By: Darryn Faulds, Fund Manager at MeTTa Capital
More than ever, Cyril must look closer to home to boost SA Inc
Just ten months ago, President Cyril Ramaphosa was gearing up for the country’s inaugural Investment Summit which sought to help raise a much-needed $100bn for the economy.
The summit was a high-profile event, featuring globally respected business leaders such as Alibaba founder Jack Ma. At that stage, Ramaphosa’s administration had raised over $35bn and its success prompted a second summit planned for later this year again.
There’s no doubt that the Investment Summit is a positive initiative that can help reignite much-needed growth. However, the reality is that headwinds threaten to derail this good work.
Rising unemployment and weak business conditions are holding back the economy. Eskom’s high debt levels are also raising concerns that rating agency Moody’s could downgrade the country’s debt to junk, sparking a sell-off in local assets and a weakening of the rand.
During these challenging times, every single rand of investment in the country counts – especially from South African investors who are desperately keen to inject capital into local enterprises.
Benefits of Section 12J
Just before the first Investment Summit last year, I wrote about why Ramaphosa should take a closer look at opportunities around Section 12J, which is legislation that gives local investors an incentive to inject capital into Small-to-Medium Enterprises (SMEs).
Section 12J has been part of the Income Tax Act since July 2009 and it enables investors to receive an immediate deduction equal to 100% of the amount they’ve invested. The legislation has a sunset clause of 2021 with the possibility of an extension.
As of February 2019, a cumulative R6 billion has already been invested in Section 12J funds in SA, highlighting its success and benefit to local SMEs.
The result has been growth stories in the real economy with SMEs building out solutions in various jobs-and-resource-heavy sectors: including hospitality, student accommodation, business and enterprise development as well as renewable energy.
Section 12J has also matured quickly and evolved with the sector’s first 12J fund portfolio offering, MeTTa Capital Moderate Risk Fund I, having been launched in 2017.
Since 2017, MeTTa Capital has conducted several capital raises. During the most recent capital raise for the period ending February 2019, our highly respected investment committee, headed by Dr Adrian Saville, conducted a strenuous due-diligence process evaluating over 110 Section 12J companies, filtering it down to a basket of six market-leading investment strategies.
MeTTa Capital is making it easier for investors to participate in an asset class that translates into more investment within the heart of SA’s economy.
But the good work done for all Section 12J investors is now at risk of being held back owing to regulatory changes.
Draft Taxation Amendment Bill
Just last month, National Treasury released the 2019 Draft Taxation Laws Amendment Bill (TLAB), which contains proposed amendments to certain elements of Section 12J.
As part of the TLAB, it has been proposed that the tax deduction for an investment in a Section 12J company be limited to R2.5 million per investor, per annum, effective from 21 July 2019.
By implementing this limitation, National Treasury is trying to curb excessive deductions which they say may translate to instances of tax abuse. This is a legitimate concern. However, we as industry believe there are better ways of handling this problem.
The tangible data points of the space already suggest real success is happening within the initiative, especially on a job-to-cost metric. By implementing a R2.5 million limit, government is at risk of holding back legitimate investment in the space.
Also, the wording of the proposed amendment appears to apply equally to companies seeking to invest in the 12J space. By their nature, companies have more capital to inject into 12J funds and also have a lower net tax-cost to the fiscus. At this limitation, we’ll see fewer corporate entities participating within the initiative, and our country could prolong the continuation of the stockpiling of cash on balance sheets.
As a player in this space, we at MeTTa Capital Managers hope that National Treasury will listen to what our industry has to say and be open to further discussions.
We need to ensure that the good work in 12J continues and that we can be a strong partner for government when it comes to creating much-needed growth opportunities in the South African economy.
- Darryn Faulds is a Chartered Accountant who is a Fund Manager with Grovest Group’s MeTTa Capital. He has experience in the auditing of large Investment and Private Equity Houses in both South Africa and in San Francisco, USA.