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Capitalising On (Ad)venture – A Look At Section 12J

Due to a multitude of factors, such as slow economic growth coupled with a some-what uncertain political climate, small and medium-sized enterprises (“SMEs”) often face challenges with regard to obtaining equity funding.

Gigi Nyanin

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In an attempt to encourage investment of equity into SMEs and junior mining companies, the Venture Capital Company (“VCC”) tax regime was introduced into the Income Tax Act 58 of 1962 (“Act”) in 2009.

Section 12J of the Act encompasses the relevant legislation governing VCCs and provides for the formation of an investment holding company, described as a VCC, through which investors can provide equity funding to a portfolio of SMEs.  More specifically, investors subscribe for shares in the VCC and claim an income tax deduction for the subscription price incurred.  The VCC, in turn, invests in “qualifying companies”.

Various legislative amendments to section 12J have given rise to an increased participation in the asset class, evidenced by the increasing number of approved VCCs.  As at 24 January 2018, the South African Revenue Service (“SARS”) website indicates that 90 companies have been approved as VCCs, while 2 have had their VCC status withdrawn.

Related: Is Venture Capital Right For You?

This article provides a high-level overview of specific aspects of section 12J.  It is advisable for SMEs and investors to obtain independent tax advice when considering utilising this investment vehicle.

Requirements for qualifying companies

The sole object of an approved VCC must be the management of investments in “qualifying companies”.  The question of whether a potential investee company constitutes a “qualifying company” is a factual one and must be considered in light of the specific circumstances of that entity.

A “qualifying company” must comply with several requirements[1], some of which include:

  • the company must not be a “controlled group company” in relation to a group of companies; and
  • the company must not carry on an “impermissible trade”.

A “controlled group company” is a company that has a corporate shareholder that holds, directly or indirectly, at least 70% of the shares in that company.  Accordingly, this requirement limits the share investment that a VCC can make in a “qualifying company” to a maximum of 69%.  This means that at least 31% of the shares in a “qualifying company” must be held by persons other than the VCC.  

The definition of “impermissible trade” encompasses a number of trades, such as trades in respect of immovable property (other than hotel keeping), financial or advisory services, gambling and trades carried on mainly outside of South Africa.  It must be noted that a number of these trades are defined with reference to other pieces of legislation and due consideration should be given to those Acts. Again, the question of whether a “qualifying company” conducts an “impermissible trade” is a factual one which should be determined on a case-by-case basis.

Tax benefit for investors

The upfront income tax deduction, which lessens some of the investment risk for investors, is available for share subscriptions only.  The deduction is only available in the year of assessment during which it is incurred and no deduction will be allowed in respect of shares acquired after 30 June 2021.

Any South African taxpayer (i.e. natural persons, companies, trusts and partnerships) can benefit from the tax deduction, however, the deduction is subject to anti-avoidance provisions, such as:

  • where an investor has used any loan or credit to finance the expenditure incurred to acquire shares in the VCC, the amount of the deduction is limited to the amount for which the investor is deemed to be at risk on the last day of the year of assessment; and
  • no investor can be a “connected person” [2] in relation to the VCC after the expiry of a period of 36 months commencing on the first date of the issue of the venture capital shares.

Related: The Truth About Venture Capital Funding

In addition to the above anti-avoidance provisions, investors need to be aware of the restrictive framework offered by section 12J.  For example, to the extent that the investment is realised (i.e. disposal of shares in the VCC or a return of capital) before the end of a five-year period, the deduction previously allowed must be included in the income of the investor in the year of assessment during which the investment was realised.

