Acts Online
GT Shield

Income Tax Act, 1962 (Act No. 58 of 1962)

Chapter II : The Taxes

Part I : Normal Tax

12J. Deductions in respect of expenditure incurred in exchange for issue of venture capital company shares

 

(1)        For the purposes of this section—

 

"impermissible trade"

means—

(a) any trade carried on in respect of immovable property, other than a trade carried on as an hotel keeper;
(b) any trade carried on by a bank as defined in the Banks Act a long-term insurer as defined in the Long-term Insurance Act, a short term insurer as defined in the Short-term Insurance Act and any trade carried on in respect of money-lending or hire-purchase financing;

[Paragraph (b) substituted by section 36 of the Taxation Laws Amendment Act, 2013 (Act No. 31 of 2013)]

(c) any trade carried on in respect of financial or advisory services, including trade in respect of legal services, tax advisory services, stock broking services, management consulting services, auditing or accounting services;
(d) any trade carried on in respect of gambling;
(e) any trade carried on in respect of liquor, tobacco, arms or ammunition;
(f) [Paragraph (f) deleted by section 38(1)(b) of the Taxation Laws Amendment Act, 2011 (Act No. 24 of 2011) - effective 1 January 2012]; or
(g) any trade carried on mainly outside the Republic;

 

"junior mining company"

means any company that is solely carrying on a trade of mining exploration or production which is either an unlisted company as defined in section 41 or listed on the alternative exchange division of the JSE Limited;

 

"qualifying company"

means any company if—

(a) that company is a resident;
(b) the company is not a controlled group company in relation to a group of companies of which a venture capital company to which that company has issued any share forms part;

[Paragraph (b) substituted by section 29(1)(a) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 1 January 2019 (section 29(2) ]

(c) the tax affairs of the company are in order and the company has complied with all the relevant provisions of the laws administered by the Commissioner;
(d) the company is an unlisted company as defined in section 41 or a junior mining company;
(e) the company is not carrying on any impermissible trade;

[Paragraph (e) substituted by section 25(1)(a) of the Taxation Laws Amendment Act, 2009 (Act No. 17 of 2009)]

(f) during any year of assessment of that company that ends after the expiry of a period of 36 months commencing on the first date on which that company issued any share to a venture capital company—
(i) the sum of the investment income, as defined in section 12E(4)(c), derived by that company does not exceed an amount equal to 20 per cent of the gross income of that company for that year; and
(ii) not more than 50 per cent of the aggregate amount received by or that accrued to that company from the carrying on of any trade was derived, directly or indirectly, from a person—
(aa) who holds a share in that venture capital company; or
(bb) who is a connected person in relation to a person referred to in item (aa);

[Paragraph (f) substituted by section 29(1)(b) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 24 October 2018 (section 29(3)]

(g) no person who holds a share in a venture capital company to which that company has issued any share holds, directly or indirectly and whether alone or together with any connected person in relation to that person, more than 50 per cent of the participation rights, as defined in section 9D(1), or of the voting rights in that company; and

[Paragraph (g) inserted by section 29(1)(c) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 1 January 2019 (section 29(4)]

(h) that company does not carry on any trade in relation to a venture, business or undertaking or part thereof that was acquired by that company, directly or indirectly, from a person—
(i) who holds a share in a venture capital company to which that company has issued any share; or
(ii) who is a connected person in relation to a person referred to in subparagraph (i);

[Paragraph (h) inserted by section 29(1)(d) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 1 January 2019 (section 29(5)]

 

"qualifying share"

means an equity share held by a venture capital company which is issued to that company by a qualifying company, and does not include any share which—

(a) [Paragraph (a) deleted by the Taxation Laws Amendment Act, 2011 (Act No. 24 of 2011)];
(b) would have constituted a hybrid equity instrument, as defined in section 8E(1), but for the three-year period requirement contemplated in paragraph (b)(i) of the definition of ‘hybrid equity instrument’ in that section; or

[Paragraph (b) substituted by section 29(1)(e) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 1 January 2019 (section 29(2)]

(c) constitutes a third-party backed share as defined in section 8EA(1);

 

"venture capital company"

means a company that has been approved by the Commissioner in terms of subsection (5) and in respect of which such approval has not been withdrawn in terms of subsection (3A), (3B), (6) or (6A):

[Definition substituted by section 29(1)(f) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 1 January 2019 (section 29(2)]

 

"venture capital share"

means an equity share held by a taxpayer in a venture capital company which was issued to that taxpayer by a venture capital company, and does not include any share which—

[Words preceding paragraph (a) substituted by section 29(1)(g) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 1 January 2019 (section 29(2)]

(a) [Paragraph (a) deleted by the Taxation Laws Amendment Act, 2011 (Act No. 24 of 2011)];
(b) would have constituted a hybrid equity instrument, as defined in section 8E(1), but for the three-year period requirement contemplated in paragraph (b)(i) of the definition of 'hybrid equity instrument' in that section;

[Definition substituted by section 29(1)(h) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019  - effective 1 January 2019 (section 29(2)]

(c) constitutes a third-party backed share as defined in section 8EA(1); or
(d) was issued to that taxpayer solely in respect or by reason of services rendered or to be rendered by that taxpayer in respect of the incorporation, marketing, management or administration of that venture capital company or of any qualifying company in which that venture capital company holds or acquires any share.

