Budget 2017 – What Investors Can Do To Build The SME Sector

23 February 2017

“Finance Minister Pravin Gordhan has done what he can to plug the Budget deficit of R28 billion by raising personal income tax, but government’s real task is to address the R46 billion of revenue that went unaccounted for,” says Neill Hobbs, founder and director of venture capital firm Anuva Investments.

Of the three major sources of national revenue – personal income tax, corporate tax and value added tax – personal income tax is the only one that could be safely raised, Hobbs says.

“Seeking to close this multi-million deficit, the least dangerous route available to the finance minister, was to lift the marginal tax rate from 41% to 43% which, together with the adjustment to the inclusion rate for capital gains tax (from 40% to 50% for individuals), is the easiest and quickest way to close this gap and annoy the smallest number of people in the process,” shares Hobbs.

“On the expenditure side national debt servicing is rising alarmingly towards 10%,” Hobbs reveals.

“However, the real issue in balancing the budget lies in the R46 billion unaccounted for or irregular expenditure identified by the Auditor-General. This is a massive figure and fiscal discipline to restrict this kind of leakage in the coming year is absolutely essential. Failing this, the revenue authorities will continue to pour money into a bucket with a hole in it and the risk of a ratings downgrade will escalate.”

In addition, there is a real concern about SARS’ ability to effectively collect taxes. “Non-compliance with PAYE and VAT payments is increasingly commonplace with under-resourced SARS officials unable to curb this trend of non-payment. This problem is further exacerbated by the poor relationship between finance minister Pravin Gordhan and SARS commissioner Tom Moyane.”

Hobbs says, however, that although the focus of the budget is on taxes, with GDP growth languishing at 1%, the real challenge is not the tax rate but job creation.

“In this regard our government is excelling itself … but getting very little credit for it,” he says.

“Notwithstanding today’s tax rate changes, the Income Tax Act contains an extraordinary number of innovative incentives available to entrepreneurs and employers.

If we consider these together with the huge amount of state support for business sponsored by the Department of Trade and Industry, Industrial Development Corporation, Public Investment Corporation, National Empowerment Fund and other initiatives there is no reason why committed business people and entrepreneurs should not find a positive way forward.”

Which is why Anuva is using a very innovative section 12J of the Tax Act to encourage investors to invest in small and medium businesses. Any tax payer (a company, trust or individual) can make a contribution to a properly registered venture capital corporation & get a 100% tax deduction of the amount contributed.

“For example, if I my taxable income for the year is R2million& I put 100% of it into a venture capital corporation then I pay no tax,” says Hobbs. “That money is then deployed in a corporation in a structured way so that it can be used as working capital to can the business to a new level of production & efficiency.”

This kind of investment results in SMMEs being funded via equity rather than debt, which immediately stabilises the business and does not leave it with a crippling debt burden.

His company is trying to reach high income earners that have a high tax threshold or investable cash who need to be aware of this – before provisional tax returns are due end Feb 2017.

The return to companies like Anuva, one of South Africa’s first Section 12J venture capital companies, is in the form of dividends rather than interest.

“We are not over-burdened with excessive regulation and are blessed with exceptional opportunities and investment returns. We sit in the gateway to the African continent and we have skills, infrastructure and resources that make us competitive in this untapped and developing continent.

“So while taxes are inevitable, the tax incentives and capital assistance that our government is making available provide ample opportunities for businesses to excel.

/ends

1.) MORE ABOUT ANUVA INVESMENTS: Anuva Investments, one of South Africa’s first Section 12J Venture Capital Companies has announced its maiden results for the February 2016 financial year. The VCC has reported earnings of R13.7million and paid a dividend of 28% to the initial investors. These impressive results are due to the company’s acquisition of Mastercare Appliances, which was under business rescue and needed a capital injection to complete the business rescue plan. According to Neill Hobbs, one of the founding members of Anuva Investments the successful business rescue of Mastercare would not have been possible without the ‘shot in the arm’ from Anuva. SARS’s policy of boosting small-to-medium business was encouraged by the introduction of section 12J of the Income Tax Act in 2009. The Venture Capital Company was intended, by SARS, to be a marketing vehicle that will attract retail investors; having the benefit of bringing together small investors as well as concentrating investment expertise in favour of the small business sector. Tax-payers who invest via this equity finance vehicle receive a 100% tax deduction on funds invested.

Anuva now controls 69% of Mastercare and plans to expand are already underway. On 1 September 2016, Anuva invested in Mastercare Medical Supplies which will be the sole distributor of sports bracing and medical products for Medac (Pty) Ltd. According to Hobbs, “Through the acquisition of Mastercare we have a national infrastructure for sales and distribution. Mastercare Medical also has distribution rights to a number of export destinations, which is very exciting for us.” Anuva plans to launch a new energy venture, Mastercare Energy, which will provide cost-effective energy solutions to households.
Hobbs confirmed the Anuva VCC strategy is to invest into promising, well-managed small-to-medium companies which are securely established and have a proven track record but are under-capitalised. The company is exploring and conducting due diligence on opportunities in education, medical, energy, security and agro/processing businesses.

2.) Read more about Anuva’s response to the 2017/2018 Budget Speech in this piece published by Fin24

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