In his first State of the Nation address, President Cyril Ramaphosa reiterated the importance of small and mediumsized busesses (SMEs) in growing the economy and creating jobs. He appealed to the private sector and big business to support SMEs through incubation and other initiatives that will be rewarded through tax incentives.
One such initiative is the Section 12J tax incentive, first introduced by government in 2009 as a way to stimulate the economy by helping SMEs access equity finance through SARS-approved venture capital companies (VCCs).
Investors contribute anything from R100 000 – but usually closer to R1 million – in VCCs, which allocate the funds to promising startups and issue qualifying shares to the investor.
The appeal is two-fold: investors have an opportunity to put their money in alternative asset classes and can claim 100% deduction from their taxable income in the year of investment, provided they hold the shares for at least five years.
But there are caveats, too. After those five years, proceeds from the investment will be subject to capital gains tax, while dividends on VCC shares are still subject to 15% dividends tax. While investors can sell their shares in the VCC at any time, that sale will also be subject to capital gains tax and the buyer will not be able to claim a tax refund.
* Originally published in Brainstorm Magazine. Read the full article here.