is that the gross income paid to the independent contractor must be disclosed under code 3616 (independent contractors), and not 3601 (income – taxable).
If A Sole Proprietor Is Employed On A Contract Basis For Three Months, Do I Have To Pay PAYE And UIF On Their Behalf?
Most employers are clear about their responsibility to deduct PAYE from their permanent staff, but the waters tend to get a little muddy when it comes to contractors and casual or part-time staff:
How To Tax An Independent Contractor Or Sole Proprietor
An independent contractor should have a contract of service in place stating that he/she is an independent contractor committed to delivering a specific end-product or service.
This means that they are then exempt from PAYE deductions. However, if the contractor is paid on a regular basis (weekly or monthly for example), or works in a regulated environment in terms of fixed hours and supervision, he/she is then excluded and PAYE needs to be deducted from their income.
If you have independent contractors working for you under subcontractor agreements, they can be made responsible for their own tax payments, thus relieving you of the hassle of having to send in monthly PAYE for people who work for you on a contract basis.
But, make sure that you have proper contract agreements in place before you wash your hands off the responsibility of contractors’ PAYE.
SARS can still query why you haven’t paid PAYE for these contractors, if it becomes evident that they haven’t been paying tax themselves; it pays to have all the paperwork in place.
It’s also a good idea to ask short-term contractors to include their tax registration number on their invoice as an additional measure to ensure that they are indeed registered for, and pay, tax.
From a casual or part-time employee point of view, bear in mind that you have to deduct 25% tax from casual workers if you pay them more than R65 a day.
As an employer of staff, SARS requires that you register for your employees’ tax. Effectively, this makes you, the employer, an agent of Government, deducting from the earnings of your employees and paying this tax over to SARS each month.
This functions as credit that is set off against the final tax liability of your employees, which is determined once a year. Employee tax includes SITE (Standard Income Tax for Employees) and PAYE.
You have to register as an employer for employee tax if you pay salaries that exceed the tax thresholds. In other words, your employees become liable for tax if their annual salary is R40 000 for individuals under 65 years and R65 000 for individuals 65 years and older, and need to be taxed accordingly.
Members And Directors Are Employees
Bear in mind that as a member and/or director of a company, you are classified as an employee.
This means that your company needs to register for PAYE even if you are the only employee.
Failure to deduct and withhold PAYE on remuneration due to directors of companies will result in the imposition of penalties, currently imposed at a rate of 10%, as well as interest.
How To Register For Employee Tax
So, how do you go about registering for employee tax? Firstly, you need to complete an EMP101 form and submit it to SARS. This form is available at your local SARS office or online at www.sars.gov.za.
In it, you need to include information relating to your name and the name(s) of your partners if you operate in sole proprietorship or partnership, or the name of your company. You will also need to submit your street and postal address, business telephone numbers and the number of people that you employ.
Registration as an employer is free. The Receiver will let you know when it has received the forms and may ask for additional information before registering you as an employer.
SARS will let you know which Revenue office you are registered with and provide you with the latest EMP 10 – Guidelines for Employers book, which contains the relevant tax tables for you to work out how much tax you need to deduct from each employee’s salary every month.
Once you are registered, SARS will send you a monthly return (an EMP201) and it now becomes your responsibility to complete and submit this form, every month, together with the amount of tax you deducted from employees’ salaries. You need to do this within seven days after the end of the relevant month.
SARS will send you a receipt, which you need to keep on file. Once a year, you will be required to add up all the PAYE tax paid and fill in an IRP501 form and submit this to SARS.
At the end of February each year, you will need to give each employee an IRP5 form which shows how much tax they have paid in that year.
Unemployment Insurance Fund (UIF)
You will also need to register for UIF, whether or not you employ staff. It applies to all employers and workers (except those working less than 24 hours a month), learners, public servants, foreigners working on contract, workers who get a monthly State pension and workers who only earn commission.
The fund makes short-term provision for individuals who become unemployed, or are unable to work because of illness, maternity or adoption leave. It also provides financial relief to the dependants of deceased contributors.
Register For UIF
As an employer, it is your responsibility to register with UIF and make the monthly payments. These include a 1% payment from you (based on your employees’ individual salaries).
