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Service (“SARS”) website indicates that 90 companies have been approved as VCCs, while 2 have had their VCC status withdrawn.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, 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”  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.
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.
 Please note that there are other requirements which have not been addressed in this article.
 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.
7 Ingredients Of Small Business Success Online
Building your future requires equal measures of passion and hard work.
Building a small business online is scary. Big businesses can easily outspend you with PPC, SEO, SMM and inbound marketing campaigns.
However, smart startup founders grimly pass around business battles on the blogosphere, charging low prices for quality product, reversing their vision, failing to voice their opinion on their podcasts, showing contempt for our product, and disrespect for our craft.
And yet, look around at the World Wide Web jungle. It’s watered by the services offered by small businesses. The technology to produce product and convert customers exists because we create codes, design services, and write web pages, blog posts, and marketing materials that generate leads and close sales. And every 350-pound gorilla company uses our products or services to thrive.
If you’re a small online business owner, you can chicken out and quit when you face your competitor in the marketing arena, or you can choose something better. Because there is something better.
In the time since I began building my content marketing business online, I’ve noticed some mindsets, traits, and abilities that make the difference between businesses that want to accelerate their sales, make a profit, and survive, and businesses that want to sell more and increase their ROI but don’t seem to have the ability to do so.
Based on my observations, here are the seven most important things small businesses need to succeed online.
This might sound too simple, but if you’re a small business owner, you know what I mean.
There’s no substitute for the love you have for your products or services. There’s no substitute for the commitment of showing up every day. There’s no substitute for the excitement of receiving an order or for the burning desire to work extra hours, to reach your prospect, to ship an order, and to make more money.
If you don’t love entrepreneurship, your product or service, and the process of getting things done, none of the rest of this really means anything.
I could have just as easily dreamed of building another Moz, Kissmetrics, or Shopify, but I chose what I loved most. Whichever business idea you dream of, it’s about refusing to do it just for the money. It’s not only about making money; it’s about changing your customer’s life for the better.
If you want to achieve that, you have to dominate your industry. You have to be the go-to person for your products or services. Be super professional at your offerings so that your customers won’t want to leave you for your competitor.
2. Attitude of service
Making money can be a tempting proposition, pursued for the sake of your own interest of becoming rich and dominating the headlines.
However, as soon as the customer clicks to order your product – the vitamin C pills, the Smartphone cover, the SEO or PR services you sell – the product becomes the focus.
Professional founders work with an attitude of serving their customers great value, yes, serving them with beautiful, durable, quality products. They also work to provide excellent customer experiences that exceed their expectations, that gratify rather than aggravate, and that are born out of the genuine attitude of serving the buyer.
Successful consultants, bloggers, and content marketers all live in service to our clients. No matter how stunning or super sexy we may find an idea, if it doesn’t serve our client, out it goes.
Why? Because we have deep love and obsession for our customers.
3. Obsession for the customer
It has always struck me as odd that many of the most serious startup founders pay more attention to selling than to their customers.
It shouldn’t be that way. Customer obsession comes first. It’s like the engine that pumps cash into your corporate account. It comes from your company’s culture, value proposition, mission, and overall vision to change your customer’s world with your product or service.
Serious visionaries are obsessed with their customers. “If you’re truly obsessed about your customers,” Jeff Bezos, Amazon founder and CEO says. “It will cover a lot of your other mistakes.”
You can’t just sell your products. You can’t just sell your services. You can’t just advertise your brand.
You need to appeal to your customers first, because they are your buyers. And you can’t see a spike in your revenue unless you’re obsessive about charming them with your brand and building quality products that will ease their lives.
4. Obsession for quality
Many small-business owners imagine that if you have a great business idea and a great vision, you’re qualified to be called an entrepreneur.
Not so fast.
Successful CEOs and entrepreneurs are not just creative; they’re producers of quality products. They understand what type of products to create in the first place, based on the feedback they get from their customers.
