How South Africa’s tax framework hurts SMEs – Huge Group CEO

Huge Group CEO James Herbst says obtaining capital is the biggest challenge smaller companies face in South Africa, and the root of the problem lies hidden in our tax framework.

Huge Group was listed on the Johannesburg Stock Exchange’s (JSE’s) Alt-X board in August 2007 and moved to the Main Board in 2016.

As a director and CEO of a small cap company listed in the JSE, Herbst is well positioned to comment on the industry.

It is widely accepted that small and medium-sized enterprises play a vital role in growing South Africa’s economy.

However, starting and running a small enterprise in the country is difficult. Challenges include red tape, investing in people to grow, and obtaining capital.

Herbst argues that the biggest issue smaller companies face is raising capital, and the root of the problem lies hidden in our tax framework.

In South Africa, unit trusts and pension funds can invest in and divest from companies without having to pay tax on their trading activities.

Retail investors do not enjoy the same tax privileges. They must pay tax on their trading activities, which limits their appetite to buy and sell shares.

“This unequal tax treatment has, in my opinion, destroyed the retail investor market – a market that is an important provider of capital, especially to small capitalisation companies,” said Herbst.

Unit trusts and pension funds are mainly focused on large capitalisation companies and typically ignore small-cap stocks.

Small companies can, therefore, not rely on large funds to obtain capital.

Herbst said that if South Africa wants to build a burgeoning SME market, it needs to create a framework for retail investors to participate on an equal footing with pension funds and unit trusts.

“Many private individuals would provide capital to small capitalisation companies if the costs of doing so – being taxes – were not prohibitive,” he said.

He said it is easy to create a level playing field – provide the same privileges to the retail investor or withdraw the unequal privileges from the other investors.