In addition, there are some shortcomings in the VCC regime, which National Treasury will hopefully address in due course.  For example, it is more tax efficient for a natural person to subscribe for shares directly in a “qualifying company” rather than the VCC, for the following reasons:

  • capital gains tax (“CGT”), at the effective rate of 22.4%, is paid by a VCC on gains realised upon the sale of shares in a “qualifying company”. In addition, dividends tax at the rate of 20% is incurred when the VCC declares a dividend to a shareholder who is a natural person.
  • should the natural person
  • subscribe for the shares in the qualifying company directly, the natural person will only incur CGT at the rate of 18%. The benefit of the upfront deduction may therefore be ‘tainted’ by this ‘double tax’.

National Treasury has acknowledged the need to make further changes to section 12J which will assist SMEs in achieving profitable growth.


[1] Please note that there are other requirements which have not been addressed in this article.

[2] As a rule, natural persons are “connected persons” in relation to a company to the extent that they individually or together with any “connected person” in relation to themselves, hold at least 20% of the equity shares or voting rights in the company. A corporate investor will be a “connected person” to the extent that –

  • it holds at least 50% of the equity shares or voting rights in the VCC;
  • it holds at least 20% of the equity shares or voting rights and no other person holds the majority of the voting rights; or
  • any other company is managed or controlled by any person who is a “connected person” to the corporate investor.

Gigi Nyanin is a Senior Associate in the Tax and Exchange Control practice at Cliffe Dekker Hofmeyr’s (CDH) employment practice.

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4 Black-Owned Businesses Participating in This Enterprise Development Programme That Are Growing – Fast

The Department of Small Business Development (DSBD) and Property Point have joined forces to take 16 small to medium-sized, black-owned, businesses, through a life-changing enterprise development programme.

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The Department of Small Business Development (DSBD) and Property Point have joined forces to take 16 small to medium-sized, black-owned, businesses, through a life-changing enterprise development programme.

In its first three months of operation, this programme has already seen incredible results with an average growth rate of 27% per business,  R17,8million in contract secured and 21 direct jobs created. This is a unique collaboration in that it is set up specifically to encourage access to markets for the beneficiary businesses and is the first of its kind in the industry.

But who are the people behind the numbers?  Meet four out of the 16 business owners , Thabiso, Falvia, Malusi and Mandla taking full advantage of this opportunity.

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Entrepreneur Today

How WordPress Can Help Your Small Business

WordPress is an amazingly large platform filled with incredible tools from useful plugins to intriguing extensions. It’s a platform for bloggers, social media influencers, and increasingly, small business owners.

Josh Althuser

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WordPress is one of the largest content management systems available. In fact, it powers nearly 30% of all US websites. Its ease of use and a open-source nature has prompted the platform to become overwhelmingly popular.

For many, WordPress is an invaluable resource that makes website management simple and promotes their brand easily. It is Little Wonder then that so many businesses use WordPress to handle their website and online presence management. Even though it is very popular, learning WordPress is an entirely different task.

Not many small businesses can afford to have a WordPress developer. In that case, it is important for many owners to learn as much as they can about WordPress.

Achieving effective market growth

There are those who still wish to use traditional services but are usually dumbfounded by the price and time requirement for making custom websites outside of the platform.

The abundant array of tools and applications makes using WordPress simple but effective for market growth.

For many businesses just starting out, getting traction and marketing growth are very difficult and can be taxing experiences if done by hand.

Related: 7 Ingredients Of Small Business Success Online

With a platform like WordPress achieving a beautiful website and pushing a brand is much simpler and easier than trying to do everything yourself.

Optimising your website with SEO

One of the most important aspects of business writing on a website is search engine optimisation or SEO. WordPress fortunately comes with a number of plugins that makes SEO very simple such as Yoast.

This service scroll through text and automates the SEO process to make sure your content is pushed to the best of its ability while also giving your brand the most exposure it can possibly take.

SEO is a very taxing and tedious process for many small business owners and the WordPress platform makes it simple.

Monitoring your website and developing leads

There is also the issue of monitoring who is coming to your website and who was looking at your products. again, on the WordPress platform there is the Google analytics plugin which allows owners to analyze who’s coming to their website and for how long.

