It is important to save small businesses in the new year
5 January 2021
By: Dino Zuccollo Source: IOL
While the proverbial sun has set on the tempestuous year that was 2020, we should not lose sight of the glimmering economic hope on the horizon for South Africa’s small, medium and micro enterprises (SMMEs) in 2021 and beyond.
This is because, back in 2009, National Treasury laid the groundwork for favourable investment conditions for SMMEs in key growth industries. Government created a growth-driving and job-creating mechanism through an investment incentive introduced in the Income Tax Act, in section 12J.
Quietly, behind the scenes and as a result of government’s foresight, billions of Rands have poured into local SMMEs since, creating thousands of jobs in the process. In the last 5 years alone, section 12J investments have resulted in over R5 billion worth of investment into more than 360 SMMEs in various strategic sectors including renewable energy, student accommodation, agriculture, schools and tourism. The 12J Association’s recent Industry Report reveals that these investments have directly created over 10 500 jobs across the country (and have the potential to create up to 45 000 in time), including in rural areas.
The incentive encourages taxpayers to invest directly in qualifying venture capital companies (VCCs) in specific capital-intensive and growth-targeted industries. Taxpayers making such investments can claim a rebate on their income tax up to set limits of R2.5 million for individuals / trusts, and R5 million for companies, each year. The real value of these investments for the local economy is that investing local taxpayers are locked in for at least five years to allow sensible and sustainable establishment and growth in the underlying investee company.
We are working hard together with Treasury to ensure that, at a time when we have lost thousands of businesses and millions of jobs to the Covid-19 lockdown, this important growth-stimulating mechanism is not lost to the South African economy. The current section 12J incentive is subject to a “sunset clause” that will see the incentive ending in June 2021. Our engagements with Treasury to date make us hopeful for an extension once some final details are ironed out to ensure that legislation is further refined to meet the demands of creating jobs and supporting SMMEs nationally.
According to National Treasury’s 2019 Economic Strategy document, SMMEs are responsible for more than 50% of all employment opportunities in South Africa; the sector contributes more than 45% of the country’s GDP. We believe that dedicated 12J investments can continue to help open the way to more inclusive growth and jobs across the country.
Many of the sectors that have benefitted from 12J investments in the past are the ones most needing positive capital intervention right now to return to viability. The tourism industry, for example, accounted for one out of every ten jobs pre-Covid-19 urgently needs capital investment.
The story of Mdluli Safari Lodge is an inspiring example of how Section 12J investments can make meaningful impacts in rural South African communities. The Mdluli Community resided on a large tract of land in the present-day Kruger National Park before being forcibly removed and relocated by the apartheid government in the 1960s. After successfully reclaiming 850 hectares in a land restitution process, the community partnered with a Section 12J investment company to develop Mdluli Safari Lodge – a sustainable tourism initiative on the community’s land located inside the Park.
The lodge opened to guests on 15 January 2020. To date, R100 million has been invested into the project. Approximately half of the capital has been raised through the Section 12J venture capital company. The Mdluli community is already deriving numerous socio-economic benefits from the lodge’s operations: during the construction phase 200 previously-unemployed men and women were employed and upskilled. Subsequently 70 permanent jobs have been created, with over 90% of the lodge’s team employed from the surrounding community. From the outset, the lodge’s development has aimed for the upliftment of the community and upgrading basic infrastructure, sanitation services and schools. The lodge and community have been able to meet these goals despite the economic lockdown. This epitomises the positive impact of Treasury’s Section 12J incentive mechanism – raising and using equity risk capital for sustainable development and job creation within an impoverished rural community.
Treasury has known for some time that SMMEs across a range of sectors including agriculture are the real drivers of inclusive growth and change in South Africa. CMF One is a nut and vegetable farming business in Mpumalanga that has benefitted from R20-million through a 12J investment company that is combining the best knowledge and expertise from South Africa’s top farmers, with capital provided by local investors.
The business is unlocking community-owned land and transforming it into a productive asset that will beneficiate the local community. This is enabling the establishment of a sustainable farming entity with local community ownership in a way that could never be achieved through bank funding. 15 permanent workers from the adjacent community have been employed, plus additional employment during busy seasons. Employment figures are set to double as the farming operations continue to expand in the coming year.
At a time of fiscal crisis, it appears counter-intuitive that Treasury should be considering a tax break as an engine for economic growth. However, our modelling shows that, given time, 12J investments can direct more revenue into the fiscus than what might be lost due to foregone income tax for two reasons: because of the revenue directly generated by 12J investments over the investment term, and because section 12J investments can – over the medium to long term – increase tax revenue by driving economic growth and job creation to grow the tax base.
Government demonstrated remarkable foresight in introducing section 12J in the first place, and now is the critical time for it to double down on its investment. 12J funding is the glimmer of hope for many SMMEs, who otherwise face the dim prospect of getting themselves back on track armed with traditional bank lending at best. At this time of economic crisis, we look forward to our continued engagement with Treasury to ensure that the sun doesn’t set on these crucial engines of inclusive growth and job creation in South Africa.