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No clarity on SA junior mining tax incentives
Di Seccombe
Posted: Tue, 25 Mar 2008
[miningmx.com] -- IN his 2008 Budget Speech, Finance Minister Trevor Manual from the outset stated that the focus of the budget was initiatives that were required to raise long term growth to meet the challenges of an uncertain economic future.
In line with these initiatives, the idea of a venture capital tax incentive was introduced in the budget speech, as access to equity finance by small and medium sized businesses has been viewed as one of the main challenges to growth in the small and medium sized business segment of the economy.
The government intends to introduce tax incentives for investors in qualifying small enterprises and start up ventures. Under this umbrella will fall junior mining and exploration companies with gross assets of R30m to R50m.
From a strict reading of this requirement it would appear that only junior mining enterprises with gross assets of
between R30 and R50m will benefit from the incentive and those with assets of less that R30m may not be eligible.
This is disconcerting as in terms of the National Small Business Act definitions, in respect of businesses involved in mining and quarrying, both small and medium sized businesses are defined as having gross assets (excluding fixed property) of less R30m.
Junior mining exploration
investments would qualify for a 50% deduction upfront, with annual deductions capped at R1m for individuals and R10m for corporations and venture capital funds.
In the current draft tax legislation, responsible for making the necessary changes to the Income Tax Act as required due to various announcements in the budget speech, there is no mention of a venture capital incentive allowance. As a result, there is no clarity on how the venture capital tax incentive will be implemented. Draft legislation will probably only be published during the second half of this year.
The budget speech talks of “venture capital” and there is no guidance as to the investments that will be covered by this term.
The South African Revenue Services (SARS) in its summary of the tax proposals of the budget speech is not clear on the exact nature of the small mining industries that will qualify for the incentive. The budget speech summary first mentions junior mining and
exploration companies, and then at a later stage in the same document a reference is made to “junior mining exploration investments”.
Internationally there is a focus on the use of various incentives to encourage exploration activities only. The path South Africa will take is unclear, it is not known whether venture capital investments into junior mining companies as a whole will qualify for the incentive, or only investment into those junior mining companies which conduct explorative activities would be eligible for the incentive.
There is no indication of what the taxation consequences will be when the investor disposes of the shares purchased in the junior mining enterprise. It is possible that the investor might have to recoup, add back, some or all of the incentive allowance that was originally claimed.
We consider that long term loans will not be regarded as “qualifying” venture capital, for which the lender may claim the incentive allowance.
“Qualifying” venture capital will most likely encompass a direct investment in the share capital of the junior mining enterprise. It is possible that the purchase of preference shares in the junior mining enterprise might not be regarded as “qualifying” venture capital.
Questions also arise in regard to the investment made by a company into its subsidiary, where the subsidiary is regarded as a junior mining enterprise. The venture capital investment by the holding company may be funded by the shareholders of the holding company.
It would seem that in this case the incentive allowance would only be available to the holding company and that if an investor wishes to benefit from the incentive allowance the investment would have to be made directly into the junior mining enterprise.
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