Enterprise development spending could be tax deductible

Over the past two years Section 12J investments have gained a lot of attention due to their attractive tax benefits. Essentially, the entire amount investment into a Section 12J venture capital company (VCC) is tax deductible in the year in which it is made, and that deduction will be permanent if the investment is held for five years.

This is more beneficial to individuals and trusts than businesses, since they are likely to be paying higher marginal rates. However, there is another aspect to Section 12J investments that could potentially be of significant value to local companies.

Because Section 12J VCC’s invest into emerging companies, if a fund is correctly structured and targets black-owned businesses, it is possible that an investment into such a vehicle could qualify as spending on enterprise and supplier development under the BEE codes. In other words, companies could get empowerment credits by using these vehicles.

“If a company invests into a Section 12J fund, and that fund invests into qualifying small businesses, the investing company will receive credit for the empowerment spend,” says Jonty Sacks, a director at Jaltech. “We have received an opinion from a BEE rating firm that if the investment is into a qualifying entity, the company will not only receive their points in year one, but every year they hold the investment they will get credit for 70% of their spend.”

This could be a huge benefit to companies who are currently writing off their enterprise or supplier development spending as a donation or simply an expense.

“These companies are spending the money anyway,” says Sacks. “But if they use a Section 12J vehicle they not only get a tax rebate, but they also end up with an investment that can generate returns.”

What is even more compelling is that it is possible for companies to use a Section 12J vehicle to continue to support the businesses that they are already targeting.

“We can put this structure in between the current enterprise and supplier development spend of these companies and the current businesses they are invested into,” explains Jaltech director, Derrick Hyde. “So they can continue what they are doing already, but now they can get a tax rebate on those investments.”

As Neill Hobbs of Anuva Investments explains, the VCC would be structured in such a way that whatever the investing company put in, gave it no more than 49% of the shares. The remaining 51%, or more, would be held by the black-owned target company.

“For example, if a company wants to invest R40 million into a black-owned supplier they could put that R40 million into a VCC, which passes it through to the target company,” says Hobbs. “That supplier is now well-funded with R40 million in equity, could have management support, and at the same time the investing company would share in 49% of the profits.”

In other words there are three incentives for the investing company. It will receive credits for enterprise and supplier development spending, it gets the Section 12J tax deduction, and it retains a minority interest in the business it has sponsored.

“That is important, because then it’s not just about giving money,” says Hobbs. “It could be expertise as well.”

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