This can be used to determine if your marketing or branding is effective and can determine what things need to change to increase exposure.

For small business, exposure is everything and awareness is the key to a successful business.

Increasing site security

Keeping a site secure is another main issue for people who run their own website and luckily WordPress has a plug-in for that.

Vaultpress, the premier security plugin, keeps your website secure and in the event of a catastrophic failure it can restore the entire site.

Business owners often fear their website crashing as it would reduce the amount of traffic it could garner and may interrupt their business practice. The WordPress platform has many tools which prevent loss of data or breaches of security so that your business can continue to run smoothly.

The benefits of using WordPress

These tools, mixed with a host of other utilities, make WordPress the premiere platform for websites for businesses of any size.

With its integration software you can automate messaging, simplify marketing and, optimise the speed of your website to give users an incredible experience without the cost of a full development team.

The technological age requires that all businesses must have a website or at least a web presence of some kind. it has been shown time and time again that a website is the best way to make a big impression on the consuming public.

Related: 10 Online Marketers To Watch In 2018

Time, as it moves slowly forward, shows us that the world will revolve around the Internet and technology. A web presence then, is not just a good idea or a trendy notion, but rather imperative to stay competitive in the future. To that end, there is no better platform to create a website on than WordPress.

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Government Funding

New Fund For Small Businesses To Be Developed

Government has allocated R2.1-billion toward the development of small- and medium-sized businesses.

Entrepreneur

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Driven by the Departments of Small Business, Science and Technology and the National Treasury, it was announced during the 2018 budget speech that entrepreneurs could unlocking funding for their businesses through a new funding initiative.

What is the new Fund?

Minister of Small Business Development, Lindiwe Zulu, explains where the fund stands and how it will work:

“The Fund will be operational during 2018/19 financial year but the planned disbursement of the funding will be the beginning of 2019/2020 financial year.”

She says R1 billion has already been transferred to the Department of Small Business Development from the national fiscus.

“The Department of Small Business Development together with National Treasury and Department of Science and Technology are working with the Government Technical Advisory Centre (GTAC) to develop the architecture of the Fund where issues around the management of the Fund will be considered,” she explains.

Related: Government Funding and Grants for Small Businesses

Who will the Fund be for?

“The Fund is targeting high growth businesses as our research on the ecosystem shows that there is a lack of funding of enterprises that are at an ideation and early start-up phase,” Zulu explains.

Her department together with the other participating arms of government, will identify areas of collaboration across research, mentorship and training of enterprises on financial management.

“The work that is being undertaken now will assist government to decide on how the fund will operate, but the government is conscious of the economic environment and would not look at setting up a completely new structure that will add to operational costs,” she says.

Addressing parliament on the fund, the minister said the financial mandate of the fund will be informed by the exercise that is being conducted through GTAC.

“Government is looking at having this fund as a soft loan which will provide affordable finance to small businesses and the emphasis will be more on ensuring that the Fund is sustainable rather than profit maximisation,” she explains.

Related: 11 Uniquely South African Business Ideas

How to apply for funding

Contact the following departments if you would like to access a portion of R2.1 billion:

Department of Small Business Development

  • Address: 77 Meintjies Street, Sunnyside, Pretoria
  • Tel: (+27) 861 843 384
  • Email: sbdinfo@dsbd.gov.za for information on the department and its services.

Department of Science & Technology

  • Address: DST Building (Building no. 53) (CSIR South Gate Entrance) Meiring Naude Road, Brummeria
  • Tel: (+27) 12 843 6300
  • EmailIsaac.Ramovha@dst.gov.za or zama.mthethwa@dst.gov.za for information and brochures about the department’s scope and funding.

National Treasury (GTAC unit)

  • Address: 40 Church Square, Pretoria
  • Tel: (+27) 012 315 5944 or (+27) 012 315 5645
  • Email: info@gtac.gov.za for information from the Government Technical Advisory Centre who will manage the small business fund for National Treasury.

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