BUSINESS owners may get a much needed funding boost from angel investors and venture capital (VC), if proposed changes to overhaul the poorly performing VC tax incentive are made law.
The proposals are contained in the Draft Taxation Laws Amendment Bill which was released by National Treasury earlier this month for public comment.
However while major changes for the venture capital tax incentive were well received by angel investors, who began petitioning the National Treasury two years ago, those for the R&D tax incentive were met with mixed responses by patent attorneys.
The VC incentives, contained in section 12J of the Income Tax Act, aim to boost venture capital investments in small businesses, by allowing individuals and listed companies to make upfront tax deductions if they invest in venture capital companies which in turn invest in certain kinds of small enterprises.
Yet despite coming into effect in July 2009, not a single investment has been made under the incentive.
The proposals were criticised by tax consultants and venture capital fund managers largely because non-listed companies such as CCs, and trusts – the usual investment vehicle of the well-heeled who want to invest in small businesses, could not benefit from the incentive. Investors are also currently not able to exercise any control in the small business the qualifying VC fund invests in.
But the draft law proposes among other things, to open the incentive up so that all taxpaying entities can benefit from deductions and to remove the R750 000 a year threshhold in respect to deductions. It also proposes to lift the turnover threshold of those small businesses that can qualify for investments from a venture capital company – from R10m to R20m and from R100m to R300m for a junior mining company. It also proposes to allow investors to take controlling stakes in the qualifying VC fund they invest in.
Guy Harris, of angel investors Greybeard Business Catalysts who spearheaded the group that lobbied National Treasury to overhaul the tax incentive, said the proposals were “very welcome” and that he expected to go ahead with setting up an angel fund on the Garden Route.
Carien Engelbrecht of Aurik Business Incubator, who was also part of the group, said she was very excited about the changes and that 90% of the group’s proposals had been take up. She said Aurik would now set up two funds utlising the incentive.
However there was mixed response from IP specialists towards the proposed changes around the R&D tax incentive.
Currently businesses can claim 150% of non-capital R&D expenses a year. But under the proposals businesses that carry out R&D can qualify for a 100% deduction of non-capital R&D expenses. They can claim an additional 50% if their research is approved by a committee, appointed by science and technology minister.
Anthony van Zantwijk, a patent attorney from Sibanda & Zantwijk, said such a committee could over bureaucratise research and put off entrepreneurs from utilising the incentive.
But Darren Margo, a patent attorney from Margo IP, said the committee was a positive development as it put the vetting of R&D into the hands of officials from the Department of Science and Technology, who were more capable than officials from the Receiver, when it came to looking at R&D.
However he said he knew of no other country – of the some 40 worldwide that have an R&D incentive – that made use of a committee to vet applications for the incentive.
Two years ago a top government official said that the scheme had “not been widely taken up” and that “only 82” businesses had benefited from the R&D tax incentive which was the launched by the department in 2006.
Yet Margo, who believes the current incentive has helped set up many factories in the country, suspects that if the new proposals are put into law there will be fewer claims under the incentive, adding that he believed many had been abusing the current system.
Currently there is no application process for R&D incentive here, one simply completes a form available from the Department of Science and Technology’s website before deducting R&D costs on ones tax return.
However the danger is that the Receiver come back later to inform you that you don’t qualify and slap you with penalties. It means a business owner may have to carry out costly audits to assess whether one would be able to claim the incentive.
This article appeared in Business Day on 21 June 2011.
Stephen Timm is a