Each individual employee needs to make a further 1% payment, but it is your duty to deduct this amount from their salary and pay it to UIF, together with your contribution, on a monthly basis to SARS if you are registered for PAYE; or directly to the UIF if you are not.
Register your business by completing a UF8 form, and each new employee needs to be registered using a UI-19 form. You can obtain these forms from the Department of Labour.
SARS has provided guidelines in order to assist employers and independent contractors.
Related: Do You Know Your Taxpayer Rights?
These are available on the SARS website here: www.sars.gov.za under ‘Interpretation Notes/Income Tax’. If in doubt, it is almost certainly best to take advice from a tax consultant.
When To Register To Pay VAT
Value-Added Tax (VAT) is an indirect tax, based on consumption of goods and services in the economy. Registered businesses pay VAT and charge VAT on all goods and services.
A self-assessment of your business will determine how you choose to charge, collect and pay VAT. This allows your business to determine its liability or refund of tax.
It adopts a credit input method which allows businesses (vendors) to deduct the VAT incurred on business expenses (input tax) from the VAT collected on the supplies made by the business (output tax). In other words, the burden of the VAT is on the final consumer while maintaining neutrality in the business chain.
Related: Registering for VAT
For smaller companies trying to attract business from big companies it’s advisable to register for VAT, as larger companies prefer to work with registered VAT users. The only way to obtain a VAT number is to register with SARS.
When Is VAT Compulsory?
You will be liable to register for VAT if you earn an income, through your business, from selling goods, or fees earned from services supplied, is more than R1 million in any consecutive period of 12 months, or will exceed that amount in terms of a contractual obligation in writing.
Non-resident suppliers of certain electronic services are also liable to register for VAT, if the fees earned from these electronic services exceeds R50 000.
If you do not receive a large number of VAT invoices and turnover is below the required amount, then it would be advisable not to register for VAT.
Did You Know?
Businesses registered for VAT on a voluntary basis are referred to as vendors. As a vendor with a VAT number and if your business turnover is below the threshold, you must still submit a return, even if the VAT amount on the return is zero.
How To Register For VAT
It is very easy to register for a VAT online. Here are the steps to follow:
- Go to http://www.efiling.gov.za/
- Click on the red button on the top right hand corner that says, “Register”.
- Three options will appear in the middle of the page: For Individuals, For Tax Practitioners or For Organisations. Click on “For Organisations”.
The next screen will provide step-by-step instructions that will ask you to:
- Read the terms and conditions and accept it; before you are guided through the registration process.
- SARS will ask you about who you are (personal information).
- The website will request information about your business.
- You will have the opportunity to register for e-filing for specific tax returns. SARS accepts activation requests for VAT. Please make sure that you have the relevant tax reference numbers handy.
Related: Filing Your Annual Tax Return
Once you have read and understood the terms and conditions and selected the box which accepts terms and conditions you will go to the next screen, which will request you to provide:
- Login (your login name will create a unique SARS e-Filing login name):
- Confirm the password
- Provide a password hint
- Security question – (such as what is your mother’s name)
- The answer to the security question
- Identification type – South African ID or passport
- Your ID number.
Is Insurance Tax Deductible?
“The only insurance contributions that are tax deductible for the employee are RA’s (Retirement Annuity) or pension fund contributions.
Dread disease cover, life insurance, disability and provident funds contributions are not tax deductible for the employee,” explains Lerato Slater, a consultant at SARS.
With regard to RA’s, the amount paid by a company is considered a fringe benefit. The contribution shown on the tax certificate issued by the RA provider to the employee is deductible within the limits set by SARS.
The employer’s contribution to the fund is tax deductible to a maximum of 20% of the total salary roll.
The employee cannot claim any rebate from SARS on provident fund contributions.
For details with regard to the tax deductions you can refer to the Income Tax Act, 1962 (Act 58 of 1962).
Are Marketing Expenses Tax Deductible?
“Marketing expenses pertaining to direct production of income are tax deductible as long as you have proof that the expense is connected to income.
If you are paying commission to a third party this would also be tax deductible as it is considered an expense,” explains DJS Tax Specialists, director, David Smith.
