An exercise in tax strategy : hooray for 12J!

• Pages: 1-8
• DOI: 10.10520/EJC-1ceb28b073
• Published date: 01 March 2020
• Record Number: btclq_v11_n1_a2
• Date: 01 March 2020
• Author: Milton Seligson

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© SIBER INK

An Exercise in Tax

Strategy:

MILTON SELIGSON SC*

ABSTRACT

           -

nally introduced in 2008 as a tax incentive to taxpayers who, in exchange

for investing in the shares of a Venture Capital Company (VCC), thereby

providing venture capital for small businesses and mining concerns, were

allowed to deduct upfront the full expenditure incurred in the acquisition of

the VCC shares. In its initial form the VCC regime did not attract the invest-

ment that had been hoped for, mainly because of its complexity in relation to

the limited benef‌its it offered.

However, after the more restrictive provisions were relaxed and the tax

benef‌its improved, while at the same time strengthening its anti-avoidance

      -

tors and has become more widely used and a substantial source of venture

capital in the South African economy. Certain further amendments to the

           

most important of which limits the tax deduction available to a taxpayer who

invests in VCC shares in respect of a year of assessment to R5 million in the

case of a company and R2,5 million in the case of a person other than a

company.

The article gives a detailed overview of the current provisions of section

  

to invest in VCC shares is counter-balanced by the anti-avoidance provisions

it contains, aimed at preventing abuse of the concession and undue loss of

revenue by the f‌iscus.

There is then a discussion of some problem areas in the application of

  at risk require-



to pay for or f‌inance the whole or any portion of the expenditure incurred

in acquiring the shares, and any portion of that loan or credit is owed by the

taxpayer on the last day of the year of assessment. In such a case, the deduc-

tion allowed is limited to the amount for which the taxpayer is, in terms of

at risk on such date.

The article considers and explains the requirements of paragraph (b) which

must be satisf‌ied in order for the taxpayer to be deemed at risk, viz. applying

the hypothetical test that in future years, if the taxpayer were to receive no

income from the disposal of the VCC shares, the incurring of the expenditure

or the repayment of the loan or credit used would result in an economic loss

to the taxpayer. The author analyses this requirement and concludes that

the taxpayer will not be deemed to be at risk if there is any agreement or

arrangement that protects the investor from sustaining loss or the risk thereof

in respect of the expenditure incurred.

* Honorary Member, Cape Bar.