They also understand that their products must solve their customers’ pain points. Their products must add value to their customers’ lives and must provide great experiences for them. You can learn more about how to build a solid product by looking at how great companies like Apple, Amazon, and Starbucks did it.
If you are obsessed with quality, you can incorporate what you learn from these companies into your business culture. Beyond your product or service, you can internalise quality packaging, simple usability, prompt responsiveness to customer queries, and even quality, compelling content on your company blog.
Because in today’s digitally driven marketing world, quality blog content is king. It’s crucial for your traffic, sales, and revenue.
5. Compelling content
You may have a brilliant idea. You may have gotten the perfect product/market fit. But, if you don’t devote yourself to the butt-in-chair time needed to produce a significant quantity of compelling content on your company blog, you won’t get where you want to go.
To a great degree, writing compelling content is a skill that can be cultivated. As a small business owner, you can devote some time to practice the art, ingrain writing into your schedule, and write every day to master the craft, or dig deep into freelance marketplaces to find a superb content creator.
Compelling content does more than just amuse your clients. Compelling content can change your life. After writing this viral post on this amazing platform, I received a dozen praises from readers across the globe. I also got a couple of writing gigs.
The blog post went viral not only because the story appealed to its intended audience, but also because the conversational tone and writing style are so engaging and entertaining … the reader feels compelled to share it.
Writing compelling posts has nothing to do with your degree, your experience, or whether or not you’re a native English speaker. It’s about how you make readers feel. That’s why every writer – just like every entrepreneur – must be creative, imaginative, and innovative.
Innovation is critical for your business growth for a number of reasons.
First, innovation develops customer value. Your customers are always in need of a product that will ease their lives, and once they get it, they move on to something else – something easier, newer, or simpler. As Steve Jobs put it, “You can’t just ask customers what they want and then try to give that to them,” the Apple founder opined. “By the time you get it built, they’ll want something new.”
Second, innovation is vital for your traffic, sales, and revenue. New ideas, new products, and new stories are what always get the most attention. “The arrogance of success,” according to William Pollard, “is to think that what you did yesterday will be sufficient for tomorrow.”
Third, innovation-active businesses are more productive and generate more jobs than non-innovation-active businesses, according to a recent data by Australian Bureau of Statistics (ABS).
But, building new products from your new ideas is risky. There’s a good chance that you’ll fail. Still, you must do it. You must double up on your experimentation. Bezos says, “If you double the number of experiments you do per year, you’re going to double your inventiveness.”
You’ll see wonders if you consistently innovate.
One of the tough things about growing a startup is that the path you walk is one you make yourself.
There’s no one to tell you how you should work, no one to tell you which direction to go, no one to tell you when to go for a break, no one to tell you when to work extra hours, and no one to tell you when to say no and when you need to be where.
That’s one of the fantastic things about running your own business. But, sometimes Fantastic is also Difficult. You might open your e-commerce shop today, work for an hour, check your email, and retreat for the day.
But, can you come back to do exactly the same thing tomorrow? Can you do it again the day after tomorrow, and again the day after that, and again, and again? Consistently?
That’s the difficult part. And that’s where many entrepreneurs are getting it all wrong. Building a thriving business is not about working for extra hours today and not working the next day.
It’s about doing the work that matters consistently. It’s about showing up every day. It’s about minimalism, not complexity.
So roll up your sleeves and keep working. “For the future,” as Paul Wellstone puts it, “belongs to those who are passionate and work hard.”
This article was originally posted here on Entrepreneur.com.
Small Business Savvy: Why You Need Negotiation Skills
Work on your negotiation skills and you will see your business grow from strength to strength.
Starting and running a successful small business requires skills and knowledge that many business owners may not possess. For example, the owner of a food truck may be an amazing chef but they may not have ample knowledge of accounting, employee management or inventory control. They may also not have the ability to successfully negotiate with landlords, partners or suppliers.
The ability to reach an agreement on an issue without having to compromise too much comes with practice, and can be learnt by taking negotiation skills courses and interacting with more established members of your industry. The reasons why these skills are vital to small business owners are outlined below.
