Venture capitalists welcome changes to tax law
05 February 2015
Posted by: Author: Samuel Mungadze
Author: Samuel Mungadze (BDlive)
South African venture capitalists have welcomed changes to tax laws contained in the Taxation Laws Amendment Act, that came into effect last month.
Adam Bekker, co-founder of Broadreach Capital, which has a registered venture capital company (VCC) fund, said the original asset limits set when the venture capital company tax regime was first introduced in 2009 at R100m for junior miners and R10m for other businesses were too low. The South African Revenue Service and the Treasury had subsequently acknowledged this.
"They first took the view that they wanted to encourage investment into very early-stage businesses or start-ups, so the book value of companies that VCCs could invest in was originally set very low."
The changes come at a time when venture capital company funds constitute a successful multimillion-pound industry in the UK as high-income earners look to reduce their tax bills. A similar trend is expected in SA. Under the previous regime, only about 10 venture capital companies were approved.
Mr Bekker said the law had to be changed because it had become clear it would be difficult to attract either investors or fund managers to use the incentives at that level.
"The risk associated with very small companies is too high for most investors, and makes it difficult for fund managers to run a profitable business managing such small investments," he said.
As from January 1 the total asset limit for qualifying companies, those businesses in which the venture capital company may invest, has been increased from R20m to R50m. For junior mining companies, the limit has been increased from R300m to R500m..
The second amendment relates to the tax deduction available to an investor who subscribes for shares in a venture capital company.
Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (Savca), said the more attractive tax incentives could boost investment into entrepreneurial businesses in SA, many of which battled to get finance.
It should also translate into much-needed job creation, she said.
Relating to the second amendment, Jeff Miller, of venture capital company Grovest, said the tax deduction previously available to investors of venture capital companies was immediate and for the full amount of the investment made, however, it would be recouped and become taxable if the investor sold the venture capital company shares at any time.
The new act allowed for the investment deduction to be permanent as long as the investment was held for five years, Mr Miller said.
"This tax relief means that VCC investors will be getting a proper risk-adjusted return."
Although pleased with the changes, Mr Miller said there was still work to be done to make the venture capital company tax regime more investor friendly.
"We would like to see tax benefits being passed on to secondary investors who acquire their interests from the original subscribers. We will also be working with government to address capital gains tax and dividend withholding tax, and ideally obtain similar tax treatments as seen in the traditional private equity fund structures."
This article first appeared on bdlive.co.za.