An approved VCC creates a fund in which all the money invested in the VCC’s shares by investors is held. This money is generally known as capital or venture capital. The money received from the investors is then invested in qualifying companies.
A qualifying share is a specific share that has been issued by a qualifying company to a VCC and does not include a share in a qualifying company that was purchased by the VCC from a third party.
Section 12J(2) allows a taxpayer, subject to certain conditions, to claim a deduction for expenditure actually incurred by that taxpayer in acquiring any venture capital share issued to that taxpayer by a VCC subject to certain terms and conditions. Only costs directly connected with the acquisition of the venture capital shares are deductible.
The deduction is limited where the taxpayer used a loan to finance the acquisition to the amount that the taxpayer could lose where no income is received or accrued from any future disposal of the VCC shares.
Any taxpayer qualifies to invest in an approved VCC.
The approved VCC must issue investor certificates to its investors which contains the amounts invested in that company and stating that company has been approved by the Commissioner as a VCC.
The section 12J deduction is limited to:
- R5 million if the taxpayer is a company; and
- R2,5 million if the taxpayer is a person other than a company.
No deduction will be allowed if at the end of any year of assessment, after the expiry of a period of 36 months commencing on the first date of the issue of venture capital shares, a taxpayer is a connected person to the VCC. If corrective steps acceptable to the Commissioner are not taken by the company, the Commissioner will withdraw the approval of that company, and an amount equal to 125 percent of the expenditure incurred by that investor to acquire shares in the VCC will be included in the income of that VCC in the year of assessment in which such approval has been withdrawn.
Where the venture capital shares are disposed of by the taxpayer within five years of initial acquisition, the section 12J deduction is recouped (recovered) under the general recoupment rules of section 8(4) of the Act.