Two relatively recent amendments to the Income Tax Act (South Africa) reflect a policy of encouraging the development of small enterprises. The first of these is aimed at reducing the compliance burden of micro enterprises and the second encourages venture capital investments in small enterprises.
Micro businesses
The Sixth Schedule to the Income Tax Act has been introduced to regulate a turnover tax available to micro businesses instead of the tax on taxable income with all the administrative and record keeping, not to mention expense, that this involves. A micro business may be a natural person, a company or a close corporation, but not a trust, and its annual turnover may not exceed R1 million. The taxpayer, if a natural person, may not have shares or a member’s interest in any company or close corporation other than listed companies, unit trusts, sectional title bodies corporate or share block companies; or be a personal service provider; or render a professional service; or earn investment income greater than 10% of total receipts from the business and investments. In other words, the target market is the small business entrepreneur.
Tax is based on turnover on a sliding scale ranging from 0% to 7% of turnover.
Venture capital investments
Section 12J came into operation on 1 July 2009 and regulates the taxation of venture capital investments. 100% of the cost of shares in a venture capital company may be deducted. The venture capital company will not trade, but will merely hold equity investments in small and medium sized companies, which are known as qualifying companies. The deduction is limited to natural persons, listed companies and companies within a listed group. The maximum amount deductible by a natural person is R750 000 per annum to a maximum of R2.25 million. Companies do not have this limit, but may not hold more than 10% of the equity of the venture capital company.
A venture capital company must be a resident, have its tax affairs in order, must be unlisted (unless it is a junior mining company) and may not invest more than 15% of its total capital in any one company. A qualifying company must also be a resident, with its tax affairs in order. Its investment income is limited to 20% of its gross income and it must spend the capital raised from its share issue within 18 months on tax deductible expenditure.