The Section 12J deadline for investors to receive a tax benefit for enterprise development spending is fast approaching, as the sunset clause draws to a close on 30 June 2021. But the issue hampering many investors has not been a lack of funds – rather, it has been identifying viable and scalable business opportunities with the potential to drive lasting economic change.
According to Jarryd Gillmer, Chief Executive Officer at Everest Wealth, investors need to target areas that have previously been excluded from the formal economy for the greatest economic impact, namely South Africa’s townships and rural communities – areas that are infamous for high unemployment rates. However, the unique challenges posed by these areas have largely deterred investors, as a lack of infrastructure, entrepreneurial skills, and high regulatory burden mean that many attempts to launch Small to Medium and Micro Enterprises (SMMEs) have ultimately failed.
“Simply throwing money at the problem doesn’t work – to be sustainable, businesses need to develop creative solutions that address the root causes preventing enterprise development in these areas. The only way to drive meaningful change is to empower local communities by offering a hand up rather than hand-outs, or by giving local communities the tools and support needed to launch and run successful businesses,” Gillmer says.
The Nyamalicious mobi-restaurant solution
Covid-19 and the hard lockdown laid bare the lack of supply of necessities in peri-urban and remote communities, as families typically have to travel to city centres and malls to do their shopping. Their mobility means that Nyamalicious restaurants can overcome the hurdle of a lack of infrastructure to meet the demand for franchise-quality food at people’s doorsteps.
“Additionally, for a small monthly franchise fee, operators receive entrepreneurial training and extensive ongoing administrative and operational support, including assistance with regulatory compliance and marketing services. This works to ensure that restaurants yield immediate returns and enjoy a higher rate of success, minimizing the risk to investors and offering them greater comfort regarding the long-term future of their investment,” observes Strauss.
He notes that Nyamalicious offers franchisees the freedom to customise menus according to the specific tastes of their target demographics.
“This is a crucial feature of Nyamalicious’ business model which makes it particularly suited to enterprise development initiatives. It enables operators to source and empower local suppliers of their choosing rather than relying on prescribed suppliers at commercial centres, driving further linkages between the township and rural communities and the formal economy,” says Strauss.
Each Nyamalicious mobi-restaurants costs just R90,000, and investors purchasing a fleet may receive the benefit of a bulk discount. Other costs include an R5,500 per month franchise fee, which covers expenses such as entrepreneurial training, operational support, and marketing services.
Utilising the Section 12J window of opportunity
Aimed at stimulating economic growth, job creation, and attracting investments into South African SMMEs, Section 12J of the Income Tax Act currently allows investors to deduct the full amount invested (up to certain limits being R2.5 million for individuals or trusts and R5 million for corporate investors) in a Section 12J venture capital corporation (VCC) from taxable income for the year.
“However, whilst this mechanism will soon be coming to an end, Section 12J investments made before the 30 June deadline of this year will still be deductible for the 2021/22 tax year. This means that investors who choose to use this mechanism to purchase a fleet of Nyamalicious franchises in the interests of enterprise development may receive a significant tax benefit this year,” says Gillmer.
Given that Section 12J investments are required to remain locked-in for five years, investors could pay the franchise fees for the next five years upfront and deduct this amount, notes Gillmer.
Strauss adds Investors could then award the operation of individual Nyamalicious Mobi-restaurants to deserving candidates who would receive the benefit of the training, support, profits, and income generated by each trailer for five years. At the end of the five-year period, investors could then choose to award the restaurant to successful franchise operators or reallocate them as necessary, ensuring that the impact of each restaurant is sustainable.
“The window of opportunity is narrow, but it does offer investors an exciting opportunity to partner with us in empowering local communities with local flavours while receiving the benefits of tax incentives. It’s a win-win solution for investors and the country,” concludes Strauss.