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The government has identified small and medium-sized entities (SMEs) as a major contributor to future economic growth. One factor that hampers
the growth of SMEs is a lack of access to equity funding.
In order to alleviate this problem the government has added Section 12J to the South African Income Tax Act as a catalyst for equity funding for
SMEs. Section 12J provides a marketing vehicle to venture capital
companies (VCCs) due to the tax incentive.
A Venture Capital Company (VCC) is a company that accepts investments from any taxpayer (individual, trust or company). The VCC manages the collective investment and make investments in SMEs.
The VCC will issue a certificate to the taxpayer for the amount of the investment. The taxpayer is then allowed to deduct their full investment
against their taxable income in the relevant tax year.
The tax benefit which arises from Section 12J is thus an incentive for taxpayers to invest indirectly in SMEs
Any taxpayer qualifies to invest in an approved VCC.
As with any other investment on realisation the taxpayer will be liable for capital gains tax (CGT). However if the investor utilised the Section 12J deduction when they purchased the shares, the base cost will be reduced to zero on realisation. Therefore the capital gains tax liability is higher than it would have been for the same investment where the Section 12J deduction was not applied.