In order for you to successfully claim an expense as a deduction for income tax purposes, there must have been a clear intention for this expense to have resulted in you earning taxable income from this expense.
Claiming of expenses is regulated by Section 11(a) of the Income Tax Act. The so-called “general deduction formula” is used to determine taxable income derived by any person who is trading.
A trade according to the Act includes every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of, or the grant of permission to use, any patent as defined in the Patents Act.
Use A Tax Specialist
You can also acquire the services of a tax specialist who can formulate an appropriate tax strategy that is aligned with your overall business strategy and the tax challenges facing your business.
SARS tax consultants (either at their offices or via the phone) can help you calculate your tax and answer any questions that you may have regarding your business.
Large accounting companies or smaller firms can assist depending on your requirements, but will charge for their professional services. Contact the South African Institute of Chartered Accountants for more details.
Be sure to choose someone sufficiently qualified, and who won’t leave you in trouble with the taxman. Do not assume that because a practitioner is registered with SARS, they have enough experience to advise you. Call references to gauge service delivery or ask trusted associates for recommendations.
Do all businesses need to register for tax? If I have five employees earning ±R2 500, how do I handle my salaries and do I have to submit SITE and PAYE for myself and employees?
According to the SARS Tax Guide for Small Businesses as soon as you commence your business you are required to register with your local SARS office and obtain an income tax reference number. You should register within 60 days of commencing the business by completing an IT 77 form (available on the SARS website www.sars.gov.za).
The remuneration of directors of private companies is subject to employees’ tax. A formula is used to determine a deemed monthly remuneration upon which the company must deduct employees’ tax in the instance of the director’s remuneration only being determined late in the year of assessment or in the following year.
Related: Tax Basics For Business Owners
Tax Refunds – What You Need To Know
You are able to object/dispute any SARS decision not to release the refund on efiling or through your tax practitioner.
Most taxpayers are not aware of the requirements for a tax refund to be facilitated and SARS very often will delay paying out the refund. In this article, we will look at the requirements taxpayers need to be aware of and the Tax Ombud’s report on the investigation into alleged delayed payment of refunds as a systemic and emerging issue in terms of section 16 (1) (b) of The Tax Administration Act No. 28 of 2011 (TAA).
What you need to know as a taxpayer:
- The tax refund must be claimed within 5 years from date of submission of the return.
- SARS has the right to withhold the refund as per section 190 (2) of TAA: “SARS need not authorise a refund as referred to in subsection (1) until such time that a verification, inspection or audit of the refund in accordance with Chapter 5 has been finalised.”
- Authorisation of payment of refund done once SARS is satisfied with the acceptable security provided by the taxpayer in terms of section 190 (3) of TAA: “SARS must authorise the payment of a refund before the finalisation of the verification, inspection or audit if security in a form acceptable to a senior SARS official is provided by the taxpayer.”
- As a taxpayer, you need to ensure that you verify your banking details with SARS and that there are no outstanding returns in order for your refund not to be delayed.
- Any decision not to refund by SARS is subject to an objection and appeal by the taxpayer in terms of section 190 (6) of TAA.
- Refunds less than R100 are not refunded but carried forward to the next tax period.
- To view the status of your refund you can use the Refund Dashboard on efiling under the ‘Returns History’ tab for the tax period in question or contact the SARS call centre.
- Interest starts accruing from 21 business days from the date on which the refund became due, i.e. verification/audit outcome finalised.
Related: Tax Basics For Business Owners
Tax Ombud’s Report
The Tax Ombud’s report identified various mechanisms used by SARS to defer or delay the payment of refunds due:
- SARS failing to link submitted supporting documents at a SARS branch to the main file.
- The use of special stoppers on taxpayers’ accounts and the delay in lifting the stoppers, e.g. being required to verify banking details in person at a SARS branch. Even after the verification is done, there is still a lengthy delay in paying the refund.
- Using the filing of new returns as an excuse to block refunds. The system blocks already verified refunds the moment a subsequent return is submitted by the taxpayer.
- Withholding of refunds for one period while an audit/verification is in progress on another period. This is contrary to section 190 of the TAA.
- The use of historic returns suddenly reflecting as outstanding but these have never been shown as outstanding on the Tax Clearance Certificate or the Statement of Account.
