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It’s time for SA's tourism sector to shine — and Section 12J can help

04 November 2019 Jeff Miller, CEO of Grovest Corporate Advisory
Jeff Miller, CEO of Grovest Corporate Advisory

Jeff Miller, CEO of Grovest Corporate Advisory

This week, Finance Minister Tito Mboweni painted a challenging picture regarding the country’s fiscal position when it came to his Medium Term Budget Policy Statement (MTBPS).

He strongly emphasised the need to spur on growth and he identified the tourism sector as one contributor to GDP that has bigger potential.

The reality is that South Africa is blessed with tremendous tourism potential and we should be focusing on this more. From our beautiful beaches to our vibrant cities and our world-class national parks, we really have it all.

Throw into the mix our sunny weather, a rich tapestry of cultures and a competitively priced local currency and you have the perfect ingredients for a thriving tourism sector.

Over the decades, more tourists from across the globe have taken notice of all that South Africa offers.

In 2004, just under 7 million international tourists visited our country. In 2018, an estimated 10.4 million international visitors arrived on our shores. Tourism contributes approximately 2.8% (or R130 billion) to South Africa's gross domestic product.

While there has been growth in the long-term, the market in the short-term has experienced some turbulence with Stats SA recently reporting that international tourist arrivals fell 5% year-on-year in July 2019. This is, in part, was a result of last year’s water restrictions in the Western Cape and the previous introduction of unabridged birth certificates for child visitors to South Africa.

The good news for the South African hospitality market, though, is that unabridged birth certificates for minor children are now no longer needed. In addition to this, a local online visa system is being introduced while government this year has further enabled visa-free travel to South Africa from countries such as Qatar, Saudi Arabia, the United Arab Emirates and New Zealand.

At a recent lekgotla, government expressed its desire for major growth in the tourism sector, with a target of 30 million tourists visitors to South Africa by 2030.

It’s clear then that moves are afoot to ensure that more tourists visit our country in future. This means that the local industry has a unique window right now to gear up for this future growth.

However, to take advantage of these future opportunities, local hospitality providers will need to raise more capital - whether it be for building new facilities (such as hotels or lodges) or upgrading existing ones.

Rather than looking to banks (which have become more stringent in their lending), local hospitality businesses should rather consider other capital-raising alternatives such as Section 12J.

What is Section 12J

Woven into South Africa’s Income Tax Act, Section 12J enables investors to provide much-needed capital to Small-to-Medium Enterprises (SMEs) while receiving an immediate tax deduction equal to 100% of the amount they’ve invested.

The end result is that investors in the top tax bracket can see relief of up to 45% on their investments in the year they invest. For every R100 000 invested into a Section 12J, the investor receives a tax deduction of R45 000, which means that only R55 000 is at risk, while the investor has R100 000 working for them.

On the flip-side, with SMEs being properly capitalised, they have a far better chance at success and, ultimately, becoming large taxpayers in future.
As of February 2019, in excess of R8 billion has been invested into Section 12J funds in SA. Currently, individuals and trusts can invest a maximum of R2.5m each year, while companies can invest up to R5m into Section 12J funds.

What’s encouraging is that new hotels create economic ecosystems around them where fresh opportunities for travel operators, food suppliers, taxi and curio businesses - among many more - arise.

New Section 12J hospitality projects have even contributed towards sustainable land reform, as has been the case with Mdluli Safari Lodge, the first-ever hospitality-focused, social-impact Section 12J fund.

Mdluli Safari Lodge

Looking to maximise economic opportunities from their land in the Kruger National Park, the Mdluli Community entered into a 50-50 partnership with the private sector via Mdluli Safari Lodge Limited - a Section 12J-backed hospitality venture.

In the late 1960s, the Mdluli Community were forcibly removed from their land as the then government expanded the borders of the Kruger National Park. Decades later, after the dawn of democracy in 1994, the late Chief MZ Mdluli initiated a successful land reclamation resulting in the community securing freehold title to the 850 hectares from which they had been removed. The reclaimed land is registered in the name of The Mdluli Community Trust.

This Section 12J fund will facilitate the unlocking of many opportunities for the Mdluli Community - including direct financial benefit, skills development, SME opportunities and significant socio-economic benefit.
Mdluli Safari Lodge is located inside the borders of the Kruger National Park. The Lodge features 50 luxurious double en-suite tents (each with their own private patio and views into the Park), bars, restaurants, spa, gym and swimming pools.

With a shortage of luxury accommodation inside the borders of the Park, Mdluli Safari Lodge is perfectly situated inside the South Western region, near the closest entrance gate from Gauteng, in an area particularly rich with Big 5 game viewing.

This Section 12J investment has been described by one investor as “one of the best investments in the country - and a no brainer for anyone who loves spending time in the bush”.

What makes this project even more meaningful is that it’s a great example of how land reform and private investment can work hand-in-hand.

Mdluli Safari Lodge is one of the funds we feel particularly proud of. We have been the pioneers of Section 12J ever since its inception, and are always looking for new and innovative ways to maximise the Section 12J structure. It’s exciting to see how this alternative asset class not only unlocks value for investors but for the economy at large - through job and skills creation. It further plays its part in stimulating local investment in hospitality by encouraging South Africans to keep their money on-shore.

Quick Polls

QUESTION

In terms of vicarious liability, damages should not be borne by companies in all conditions, but only in those circumstances which it is reasonable for them to do so. Do you agree?

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