Venture capital tax changes
The initial amendment would have led to several of these companies losing their VCC status and attracting a huge tax liability in the year their status was revoked.
The main reason behind the proposed change in the July Taxation Laws Amendment Bill was abusive tax structures that have been openly advertised in the media, which were clearly outside the rules of the regime.
The tax incentive was introduced in 2009 to encourage equity funding for small businesses by providing investors a full tax deduction on the amount invested with the VCC, provided they remain invested for five years.
The proposal that caused most concern was that the qualifying company (in which the venture capital company may invest) may only issue one class of shares. This proposal would have led to the amendment of most VCC structures. If they could not be changed, they would have had to be unwound.
National Treasury has dropped this proposal in the second round of the Taxation Laws Amendment Bill, published at the end of October.
The modified proposal allows for the issuing of multiple classes of shares, but no investor will be allowed to hold more than 20% of the shares of each share class.
Mansoor Parker, tax executive at law firm ENSAfrica and a member of the business incentive work group of the South African Institute of Tax Professionals, says Treasury has proposed more favourable solutions in the October amendment bill, following consultation with the industry.
In terms of the new version of the bill, a qualifying company may issue different classes of shares without restriction. The VCC can also issue different classes of shares, provided that no taxpayer holds more than 20% of the shares in a particular share class. Treasury has also introduced a new amendment relating to “participating rights”. An investor may not hold, directly or indirectly and whether alone or together with any connected person, more than 50% of the participating rights in the qualifying company.
Parker says in terms of the July bill, a VCC was virtually prohibited from trading with a qualifying company. But in the October bill Treasury proposes a VCC may trade with a qualifying company in which it holds shares, provided it does not amount to more than 50% of its total trades.
According to Parker the proposed changes to the controlled company test and the investment income threshold tests are “positive”.
The amendment makes it clear that a VCC may subscribe for shares in a company which is 70% held by another company.
In terms of the investment income test, it will only be applied in the year the qualifying company starts to trade or in the year after a period of 36 months from the date the shares were acquired. This gives the VCC a three-year grace period in which their investment income may exceed 20%.
Treasury has acknowledged that it may take time for some qualifying companies to generate income other than investment income, and VCCs could unintentionally breach the 20% investment income threshold test.
Westbrooke Alternative Asset Management says in a statement that the tax incentive has been given a lifespan of 12 years, with only six years remaining.
The company is spearheading the formation of an industry body to assist in proving the viability of extending the incentive past June 2021.
Jonti Osher and Dino Zuccollo, fund managers at Westbrooke, say the incentive has had a much delayed start. “It took from 2009 to 2015 for the tax legislation to be amended to be more attractive to investors,” they say.
Westbrooke has R1.7billion in assets under management from over 600 investors. These investments have created more than 1200 jobs, Osher and Zuccollo say.