These skills are beneficial for everyone involved
While negotiating in a boardroom is a useful skill to have, small business owners need skills that translate to their situation. Negotiation skills are needed when meeting with suppliers, in order to receive a better price for bulk goods, and can be useful when hiring a new employee and discussing what their responsibilities will be.
Being able to negotiate professionally is also beneficial when dealing with customers. You will be able to reach an agreement that suits you both, without fumbling and settling for less. Your customers will respect you as a vendor, especially if you are able to stay calm and collected throughout the transaction.
You can create win-win situations
Negotiating is not simply creating a positive outcome for one party but reaching an agreement that both parties benefit from.
The best small business owners are those who are able to negotiate an outcome that has a win-win result, in which every party involved believes the deal is a good one.
Being able to reach agreements that are positive for both you and the other party is a highly valuable skill. Not only will everyone involved have positive results but you will become a more respected businessperson. Your suppliers will enjoy dealing with you, your clients will respect you and partners will be more likely to use your viewpoints in their decisions.
Good negotiation will improve your bottom line
The ultimate goal of a negotiation is to reach an agreement that is favourable to you and your business. By being able to negotiate a good deal, you are automatically improving your bottom line. But, this takes a keen mind and a knack for negotiation, which some business owners do not have. By taking courses, you’ll be able to improve your ability and thus improve your end results.
If you are able to reduce your overhead by 10% due to an effective negotiation, that money can go directly to your profit margin. Negotiation skills are imperative for a thriving small business, because as the business owner, you are in charge of dealing with suppliers, partners and clients and will need the ability to create outcomes that favour your bottom line and end goals.
Related: How to Win a Business Negotiation
Your business confidence will be boosted
Walking into a negotiation feeling unsure of yourself and your ability to negotiate can lead to an agreement which favours the other party, not yourself. However, by improving your skills and being able to argue and negotiate professionally will boost your business confidence tenfold.
Having confidence when walking into a negotiation means that you will be able to concentrate on the issue at hand, not worrying about whether the other party is out-manoeuvring you. The ability to confidently make a presentation and provide offers and counter-offers has been shown to garner better results. Confidence in business helps to win many boardroom battles.
You will build respect
Having effective negotiation skills will build respect in the eyes of your competitors, suppliers and staff. Having the respect of your employees is vital for a successful small business, as your team is most likely small and close-knit. If they respect their employer, they will most likely work harder and be more productive.
Being respected in your industry is another benefit of having sound negotiation skills.
The impression you leave after a negotiation can have a lasting effect on how you are viewed in your industry, so it is best to be able to have a positive impact. Being able to negotiate professionally and without incident will more likely result in respect from vendors, partners and clients.
The simple fact of the matter is that it is better to be seen as intimidating rather than a pushover at the negotiation table. Your ability to confidently present your case will have a positive effect on your reputation in your industry, and will ultimately work toward achieving your bottom line and end goal. Work on your negotiation skills and you will see your business grow from strength to strength.
Win A Business Makeover With Retail Capital To The Value Of R250 000
Retail Capital is giving SMEs an opportunity to win a makeover to build their brand with an investment of R250,000.
Retail Capital is giving SMEs an opportunity to win a makeover to build their brand with an investment of R250,000. During the summer campaign, SMEs are encouraged to share the vision of how they would like to see their business grow, and led by a team of experts, Retail Capital will work with the winning SME to help make their vision come true.
While South Africa’s economy is not faring well, Retail Capital CEO Karl Westvig remains optimistic about the country’s retail and hospitality sectors. “We are seeing some green shoots, with an increase in turnover in these sectors – starting from the end of September. Economic conditions remain very tough, but businesses seem to be trading well into October and we’re hoping this continues into the festive season trading.”
According to recent statistics from Statistics South Africa (Stats SA), South Africa’s retail sales rose by 5.5% year-on-year in August 2017, following a downwardly revised 1.6% gain in the previous month and above market expectations of 2.3%. It is the biggest gain in retail trade since August of 2012.
