South African tax incentive fund manager Westbrooke Alternative Asset Management has called on Finance Minister Tito Mboweni to fast-track emergency amendments to the Section 12J legislation so that R6-billion of investor capital can be more speedily invested in small, medium-sized and microenterprises (SMMEs) during the coronavirus pandemic.
A provision of the Income Tax Act, Section 12J was established to assist qualifying SMMEs to gain access to equity funding by providing investors with a 100% tax deduction for making investments in these businesses.
Section 12J provides individuals, companies and trusts with a tax incentive to invest in venture capital companies that back SMMEs that have long-term growth potential in economic sectors that are often hard-pressed for financing.
The incentive gives taxpayers the ability to write off all of their investment against their taxable income. Investors benefit from up to 45% immediate tax relief, reducing the cost of the investment, providing downside protection and enhancing overall returns.
Westbrooke principal and chairperson of the Section 12J Industry Association Dino Zuccollo estimates that approximately R6-billion of S12J capital is still to be invested in the South African economy, primarily because most of this capital raised, takes time to make equity investments into a large number of SMMEs, especially during periods of elevated risk and uncertainty.
Zuccollo believes that industry investment will decrease in the current lockdown context owing to the complexities of making equity investments into high risk SMMEs.
“Historically, access to funding by SMMEs has been challenging and in the current circumstances it is even more difficult. A significant portion of existing 12J investments are in the hospitality industry, which is experiencing severe liquidity issues as a result of lockdown.
“The end of the lockdown is unlikely to solve these issues, as the impact of local and international travel bans and social distancing will likely remain. We don’t expect to see a significant increase in the amount of capital invested until the coronavirus pandemic has passed,” he states.
Should local SMMEs not receive emergency funding in the coming months, it is likely that many will close permanently owing to their inability to pay staff, occupancy costs and other significant fixed costs.
Despite these challenges, Westbrooke believes that with certain emergency amendments to the 12J legislation, the industry will be well positioned to assist government in navigating the cashflow needs of SMMEs during the pandemic.
“The industry is well-positioned. Westbrooke has over R1-billion in 12J investor funds available for immediate investment, and we estimate that the industry has an additional R5-billion. Emergency amendments to the existing legislation, including changing the permissible activities to include the granting of loans, as well as explicit and appropriate government support would encourage S12J investor capital to be invested at speed,” explains Zuccollo.
The industry is currently restricted because it is not allowed to invest in businesses where the gross book value of assets of the investee company exceeds R50-million. Should this limit be increased to R100-million, or the definition changed to net assets, it would increase the scope of businesses that could potentially benefit from S12J capital as the coronavirus liquidity squeeze tightens.
The Minister of Small Business Development Khumbudzo Ntshavheni has announced a debt relief fund to assist SMMEs with relief on existing debts and repayments in the wake of the Covid-19 crisis and President Cyril Ramaphosa has announced the creation of a Solidarity Fund to support those whose lives are disrupted. With this in mind, the Department of Small Business Development has announced it will launch a Debt Relief Fund.
“While we applaud government for the swift steps taken to curtail the spread of the coronavirus and the associated impact on SMMEs, the economic reality is that only a coordinated and integrated response between government and the private sector can address the magnitude of this problem. Enabling S12J industry funds is an important mechanism,” Zuccollo said.
Since 2015, Westbrooke has invested more than R1.3-billion into more than 50 SMMEs in the hospitality, tourism, student accommodation and asset rental industries.
“We are able to assist government in navigating this crisis, and we hope to work collaboratively to find solutions for the 12J industry to provide immediate support for SMMEs. Speed is of the essence,” says Zuccollo in a release to Creamer Media.