Section 12J, the unsung hero?
Tax incentive funds succeed in assisting business where government and banks have failed
Section 12J tax incentive venture capital companies could prove a valuable source of much-needed funding during this critical survival phase of many small-, medium-, and micro–sized entities (SMMEs). According to one of South Africa’s leading Section 12J fund managers, Anuva Investments, entities within their investment portfolio who have had little or no success with government relief funding - or have seen no rationale in bank Covid-structured loans - have relied on the group’s Section12J capital and knowledge base as critical to the survival of the businesses and retention of their work force.
A recent report issued by the Section 12J Industry Association clarifies that as at February 2020, the total assets under management within the Government’s Section 12J tax incentive structure are in excess of R9billion, which at closer inspection is largely invested by South African high-net-worth individuals. The report, titled “An analysis of the impact of the incentive on SMMes and the associated benefits to the South African Economy,” finds that to date Section 12J capital has found its way to more than 360 SMMEs and created or sustained an approximate 10 500 jobs.
Debt and equity funding into SMMEs have reached rock bottom thanks to the Covid-19 paralysis many businesses find themselves in. Business owners and directors have relied on challenged government relief measures such as the Temporary Relief Fund, the Unemployment Insurance Fund, and various specialist industry measures set up as the South African Government rallied to support an already stressed economy. Private sector funding schemes dried up almost overnight as ‘panic-funding’ gripped most South African business owners at the onset of lockdown.
Cape-based pharmaceutical supplier Biodelta Industries found themselves on the verge of a glowing opportunity, without any funding to see it through. CEO Leon Giese investigated Section 12J companies as a funding option and turned to Anuva Investments. “We were fortunate that the investment committee at Anuva took us seriously and recognised our call for funding as urgent,” he relates, The R20 million invested, allowed the company to act swiftly and turn its focus into the supply of in-demand Covid-19 products. “Instead of waiting for banks, dealing with red-tape or endless back and forth, Anuva completed their due-diligence in a matter of days,” he explains. The company was able to retain its full work-force and ramp up production to become a crucial supplier in the fight against Covid-19, extending its product range and manufacturing focus to deliver much-needed key products. Surgical masks, sanitisers and immune booster supplements were fast-tracked in the production output, thanks to the capital advanced to fund the strategy.
Wesley Rabie, CEO of appliance repair firm MasterCare, who form part of Anuva Investments’ equity portfolio, relates that not only was the funding crucial to the survival of their 7 branches nationwide, but more valuable was the mentorship and guidance that was immediately forthcoming as the crisis hit. “We have learnt that many of our investors are successful business people and entrepreneurs with a wealth of insight and experience. Their guidance and mentorship has been critical in our emergence out of business rescue and more recently as we have negotiated the Covid pandemic,” he declares,
Dino Zuccollo, chairman if the Section 12J association of South Africa, says that “In the wake of the Covid-19 pandemic, the South African economy is in a very vulnerable state. Given the importance of the role that SMMEs play in job creation and economic growth, the existence of the Section 12J incentive could not be more important and relevant.”
The Section 12J incentive, which was introduced in 2009 but considered by many to be only recognised by the investment world in 2015, allows for South African tax-payers to receive a 100% tax deduction of the amount invested into a Section 12J qualifying company.
The incentive is subject to a sunset clause in terms of which it expires after June 2021. It is argued that in the current economic climate and with the urgent need for a thriving or at least sustainable SMME sector, it should be extended to June 2027, allowing the industry to provide much-needed equity capital, and in turn address the economic and employment crisis.