The Southern African Venture Capital and Private Equity Association (Savca) has raised concern that governance issues could emerge in some venture capital companies approved by the SA Revenue Service (Sars) for a tax incentive.
The VC tax incentive, set up under Section 12J of the Income Tax Act, allows investors who make investments in approved VCs — that then invest in qualifying small companies — a tax deduction.
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While the incentive came into effect in 2009, the number of VCCs approved under the incentive by Sars shot up in recent years following amendments the Treasury made to the incentive to make it more attractive to investors. The number of approved VCCs now stands at 103.
Savca CEO Tanya van Lill said with the increase in the number of approved VCs, the association is concerned that governance issues could emerge in some VCCs that could “taint the broader industry of more compliant and well governed entities”.
“Savca places governance and good conduct at the centre of its objectives on behalf of its members,” added Van Lill.
Savca concerned that governance issues could emerge in some venture capital companies approved by Sars for the Section 12J VC tax incentive
Sars told Venturburn that said as of 27 March a total of 1246 investors had invested in approved VCCs.
By 4 April a total of R2.56-billion had been raised by SARS approved VCCs, while R640.9-million had been re-invested in qualifying companies. These amounts are likely to grow, as not all VCCs have submitted their declarations of investors and investments.
Knife Capital partner Keet van Zyl added that many funds focus on property developments indirectly via the definitions of “hotel keeper” set out in Sections 3.3 and 5 of an external guide issued by Sars on the Section 12J incentive.
VCCs are not allowed to invest in immoveable property except in the case where of a trade defined as a hotel keeper (including bed and breakfast establishments) with assets not exceeding a book value of R50-million, he noted.
Added Kigeni Holdings’ Gavin Goldblatt: “I do think that people are abusing the system and Sars will clamp down, which unfortunately will affect those of us that are complying with both the letter and the spirit. But the issue should be stricter enforcement rather than increasing regulation.”
Goldblatt agreed that VCCs were funding a lot of the companies that the banks should fund — including funding companies that build, own and operate solar PV plants and sell the power. But he added that this was because banks aren’t funding them.
He argued that the two solar PVs his VCC is funding has created over 60 jobs, adding that the vast majority are unskilled people who are trained up and taught real skills and then employed. The VCC has made three investments in all and received investments from five investors and had invested over R100-million and will close on R1-billion.
Van Lill said Savca is considering embarking on an impact study of 12J this year. “We are currently engaging with our Research Sub-Committee to establish which research projects we will be embarking on given the resources we have available,” she said.
Commenting on whether most of the entities approved by Sars are private equity investors, rather than venture capitalists, Van Lill said Savca had “no specific comment” in this regard but is aware that there are differing interpretations of the legislation amongst legal practitioners and has consistently requested a tightening of definitions and clarification on meanings.
“Savca will however be embarking on more initiatives this year to help build the VC industry, which includes our industry awards and a VC conference we will be hosting later in the year, together with the launch of our VC survey,” she said.
Asked whether Sars is not concerned over any abuse Sars spokesman Sandile Memela said qualifying companies which receive such investments from approved VCCs are not required to report on activities undertaken through the injection of such equity finance.
“Sars only administers the approval and rejection of VCC applications. Section 12J of the Income Tax Act, 58 of 1962 does however require VCCs to report on amounts which they have received and amounts which they have invested in qualifying companies.
“Also, as with any incentive or any other provision of a tax act, where abusive is picked up or loopholes are identified, these are shared and discussed with National Treasury. Any decisions relating to tax policy are in the domain of National Treasury,” he said.
Ventureburn also asked Mamela whether Sars is not concerned that at over 100 VCCs approved now, the market may be flooded – with perhaps to many funds competing for capital now.
“Sars is of the view that the more VCCs which are Sars approved, the greater the value proposition for investors,” he said.
Editor’s note (5 April 2018): Sars initially supplied figures on the performance of the incentive as of 27 March. The article has been amended to include updated figures Sars subsequently supplied for 4 April.
