joint venture incentive: profitable changes
1 September 2016
By Jeff Miller Source: Business Live
An energy fund, an equipment rental business and a credit verification start-up — these are some of the businesses that are benefiting from investments through a venture capital tax incentive.
The SA Revenue Service (Sars) says that, following amendments that took effect in April last year, the incentive is beginning to take off. Despite this, some say further changes are needed to make it more attractive.
Under section 12J of the Income Tax Act individuals, companies and trusts can get a tax deduction if they invest in a venture capital company (VCC) that in turn invests in a qualifying small business for at least five years.
Freddie Fourie, Who Runs Brutes Air Rental Solutions, Says An Investment From Westbrooke Capital Management Will Help His Company Fund the Rental Of Compressed Air Equipment to Companies. He Is Partnering With Brutes Air Solutions, A 12-Year-Old Company.
While Fourie does not want to disclose the amount invested (which is provided as the firm meets various milestones) he says just one or two jobs might be created by the investment. But he says it could help clients such as firms in the manufacturing and medical sector to increase employment.
However, FraudCheck managing director Adele Lewis says a recent R5.4m investment from venture capital company Grovest has helped the company raise its staff component from two to seven.
The investment is to fund the development of a new online platform for the three-year-old firm, which provides corporates, individuals and small businesses with credit vetting and pre-employment verification.
Lewis says that last year, following the investment, the company’s growth in sales was up to 800% over the previous year.
Another company, Energy Capital, was earlier this year able to tap R2.6m from Broadreach Capital’s Harbour Energy 1 fund to bankroll the installation of a rooftop photovoltaic system for a business park in Pinetown, KwaZulu Natal. Energy Capital chief executive Doug Brazier says the funding created eight jobs, mainly of installers on site.
Investors generate a return by the company selling the power generated from each unit to clients. His company is looking to tap more funding from Harbour Energy for another 120 similar projects it has planned.
Sars spokesman Sandile Memela says that at the end of February, 340 investors had invested in Sars-approved VCCs, committing a total of R631m, with six VCCs having invested R56m in 18 qualifying companies. To date
38 such funds have been approved.
The incentive came into effect on July 1 2009, but attracted few investors as many saw the requirements they needed to meet to benefit from the incentive as overly stringent.
But Memela says that since April last year, when the latest changes came into effect, the incentive has “taken off”, with 25 of the 38 VCCs having been approved since then.
The new changes allow for a higher investee asset threshold (R50m in qualifying small businesses and R300m in junior mining companies) and a permanent investment deduction.
Treasury has now proposed a further change — to amend the connected person rule for the incentive. At present investors cannot claim a deduction if they hold an interest of 20% or more in a VCC or if an investee forms part of the same group of companies as the VCC.
In the draft 2016 Taxation Law Amendment Bill, published in July, treasury proposes to amend the provision so that from January 1 2017 investors will be allowed three years from the time they invest in a VCC to abide by the
connected person rule.
While the SA Venture Capital & Private Equity Association (Savca) has welcomed the amendment, it has outlined further proposed changes in a submission made to treasury in August.
Samantha Pokroy, who heads Sanari Growth Partners and who has been leading engagements with Sars on behalf of Savca, says the association has made progress on “various fronts”, but that she does not want to discuss the
details at this time as talks are at a sensitive stage.
But JC Bruce, who oversees two approved VCCs, says investors are concerned that capital gains tax is applied when shares are disposed of and that the transferability of tax benefits when investors dispose of their shares is
Addressing these could encourage more people to invest, he says.
Percy Ying, a fund manager of Nesa Venture Capital Investments, which has an approved VCC, says the minimum period of five years in which investors have to stay invested in a VCC to avoid upfront deductions being recouped is also troublesome.
In the UK, where a similar incentive operates, investors need only to stay invested in similar vehicles for three years, he says.
“I think they [Sars] are being overly stringent.”
However, Richard Asherson, a partner in Westbrooke Capital Management, says he has received no expressions of concern. “Investors have been successful in obtaining their tax relief. The process is seamless through the use
of the Sars e-filing system.”
So far the company has allocated R325m to 10 investments in a range of sectors from two VCC funds with 85
investors, he says.
Grovest chief executive Jeff Miller says that while there will always be some concerns from investors around utilising the incentive, in the main the sentiment is positive.
His company reports twice yearly to both Sars and investors on investments that were made and provides both parties with financial statements.
But he says it is perhaps too early to measure the effect investments have made, in terms of jobs and tax revenue
for example, as the investments typically take between three and seven years to reach maturity.
Grovest has five VCC funds with 130 investors. These have deployed about a quarter of the R200m that is under
management, Miller says.
The company is also administering three funds on behalf of clients. But Miller does not want to reveal who these clients are, citing a concern over confidentiality.
So far Grovest’s ventures fund has made 10 investments, while the tech fund, which invests in disruptive technology, has made one. The company is still raising capital or doing due diligence on deals for the three other funds, which focus on energy, hospitality and seed funding for start-ups, respectively.
The seed fund is run together with Seed Academy and the Women’s Development Bank.
Seed Academy group chief executive Donna Rachelson says the idea is to raise R50m by February next year, mostly from corporates through enterprise and supplier development spend, to make about 20 investments.
Miller says investors can expect to make returns of between 20% for the hospitality fund and 30% for the tech fund.
But i-Cubed Capital chairman Ismail Kajee says the current economic climate makes it difficult to estimate the return on investment. Still, he says, investors can expect a return of anything from 15% upwards.
The company’s VCC has invested a total of R11m in three companies through five investors so far. The current investments include an Engen petrol station in Newlands, Johannesburg, an e-commerce company and a firm that will begin supplying processed ribs to Steers shortly.
Meanwhile demand for funding is growing. Every week at least one business plan lands on Deidre Renison’s desk. Her VCC plans to source R100m in coming weeks to assist small businesses that enterprise development support company Engeli helps.
Thousands of businesses could benefit from the incentive, but only if more investors are encouraged to utilise the growing number of VCC funds approved by Sars.