The views expressed in this article are not those of the FIA
Small businesses provide attractive income and capital growth
The small and medium enterprises (SME) sector has proved to provide fabulous growth and income opportunities for long-term investors. The developed formal sector is battling a range of woes that range from political uncertainty, a technical recession, cost-cutting measures, and the challenge of additional competition from disruptive new market entrants. Small and medium-sized enterprise (SME) that are efficient, flexible and nimble enough take advantage of new developments and adapt to change despite the negative macro sentiment provide a certain allure.
Tax incentives for private sector investment in SMEs enhance the benefits
In 2009, Treasury and SARS created an incentive for South African tax payers (individuals, companies and trusts) to invest into certain categories of SMEs. The incentive was written into the Income Tax Act under Section 12(J) to stimulate economic growth and job creation. Tax payers who invest into qualifying SMEs through authorised Venture Capital Companies (VCCs) are given a tax deduction based on the size of their investment and their current tax position.
How do you take advantage of the potential growth while mitigating the risks?
The growth potential and tax deduction may be very attractive, but SME investing is not for everyone or for your entire portfolio. The challenge with the SME sector is that it does have its fair share of failed ventures. Unlike an investment in a mature business where there is a track record of revenue and income, the success of a small business can be susceptible to many risks, including being reliant on the development of a new product or service that may or may not find a market or have the resources to overcome setbacks.
What are the challenges from an investment perspective?
From an investment point of view, they can be difficult to evaluate and value, as the information about them can be limited or provided from a single (and possibly less objective) source. One also may not have the necessary insight into the industry in which they operate or the business model that is necessary for success.
There is help available to research, filter and combine attractive opportunities
At Virtuosity Capital we spend considerable time and resources researching, filtering and risk-profiling the range of venture capital opportunities and learning how best to navigate this S12J area of investing. With S12J investing, while the full amount invested is 100% deductible from your taxable income in the year in which the investment is made, investors however need to remain invested for at least five years to benefit from a 45% tax deduction in the year in which they invest. So, strategically, it’s not only about this tax break. It’s important to find the right ideas and combine them optimally to meet liquidity and risk profiles that withstand the test of time.
To benefit from the tax break while managing your risk, get professional advice
The SME sector is one that requires robust due diligence and a careful screening process. It is therefore best accessed with the help of a professional adviser to ensure that you understand the role that an investment in venture capital plays in your overall portfolio. This opportunity is ideal for a satellite portion of an overall investment portfolio and offers the diversification benefits of having exposure to venture capital opportunities and the accompanying exposure to small business growth potential.
With the end of the tax year looming, you have a limited time to make the most of this opportunity. Don’t miss out!