- The raising of assessments and passing of journals to absorb credits on taxpayers’ accounts, i.e. overpayments. In doing so, SARS creates fictious tax liabilities instead of making a decision on the refund.
- Requesting further information during the audit to delay finalisation, thus delaying the time frame from when the interest accrues.
- No turnaround time for assessments successfully disputed.
- Obstacles regarding diesel refunds.
- Raising of assessments prematurely before the 21 days to submit the supporting documents
- Refunds for periods that have been verified automatically set-off against bad debts on other periods not withstanding a request for suspension or where there is the suspension of payment. SARS may not instate any collection steps from date of submission of request for suspension of payment until 10 days after decision to not grant the request has been communicated to the taxpayer in terms of section 164 (6).
You are able to object/dispute any SARS decision not to release the refund on efiling or through your tax practitioner.
Reimagine The Use Of Technology
The phenomenon of ‘big data’ is rapidly catching up with the world of tax.
Invest And Save 100% Of Your Tax Payable To SARS With The 12J Fund
Section 12J funds were created in response to the South African Government offering tax incentives for private investors to support funds that support SME growth in South Africa. Three experts unpack the benefits of investing in 12J funds — particularly for high net worth individuals.
What is a 12J Fund?
Clive Butkow: In 2009, the South African Government implemented a tax incentive for investors in enterprises through a Venture Capital Company (VCC) regime known as Section 12J.
These funds were set up to help early stage companies raise venture capital to stimulate economic growth and job creation. Section 12J was based on the Venture Capital Trusts (VCT) in the UK, which enable high net worth Individuals to save tax and rather invest in a VCT, which will then invest in start-ups. Individuals, trusts and companies can all invest in a Section 12J company and receive the respective tax deduction.
Neill Hobbs: The South African Revenue Services (SARS) has written Section 12J into the Tax Act, which offers taxpayers a 100% reduction in their taxable income in the year of investment for the amount they invest by way of a subscription for shares in a Section 12J VCC. The VCC then invests into small and medium-sized enterprises (SMEs) with the added intention of creating jobs and securing employment. The VCC must be approved by both SARS and the Financial Services Board.
Why is it tax deductible?
Gidon Novick: The legislation provides for a tax deduction providing the fund complies with the requirements of the Act. The intent of the incentive is to stimulate certain critical areas of the South African economy (such as tourism and hospitality) through SME growth in the sector.
Neill: Section 12J advocates investment into SMEs and junior mining exploration to act as a catalyst for a positive shift in the economy. We know that SMEs are a significant source of employment in the economy and provide a plethora of job opportunities and income security for households. This ultimately creates a positive iterative loop in the economy.
How do the tax deductions work?
Clive: The total amount invested can be deducted from the tax- payers’ taxable income. This results in a taxpayer (who is paying tax at the marginal rate of 45%), saving 45% of their investment by reducing their taxable income. For example, a taxpayer who has a taxable income of R1 million and would normally pay R450 000 to SARS will rather pay the R1 million to the Section 12J company and pay zero tax.
The caveat is that the taxpayer needs to hold their shares for five years in the relevant Section 12J fund, or SARS will recoup their tax saving. The tax is deductible to incentivise taxpayers to rather invest in a Section 12J company and promote the growth of the South African economy than pay tax on their taxable income.
This seems like a double benefit to investors? Is that correct and why?
Clive: There’s definitely a double benefit, as the taxpayer receives a once off deduction from SARS in the year they invest in the Section 12J company, as well as an added benefit based on the performance of the Section 12J company. Some companies are set up to invest their capital in higher risk ventures with others in lower risk ventures. The returns to investors range from 15% to 38% based on the nature of the fund and their investment strategy.
Gidon: The benefit to investors would be in the form of their tax deduction but importantly also their investment returns. Investors need to fully understand the nature of the investments the fund is making, the risks involved and their ability to cash out after the five-year minimum term, in other words, the liquidity of the investment.
Neill: Individual investors will get an immediate tax saving, up to 45% of the amount invested, in addition to any dividends and long-term capital growth. A Section 12J VCC provides self-interest value to the taxpayer in the tax saving and growth in investment, but in a broader sense, marries business value with societal value through the boost in the SME space.