[Paragraph (d) inserted by section 29(1)(i) of the Taxation  Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 24 October 2018 (section 29(3)]

 

(2) Subject to subsection (3), (3A), and (4), there must be allowed as a deduction from the income of a taxpayer expenditure actually incurred by that taxpayer in acquiring any venture capital share issued to that taxpayer by a venture capital company.

[Section 12J(2) substituted by section 38(1)(i) of the Taxation Laws Amendment Act, 2011 (Act No. 24 of 2011) - effective 1 January 2012]

 

(3)        

(a) Where, during any year of assessment—
(i) any loan or credit has been used by a taxpayer for the payment or financing of the whole or any portion of any expenditure contemplated in subsection (2); and
(ii) any portion of that loan or credit is owed by the taxpayer on the last day of the year of assessment,

the amount which may be taken into account as expenditure that qualifies for a deduction in terms of subsection (2) must be limited to the amount for which the taxpayer is in terms of paragraph (b) deemed to be at risk on the last day of the year of assessment.

(b) For the purposes of paragraph (a), a taxpayer must be deemed to be at risk to the extent that—
(i) the incurral of the expenditure contemplated in subsection (2); or
(ii) the repayment of any loan or credit used by the taxpayer for the payment or financing of any expenditure contemplated in subsection (2),

[Section 12J(3)(b)(ii) substituted by section 23(1)(a) of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014) - effective 1 January 2015]

would (having regard to any transaction, agreement, arrangement, understanding or scheme entered into before or after such expenditure is incurred) result in an economic loss to the taxpayer were no income to be received by or accrue to the taxpayer in future years from the disposal of any venture capital share issued to the taxpayer as a result of the incurral of that expenditure: Provided that the taxpayer must not be deemed to be at risk to the extent that—

(aa) the loan or credit is not repayable within a period of five years from the date on which that loan or credit was advanced to the taxpayer; and
(bb) any loan or credit used by the taxpayer for the payment or financing of the whole or any portion of any expenditure contemplated in subsection (2) is (having regard to any transaction, agreement, arrangement, understanding or scheme entered into before or after such expenditure is incurred) granted directly or indirectly to the taxpayer by the venture capital company by which the qualifying shares are issued as a result of the incurral of that expenditure.

[Section 12J(3) substituted by section 38(1)(j) of the Taxation Laws Amendment Act, 2011 (Act No. 24 of 2011) - effective 1 January 2012]

 

(3A) 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 has incurred expenditure as contemplated in subsection (2) and that taxpayer is a connected person in relation to that venture capital company—
(a) no deduction must be allowed in terms of subsection (2) in respect of that year of assessment in respect of any expenditure incurred by the taxpayer in acquiring any venture capital share issued to that taxpayer by that venture capital company;
(b) the Commissioner must, after due notice to the venture capital company, withdraw any approval in terms of subsection (5) with effect from the date of that approval by the Commissioner of that company as a venture capital company in terms of that subsection; and
(c) the Commissioner must withdraw the approval of that company in terms of subsection (5) and an amount equal to 125 per cent of the expenditure incurred by any person to acquire shares issued by the company must be included in the income of the company in the year of assessment in which the approval is withdrawn by the Commissioner,

if corrective steps acceptable to the Commissioner are not taken by the company within a period stated in the notice contemplated in paragraph (b).

[Section 12J(3A) substituted by section 32(1)(a) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016) - effective 1 January 2017]

 

(3B) If any taxpayer holds, at the end of any year of assessment following the expiry of a period of 36 months commencing on the first date of the issue by a venture capital company of venture capital shares of any class, more than 20 per cent of the venture capital shares of that class—
(a) no deduction must be allowed in terms of subsection (2) in respect of that year of assessment in respect of any expenditure incurred by the taxpayer in acquiring any venture capital share of that class issued to that taxpayer by that venture capital company;
(b) the Commissioner must, after due notice to the venture capital company, withdraw any approval in terms of subsection (5) with effect from the commencement of that year of assessment; and
(c) an amount equal to 125 per cent of the expenditure incurred by any person to acquire shares issued by the company must be included in the income of the company in the year of assessment in which the approval is withdrawn by the Commissioner under paragraph (b).

