Cape Town – Small and medium businesses were well positioned to take advantage of an equity finance mechanism that was recently developed by the South African Revenue Service (Sars), according to Standard Bank.
The mechanism would fuel growth with large scale incentives for investors.
“The tax incentive will definitely entice investors to avail more funding to small businesses,” said Ravi Govender, head of small enterprises at Standard Bank. "Entrepreneurs are well positioned to take advantage of this opportunity and will get the funding they’ve always wanted, as venture capitalists are willing to take on more risk than traditional financial institutions."
There has been limited take-up of the incentive, but recent amendments to the tax legislation look set to change that. This intervention would help smaller investments or businesses that were overlooked by large institutional investors to become financially viable private equity opportunities.
Strengthen competitiveness
“One of the requirements is that venture capitalist companies can only invest in permitted industries and sectors, which should strengthen the productivity and competitiveness of the businesses in these sectors,” said Govender. “They are always looking to maximise their profits and as a result only invest in small businesses that demonstrate high growth potential.”
National Treasury introduced Section 12J into the Income Tax Act in 2009, to assist in the development of a venture capital industry in South Africa. The section specifically aims to help the growth of small and medium sized businesses by increasing their access to equity finance. To attract investors into this typically under-funded sector, which is critical for driving economic growth, Sars said it offered significant tax incentives.
The provisions in the Income Tax Act allowed a full tax deduction to be claimed on investments into qualifying 12J Venture Capital Companies (VCCs). This meant that an investment into a VCC would be deducted from an investor’s taxable income, creating a sizable incentive to invest.
Venture Capital Companies
The Taxation Laws Amendment Bill, tabled recently in Parliament, contained welcome amendments to the legislation, in line with the finance minister’s commitment in the 2014 Budget Speech that “amendments will be made to the venture capital company tax regime... to enhance support for entrepreneurial development”.
Enhance opportunity
Broadreach Capital, a VCC and a financial services provider, said the proposed amendments would enhance the opportunity for investors to help South African small businesses flourish.
“The most significant of these proposed changes would increase the maximum book value of assets of companies in which VCCs may invest from R20m to R50m and remove the income tax recoupment on selling an investment in a VCC should the investment be held for five years,” said Broadreach.
Govender said the advantage for small business was that venture capitalists looked for active involvement in the business, such as consulting and mentoring the entrepreneur, which will enable him or her to run the business more optimally. “Most venture capitalists also have extensive industry knowledge, which small businesses can leverage off.”
“The social capital that venture capitalists can provide through their connections is also invaluable for small businesses looking to grow their customer base and expand their business,” he said. “The biggest barrier to small businesses has always been access to finance, as these barriers are broken down, businesses need to ensure that they are well positioned to take advantage of this.”
- Fin24.