What questions should investors who are interested in investing in a 12J fund be asking?
Clive: The most important question is of the experience and reputation within the management team. Money follows management in the venture capital asset class. The management team needs to have experience in the investment strategy of their Section 12J fund. At Kalon Venture Partners we only invest in disruptive digital technologies where the CEO and the board have significant experience in buying, building and selling technology companies. The CEO was the ex-COO of Accenture South Africa and prior to that led Accenture’s technology business. Another important consideration is how the Section 12J company creates liquidity for their investors as it’s important for the investor to understand how and when the Section 12J company will pay dividends of the profits and surpluses on the sale of assets. Lastly, investors must understand the governance and investment disciplines, systems and processes when making investments.
Gidon: What is the risk/return profile of the underlying investments? Who are the fund managers and what is their track record? What are the assets that underpin the investments? How will this fund make an impact on the South African economy and job creation? How will I get my money out after five years?
Neill: Confirm SARS and FSB approval. What is the VCC’s investment strategy? The VCC’s industry focus? What is the fund’s launch date? Track record? Capital raised? Targeted return? Number of investments made in qualifying companies? Annual financial statements published? Basis for valuing the underlying investment and the VCC’s dividend policy and history? Fee structure? Minimum investment?
What are the pros and cons of a 12J fund versus more traditional investment portfolios?
Neill: The benefit for a deduction in respect of a retirement annuity contribution is limited to
R350 000 in a year, whereas the contribution and benefit of an investment into a Section 12J VCC is not capped and can be 100% of taxable income.
Many SMEs require capital and management support. With the support from the VCC team, stakeholder integration and interaction takes place on the factory floor, rather than just in the boardroom. The investor management team walks the walk with the SME.
A VCC investment should be viewed as a long-term investment. The proceeds on the sale of the VCC shares will be subject to full tax recoupment if the shares in the VCC are sold within five years from the date of investment.
If the shares are held for a period exceeding five years, the sales proceeds from the sale of the shares will only be subject to capital gains tax, albeit from a zero base.
Clive: A major pro for investors is the upfront tax advantage where there is no limit to the investment that you can make, unlike an RA, which is limited to a percentage of taxable income and capped. A second pro is the fact that investors can now diversify their portfolio with 12J investments and not only invest in the traditional capital markets.
What is the amount you can invest into a 12J fund?
Neill: CIPC requires that if a VCC does not have a prospectus, then the minimum amount that can be invested is R1 million. The intention with this is to make sure that any general person from the public, who might not understand the investment they are investing into, does not invest more than is appropriate for them.
Clive: Our recommendation at Kalon Venture Partners is that an investor should not invest more than 7,5% to 10% of their net wealth into a Section 12J due to the higher risk profile of a venture capital investment.
Is there a ‘right’ time to invest in a 12J fund with regards to tax exemptions?
Clive: There is no right time to invest, however with the current rand strength we see this as a vital time to diversify one’s portfolio. The most effective time to raise capital is at the tax year end on 28 February. An alternate time of the year that capital is raised is during the provisional tax season in August or September each year.
Gidon: An investor should only consider a 12J if they have the taxable income and don’t need access to the funds they have invested for at least five years. Investments must be made before the tax year-end (ie 28 February) to qualify for the deduction in that year.
Neill: Section 12J is particularly attractive to high income earners. It’s also attractive to those taxpayers who have made a capital gain, which will be subject to capital gains tax. For example, an individual who realises a capital gain of R5 million in the 2018 tax year, will only have to invest the inclusion amount of 40% (R2 million) into a VCC to avoid capital gains tax completely in the 2018 tax year.
A VCC investment is the only recognised manner in which a corporate employee, who is subject to PAYE on their salary, can receive a refund of PAYE deducted by the employer. Although there is no provision for a directive for the reduction of the PAYE amount, an employee who earns R2 million per annum, and makes a R2 million VCC investment, could receive a full refund of PAYE on the submission of their annual tax return.
The sunset clause is currently 30 June 2021. This means that funds invested before that date must remain in for the five-year period, but any funds invested into a 12J fund after that date will not enjoy the current tax benefits. This date could be re-assessed and extended.
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