[Section 12J(3B) inserted by section 29(1)(j) of the Taxation  Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 24 October 2018 (section 29(6)]

 

(4) A claim for a deduction in terms of subsection (2) must be supported by a certificate issued by the venture capital company stating the amounts invested in that company and that the Commissioner approved that company as contemplated in subsection (5).

 

(5) The Commissioner must approve a venture capital company if that company has applied for approval and the Commissioner is satisfied that—
(a) the company is a resident;
(b) the sole object of the company is the management of investments in qualifying companies;
(c) [Section 12J(5)(c) deleted by section 38(1)(l) of the Taxation Laws Amendment Act, 2011 (Act No. 24 of 2011) - effective 1 January 2012];
(d) [Section 12J(5)(d) deleted by section 38(1)(l) of the Taxation Laws Amendment Act, 2011 (Act No. 24 of 2011) - effective 1 January 2012];
(e) the tax affairs of the company are in order and the company has complied with all the relevant provisions of the laws administered by the Commissioner;
(f) [Section 12J(5)(f) deleted by section 38(1)(l) of the Taxation Laws Amendment Act, 2011 (Act No. 24 of 2011) - effective 1 January 2012]; and
(g) the company is licensed in terms of section 8(5) of the Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002).

[Section 12J(5)(g) substituted by section 29(1)(k) of the Taxation  Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 1 January 2019 (section 29(2)]

 

(6) If the Commissioner is satisfied that any venture capital company approved in terms of subsection (5) has during a year of assessment failed to comply with the provisions of that subsection, the Commissioner must, after due notice to the company withdraw that approval from the commencement of that year if corrective steps acceptable to the Commissioner are not taken by the company within a period stated in that notice.

[Section 12J(6) substituted by section 38(1)(m) of the Taxation Laws Amendment Act, 2011 (Act No. 24 of 2011) - effective 1 January 2012]

 

(6A) 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—

[Words preceding section 12J(6A)(a) substituted by section 23(1)(b) of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014) - effective 1 January 2015]

(a) [Section 12J(6A)(a) deleted by section 38(1)(n) of the Taxation Laws Amendment Act, 2011 (Act No. 24 of 2011) - effective 1 January 2012]; or
(b) less than 80 per cent of the expenditure incurred by the company to acquire assets held by the company was incurred to acquire qualifying shares issued to the company by qualifying companies, each of which, immediately after the issue, held assets with a book value not exceeding—

[Words preceding section 12J(6A)(b)(i) substituted by section 23(1)(a) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015) - deemed to have come into operation on 1 January 2015]

(i) R500 million, where the qualifying company was a junior mining company; or
(ii) R50 million, where the qualifying company was a company other than a junior mining company; or
(c) more than 20 per cent of any amounts received in respect of the issue of shares in the company was utilised to acquire qualifying shares issued to the company by any one qualifying company,

[Section 12J(6A)(c) substituted by section 23(1)(b) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015) - deemed to have come into operation on 1 January 2015]

the Commissioner must after due notice to the company withdraw that approval with effect from the commencement of the year of assessment during which the period ends that is stated in that notice during which corrective steps acceptable to the Commissioner must be taken if corrective steps acceptable to the Commissioner are not taken by the company within the period stated in that notice;

[Section 12J(6A) substituted by section 29(1)(l) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 1 January 2019 (section 29(2)]

 

(7) A company may apply for approval in terms of subsection (5) in respect of the year of assessment following the year of assessment during which approval was withdrawn in respect of that company in terms of subsection (6) or (6A)if the non-compliance which resulted in the withdrawal has been rectified to the satisfaction of the Commissioner.

[Section 12J(7) substituted by section 25(1)(h) of the Taxation Laws Amendment Act, 2009 (Act No. 17 of 2009)]

 

(8) If the Commissioner withdraws the approval of a company in terms of subsection (6) or (6A) as a result of non-compliance with subsection (5), an amount equal to 125 per cent of the expenditure incurred by any person for the issue of shares held in the company must be included in the income of the company in the year of assessment in which the approval is withdrawn by the Commissioner.

[Section 12J(8) substituted by section 25(1)(h) of the Taxation Laws Amendment Act, 2009 (Act No. 17 of 2009)]

 

(9) Notwithstanding section 8(4), no amount shall be recovered or recouped in respect of the disposal of a venture capital share or in respect of a return of capital if that share has been held by the taxpayer for a period longer than five years.

[Section 12J(9) substituted by section 28(1) of  the Taxation Laws Amendment Act, 2017 (Act No. 17 of 2017) - effective 1 January 2018]

 

(10) A venture capital company must submit to the Minister a report providing the Minister with the information that the Minister may prescribe.

 

(11) No deduction shall be allowed under this section in respect of shares acquired after 30 June 2021.

[Section 12J(11) substituted by section 27(1) of the Revenue Laws Amendment Act, 2008 (Act No. 60 of 2008) - effective 1 July 2009]