Your father might soon be proved wrong for saying: "Ain't nothing for sure but death and taxes." Though the grim reaper's scythe does ultimately fall on us all, government will on July 1 introduce new legislation that gives venture capitalists tax breaks, particularly small investors in the mining sector.
But understanding these tax breaks takes some scrutinising, and the benefits are not nearly as glossy as the proposals finance minister Trevor Manuel originally laid out in his budget speech last February. In those proposals government offered a 50% payback on investments in junior mining exploration companies.
A 50% refund for investing capital in a junior mining exploration company seemed too good to be true at the time - and it turned out to be just that. As government's current account deficit begins to yawn after years of surplus, such generous measures to bolster investments in the local exploration sector would have further strained the fiscus.
The smaller SA exploration outfits have struggled to fund their projects because of a lack of local investor appetite for their high-risk businesses.
SA Mining Development Association's Bridgette Radebe has long bemoaned the lack of available funding for small mining companies. Last year, she lobbied for the creation of a "resources bank" similar to the Land Bank, the financing mechanism that farmers can avail themselves of.
So what does this new addition to the income tax act mean?
At first glance, it looks similar to Canada's flow-through share system. Both are based on equity investments in junior mining companies, with benefits flowing to the investor through tax breaks. In the Canadian system, income from early stage investment in an exploration company is not taxable, depending on what tax bracket the individual falls into. The amount deductable also depends on how much the company spent on its exploration programmes.
The flow-through share model dictates that investors should not sell their shares for a period of 18-24 months to reap the tax benefits.
In Canada, this tax break appears to have worked well. By the end of 2008, there were 1 071 mining companies listed on the TSX Venture Exchange - the country's equivalent of the AltX. Yet on Johannesburg's baby bourse, there are less than 10 such companies.
As at December 31, the market capitalisation of the TSX Venture Exchange's mining outfits was a collective C$8,7bn, compared with the $207bn of the 356 bigger counterparts on the main exchange. Together, these companies hold 9 650 mineral exploration projects across the globe.
In 2008, TSX Venture Exchange-listed companies raised $3bn - not too far off from the $5,2bn raised by mining companies on the main exchange.
In SA, the tax breaks will work slightly differently. They will allow investors to claim 100% of their investment in a small company as a tax deduction against any other taxable income. But there are complicated rules around this. These rules stipulate that individuals can claim up to R750 000/year to a maximum of R2,25m from the taxman. Companies investing in exploration firms have similar limits, and have to be listed, or at least 70%-owned by a JSE- or AltX-listed entity.
But the bar is set low: any exploration company with a market capitalisation of more than R100m is disqualified. And that's after capital raising has been completed.
Venture capital funds will have to be created to take advantage of these benefits, but no single individual or company will be able to own more than 10% of each fund. Foreign companies are excluded from benefiting from the tax deductions, and the mining company must be generating revenue within a three-year period.
These rules will effectively create a multi-tiered structure: individuals and firms will invest in venture capital mining funds, which will invest in the actual exploration mining companies. The venture capital funds are required to invest at least 80% of their portfolio in qualifying mining juniors.
KPMG tax expert Andries Myburgh says all these requirements are "quite onerous". He says government has narrowed the band to focus more on small investors and the smallest exploration companies. He says the new legislation needs more work and should not be introduced just yet.
These new tax breaks seem like a good idea in principle, but the problem is this system provides little relief. That's especially so for junior explorers struggling to raise finance amid a global credit squeeze and relatively low commodity prices.
To lure investors, these tax breaks need to be bolder. As it is, individual investors have burnt their fingers on the stock markets since the onset of the financial crisis and are reluctant to take too large a risk with their remaining wealth.
This is cyclical, however. When commodity prices and investor sentiment recovers, money will start finding its way into the mining sector.
But to provide the same sort of kick-start that sparked life into Canada's junior mining sector, the new tax rules should have been more aggressive.
Nonetheless, junior miners have expressed a general level of satisfaction with the new legislation. Whether it will have the same effect as the flow-through share system did in Canada is doubtful, though.
