Cape Town – A ten-year-old piece of tax legislation is fast becoming the key to opening venture capital companies up to increased wealth and equity, from South Africa’s largest investors to the country’s small and medium enterprises.
This is according to ZAR X founder Graeme Wellstead, and Jaltech director Jonty Sacks. ZAR X is a licensed stock exchange and Jaltech is a firm which provides assistance and support to companies established in terms of Section 12 J of the Income Tax Act.
They say this yields major benefits for an effective South African Revenue Service (SARS), giving incentives to those who invest their wealth domestically instead of offshore.
The two - who have also endorsed President Cyril Ramaphosa's Youth Employment Service (YES) initiative - say there are social benefits that will ripple off from investments remaining in SA, including accelerated enterprise development and job creation.
The National Development Plan, whose planning committee Ramaphosa served as deputy chair before he became deputy president of South Africa in 2014, envisages 5% annual growth for the South African economy, driven by small and medium enterprises.
Wellstead and Sacks are looking to assist venture capital companies in complying with legislation, so that they can take advantage of the opportunities this offers.
The pair have said sections of the Income Tax Act, particularly Section 12 J of the Act, afford investors major tax breaks for keeping their money in South Africa instead of investing capital offshore.
Wellstead and Sacks believe the amount of wealth which could be unlocked as more VCCs emerge could amount to hundreds of billions within a matter of years.
Benefits and barriers
The 2009 version of the Income Tax Act amended Section 12 J, and saw the creation of companies with investments that delivered associated tax breaks and benefits.
The Act also broadens the scope for companies that can be listed, which allows venture capital companies and funds to invest in them.
However, a significant barrier remained in that major investors could not put their equity in companies that were not listed.
Sacks told Fin24 that Jaltech and ZAR X recently agreed to explore opportunities to get their clients listed.
"A few months back we engaged with ZAR X on opportunities for clients to list. Treasury introduced this to encourage SA to keep their money on shore.
"It entails a tax credit, [which] taxpayers who invest domestically are entitled to. So if one earns R2m a year with R900,000 in tax, if they make a R1m investment, then their R900,000 will be reduced to R450,000 based on the tax deduction of R450k," said Sacks.
Recent amendments have seen a huge interest from the venture capital industry and the financing sector, Sacks added.
There are Section 12 J companies that have raised a lot of money as a result of the amendments, he said.
"Investors can invest in these and only have an exposure of R550,000 with a return based on the full amount invested. Risk is reduced by the percentage of tax. It is a clever way of keeping money in South Africa," Sacks said.
Sacks said giving small and medium enterprises access to equity from large investors held benefits for both the investors and the smaller businesses, which could not list on traditional stock exchanges such as the Johannesburg Stock Exchange (JSE).
"We want Section 12 J to skyrocket, so we approached ZAR X to talk about listing VCC. It exposes wealth to managers who can only invest in listed entities.
"Investors can invest in VCCs and get a tax deduction in an asset they would have invested in anyway. Listing a VCC on ZAR X has opened VCCs to a large pool of capital currently being managed by fund managers with a listed equity mandated," he said.
Wellstead said ZAR X and Jaltech were working to ensure that the amendments became a game changer for the stock exchange industry in SA.
"Both our firms are innovative industry disruptors, and we have entered a sector that has been dominated by the JSE for over a hundred years.
"We have a less complicated and flexible listing regime that aims to drive financial inclusion in capital markets through the use of technology and principles-based listing rules," said Wellstead.
He said ZAR X had various advantages that placed it at the helm of offering VCCs the best platform to access equity.
"Currently VCC shareholders have two options when disposing of their shares. Either they need to identify a buyer or hope that the VCC has sufficient funds to purchase their shares.
"Now with a VCC listing on ZAR X, VCC shareholders can dispose of their shares in the open market on a listed exchange. This creates more liquidity in the market.
"We have a model that [gives] us a lot of flexibility and we are ideally placed to offer bespoke investment products, such as Section 12 J structures.
"ZAR X is an independent, fully-fledged stock exchange with a revolutionary trading model. The Section 12 J structure is ideally suited to our administrative capabilities, which assist in ensuring the tax compliance of the scheme," Wellstead said.
He added that this presented opportunities for the country as a whole, in that the sector would drive innovation, local investment in small business, job opportunities and employment, and capital growth in the country.
"There is growing interest in this asset class, and it is certainly beneficial since it introduces an incentive for domestic investment.
"That is good for revenue generation, business development and job creation. It has become the vogue in recent times, and has enormous potential to positively impact the economy and the fiscus.
"It is a massive opportunity on a number of levels, as it give entrepreneurs an opportunity to develop business ideas with a huge tax incentive," Wellstead said.
* Investors and Section 12 J venture capital companies can network at the 12J Marketplace Conference on August 2, 2018, at the ZAR X Headquarters in Bryanston, Johannesburg.