What SA startups should take away from the 2014 budget speech

Last week was the South African budget speech for 2014. While some might be upset about the recent tax increase of alcohol and cigarettes, others are focusing on the brighter things in life. SiMODiSA which is an initiative that seeks to promote and further high growth and innovative SMEs in South Africa, highlights a number of these points of interest.

SiMODiSA notes that these policies (many of which itself recommended) aim to be the key drivers of economic growth and job creation, and which are especially oriented towards a technology-driven economy.

So behind the tedious yet important speech, what can startups make of it?

• Well, first off, tech and media companies are now allowed to freely list offshore to raise capital. More specifically SiMODiSA explains, unlisted technology, media, telecommunications, exploration and other research and development companies are allowed to freely list offshore to raise capital for their operations. This is provided that these companies remain incorporated in South Africa, remain tax residents, are effectively controlled and managed locally and that their intellectual property remains registered in South Africa. Within two years of their offshore listing, they will also need to have a secondary listing on the Johannesburg Stock Exchange.
• Secondly, companies who are already listed on the JSE need to have secondary listings and depository receipt programmes to facilitate expansion, subject to reporting requirements. Last week we exemplified the significance of big business supporting an environment of innovation and growth.
• Thirdly, intellectual property generated in South Africa is to be freely assigned offshore, subject to appropriate tax treatment.

Furthermore, the venture capital company tax regime aims to encourage investment into small businesses and junior mining companies. Since inception in 2008, uptake has been very limited but has improved this year. These include the following:

• Making deductions permanent if investments are held for a certain period of time.
• Allowing transferability of tax benefits when investors dispose of their holdings.
• Increasing the total asset limit for qualifying investee companies from R20-million to R50-million, and from R300-million to R500-million in the case of junior mining companies.
• Waiving capital gains tax on the disposal of assets, and expanding the permitted business forms. Proposals have also been accepted that will exempt small and medium-sized enterprises from tax on grants received, an important benefit to support the growth of small and medium enterprises.

The reforms will help reduce the cost of starting a company as well as improve access to capital for many startups so kudos to South African Minister of Finance, Pravin Gordhan.