How to help entrepreneurs lead SA recovery, with tax-friendly 12J investments – Patrick Kuwana

Written on 11/25/2020
Melani Nathan

Tax payers have a window of opportunity to invest in the SME sector and turbo-charge the economic recovery, says Patrick Kuwana.

The South African economy is weathering the same Covid-19 storm that other nations across the globe are experiencing. Same choppy seas but a very different boat with a uniquely determined crew at the helm. We may not have control over the elements, but we certainly can take charge of our recovery, says Patrick Kuwana. A good start is to throw our collective weight behind the engine room of the economy, the courageous SME – small, medium-size enterprises – sector, that deserves all the support it can get. The tax-friendly Section 12J regime does exactly that, by encouraging investment into SMEs and allowing tax payers a 100% deduction while also building a dividend stream. Time is running out on this sunset dispensation though, and investors would do well to consider an S12J investment in their portfolios before June 2021. – Melani Nathan & Derek Alberts

Finding economic recovery solutions: 12j can help create jobs and inclusive wealth

By Patrick Kuwana*

Photo published courtesy of C3 capital.
Patrick Kuwana – Founder and CEO at C3 Capital

Two weeks ago Stats SA released record-high unemployment rates with the official rate reaching 30.8% and the expanded definition, which includes discouraged job seekers, reaching 43%. This essentially means 13% of potential job seekers have completely lost hope and don’t even bother looking anymore (by the way, lost hope is a massive debilitating factor in any process of recovery). In terms of real numbers, 1.65m jobs have been lost in 2020. This is on the back of an economy that was growing at less than 2% prior to the Covid-19 outbreak and contracted by 52% in 2Q 2020. Another way of looking at this is that 43% of South Africa’s potential working population who should be contributing and adding value to ‘organisation South Africa’ is not.

The most worrying unannounced statistic

One of the most concerning statistics that is not given much media attention is that, according to the Global Impact Investing Network and its Report on the Landscape for Impact Investing in Southern Africa, only 7% of South Africa’s population is engaged in entrepreneurship, compared to an average of 25% in other countries on the continent. The growth of any economy is directly linked to the levels of entrepreneurship as this is one of the lead indicators of economic performance. Ignoring this statistic will bite us really badly in the future.

Cry over spilt milk or produce more milk

Now that we know these facts we can lament, blame various factors for them or throw stones at someone else because of them. However, the real question is what do we do about this? We can cry over spilt milk or get to work to produce more milk and build strong containers to stop the milk from being spilt again. To be more specific with the question – what do we as citizens and the private sector do about this? I sincerely hope our answer is not one that causes us to wait for government to save us. One of the biggest mistakes we have made as citizenry over the last 26 years is to wait for government to do something about the challenges that we face. By doing so, we have effectively given the political establishment and government a level of power they don’t have in determining the future prosperity of SA.

Entrepreneurs and Small Medium Enterprises are the key to unlock economic growth

It is a known fact that SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. SMEs across South Africa represent more than 98% of businesses. They employ between 50-60% of the country’s workforce across all sectors, and are responsible for a quarter of job growth in the private sector. Based on this, it seems quite logical that we need to put our economic recovery efforts into investing in entrepreneurs and SME growth, especially since this is the area that has taken the greatest Covid-19 hit.

South Africa is awash with entrepreneurs with ideas, creativity and innovation that can rapidly shift the socio-economic landscape of the country. South Africa is also awash with entrepreneurs already running world-class SME businesses that are making a major contribution to the nation. The biggest challenge facing aspirant entrepreneurs is a lack of financial capital to either bring their idea, creativity or innovation to market, and for existing SMEs to grow their business.

Perhaps unlocking financial capital for this sector should be the single focal point if South Africa wants to execute “project economic recovery”.

Read also: President Ramaphosa: Our top priority – to fix SA economy

12J: Getting every tax payer to be an investor in an entrepreneur, SME sector

Interestingly, National Treasury through SARS offers an investment mechanism, known as Section 12J, that aims to bolster the SME sector. Section 12J of the Income Tax Act allows an investor – the tax payer – to deduct the full amount invested in a Section 12J VCC (Venture Capital Company) from their taxable income for the specific tax year. VCCs manage investments in qualifying businesses with the objective of stimulating investment in local SMEs.

By paying our personal or corporate tax into the 12J VCC regime, we are enabling our hard-earned taxes to be used in the rebuilding of the economy and enhancing the cycle of inclusive wealth creation. It allows our taxes to be diverted and transformed into much-needed capital, and to fund entrepreneurship-driven job growth. This method presents a primary solution to economic recovery and sustainable job creation by transforming tax-paying employees into investors into SMEs.

Not only does this direct taxes into “socio-economic impact”, it also allows qualifying employees an opportunity to create wealth and earn healthy dividend streams over the minimum five-year investment period.

The question is: Other than ignorance, why are so few tax payers – or investors – currently doing this?

Last week President Ramaphosa hosted the investment summit to attract investment mainly from international and big corporate sources, but perhaps a new focus on unlocking local taxes for the purposes of investment could be a huge contributor towards building a thriving and robust job-creating small and medium business sector.

Read also: CR connects jump leads to economy’s tired battery

Joining a cycle of sustainable wealth creation that drives positive job impact

If there is a mechanism where current tax payers can accelerate their ability to create wealth and at the same time be the central role players to South Africa’s socio-economic recovery, why would we not put everything we have into this?

The most viable potential to unlock investment funding into the SME sector, and hence create jobs, lies in the hands of current tax-paying employees and corporates. We need a movement of South African tax payers to rally and rebuild.

A final thought: “Poverty can never be fixed by trying to fix poverty – poverty is fixed when prosperity is created and used to help others create prosperity.”

  • After a successful corporate career in the IT industry, Patrick Kuwana became a serial entrepreneur – co-founding several businesses, and being involved in numerous business incubators and accelerators in Africa and Asia. He is the founder and CEO of C3 Capital, a private equity firm that combines financial capital with a unique business growth blueprint and execution expertise.  Their vision is to build local businesses that will positively impact the quality of life of Africa’s current generation and build sustainable prosperity for future generations.

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