Related: How To Raise Working Capital Finance
“I do believe that these sectors will see an improvement during the summer season. But, key to this will be for small business owners to ensure that they have the right amount of stock, adequate cash flow, as well as other systems in place to meet the ever-changing needs of customers,” says Westvig.
For many small businesses, however, continually adapting to market changes requires cash injections that they don’t often have.
The prize includes the following:
- Business plan/consulting
- Marketing strategy
- Design and branding
- Website and social Media and,
- R50k capital to gear your business.
Westvig explains that the summer campaign tagline ‘Your Vision. Our Belief’ really speaks to why Retail Capital first opened its doors. “Our goal is to see the potential of small businesses and to work with them in making these become a reality.”
He adds that the idea is not to simply help one business during the campaign either. Westvig points out that one of the biggest challenges that small businesses face in the sluggish economy is enough foot traffic through their doors. “Generally, the main hurdle in creating brand awareness and projecting credibility of their establishments boils down to establishing a strong online presence.”
“One of the first ways that South Africans identify a business or service provider that they want to work with is over social media – even in a country where the digital divide has traditionally separated the technological haves from the have-nots,” he says.
He explains that companies that don’t have a social media presence are running the risk of being overlooked entirely. “They may attract customers in their own community with signage or word of mouth, but to grow a business, they need to expand their reach – and that’s where social media comes in.”
But, the reality is that resource and time constraints mean that for many SMEs, social media is not prioritised. “Unfortunately for the average small business owner, they don’t have the time or expertise to get connected.”
Understanding the importance of having an online presence, Retail Capital has also committed to developing the digital presence of all campaign entrants. This would include setting up each entrant’s digital presence on platforms such as Google, Facebook, Twitter, Tripadvisor, Zomato and any others that may be relevant to their specific market or industry.
“As a partner to many SMEs in South Africa, we are continually looking at new and innovative ways to help provide them with the much-needed support in order for them to realise their visions. SMEs need to be supported with initiatives like targeted education and training, supportive legislation, and funding opportunities that collectively help them grow our national economy,” says Westvig.
Who we are and what we do:
“More than R1.25 billion has been extended to a range of businesses including food trucks, hair salons, restaurants, spas and franchised retail stores. Many of these businesses have not been able to raise funding in any other way, other than to go to unscrupulous lenders,”says Karl Westvig, the CEO Retail Capital, a company that provides working capital with the help of innovative lending technology.
“We have also estimated that for every R160 000 we lend, we create a new job. This means that 625 jobs have been created purely by enabling small businesses to get the funding they need for working capital requirements or expansion opportunities.”
Retail Capital’s system, which enables it to advance funding to small businesses, based on real time information on credit card transactions, is providing a new funding alternative to entrepreneurs who have previously been turned away by banks. Because it is able to get actual sales information, it can approve funding immediately, and allow for flexible repayment options based on sales cycles of the particular businesses it is funding.
“This creates significant opportunity for small business owners to focus on their business and grow volumes or look for expansion opportunities rather than spend their time frantically trying to repay debt or keep the business alive after debt repayments have eaten away at any cash reserves they might have had.”
Retail Capital funding is repaid by it taking a percentage of a business’s recorded credit or debit card sales, with repayments fluctuating in line with their business cycle. This has the effect of ensuring that it isn’t overburdened with debt.
“In the past six years since starting the business, small businesses have had the benefit of R1 billion in funding they would have been unable to get through traditional channels,”says Westvig.
Against the backdrop of recessionary conditions in South Africa, Retail Capital’s client information reveals growth in informal sector turnover across a number of industries.
“We believe that growth in the informal sector is outstripping that of the formal sector,”says Westvig.
As a large proportion of the businesses it funds are women- and black-owned, there is evidence that entrepreneurs who have previously been excluded from access to finance are now enjoying success now that their access to finance problem has been solved.
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