Should Treasury have implemented more provisions to boost SA’s economic growth?

South Africans are the worst savers globally, an enduring fact that has just been confirmed by the latest figures from the Investec GIBS Savings Index, which measures the country’s savings rate and savings behaviour. Clocking in at a 27-year low, the lack of household savings has a direct impact on small and medium-sized businesses (SMMEs) that are in fact funded largely by individual investors.

 SMMEs operate in a tough business environment in South Africa and face the brunt of political instability and regulatory roadblocks. Still, they provide 60% of SA’s labour force and contribute to approximately 34% of GDP.

 Call for better support for SA’s growth engine

“SMMEs are undoubtedly South Africa’s growth engine. We need a business-friendly environment that encourages entrepreneurs to start new businesses and supports business-owners to expand their operations,” says Neill Hobbs, tax expert and co-founder of Anuva Investments, a section 12J Venture Capital Company (VCC). 

One of National Treasury’s supportive moves was the introduction of Section 12J of the tax act in 2009 that rewards taxpayers for investing in SMMEs. Through a subscription of shares into a Section 12J company, taxpayers can make investments that are 100% tax-free. “In this way, investors are incentivised to do their bit towards investing in local businesses,” adds Hobbs.

 What are the real-life returns of a 12J investment?

For Anuva, the investment approach is to identify and invest in already-established SMMEs that require capital growth. “What SMMEs have in energy and appetite for success, they lack in working capital and possibly key skills and network. With Section 12J, these businesses are able to use tax-deductible equity funding to realise goals and fund growth. In this way, Section 12J has created an extraordinary opportunity to aid SMMEs while simultaneously creating Rand value for the individual investor,” says Hobbs.

 The target companies are expected to return a net profit after tax (NPAT) of 20% on funds invested within a period of three years, says Hobbs. “For the investor, the returns include an immediate tax saving of up to 45%, 8% targeted dividend and capital growth.” (See footnote for graph and detail on investor returns)

He adds that the Budget announcement was an ideal opportunity for Treasury to introduce more provisions such as 12J that encourage individuals and the private sector to invest in sectors of the economy that need it most. “We were hoping for more of the same i.e. incentivizing taxpayers to invest in SMEs.”

Who should invest?

According to Hobbs, investors with a good understanding of private equity and venture capital, with a high taxable income and investable cash, which can be invested for a period exceeding five years should consider section 12J as a key part of a diversified portfolio.

For investors looking to support local business, section 12J is certainly worth a look. National Treasury’s 2009 introduction of this generous tax incentive is a great example of how conscious investment can help move the needle. Given how pivotal this sector is to the local economy, more tangible measures such as this are needed.

The graph is a high-level illustration of the cumulative investment growth, over a three-year period, in terms of capital and tax saved modelled on a R1, 000, 000 investment.

If a taxpayer were to invest R1, 000, 000 into Anuva in 2015, the taxpayer would have received an immediate R410,000 tax saving on entry into the investment – assuming the taxpayer was in the 41% tax bracket in 2015. Put differently, the investment of R1, 000, 000 costs the taxpayer R590, 000.

 In 2016, the shares in Anuva were revalued from R15.30 to R17.05.  This resulted in capital growth of R114, 379 for the taxpayer. Anuva declared a 24% dividend. This taxpayer would have received R238, 757 in dividends. With the option to reinvest, these dividends would have resulted in a further tax saving of R97 890.37 in 2016. The cumulative tax saved in 2015 and 2016 was R507, 890.

In 2017, the shares were revalued from R17.05 to R18.90 resulting in capital growth of R261, 200 for the taxpayer. Anuva declared an 8% dividend. The taxpayer would have received R94, 479 on the R1,353,136 capital. Again, the taxpayer had the option to reinvest dividends declared. The tax saved in 2017 on dividends reinvested would have been R38, 738 resulting in a cumulative tax saving of R546, 628.  In other words, the investment is worth R1, 594, 436 and cost the investor R453, 372 (R1, 000, 000 less R546, 628).