Tax Alert: South Africa’s employment tax incentive

Provided By Eversheds Sutherland

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By Tanya Pollak And Carmen Moss-Holdstock

Topics Labour Law | Tax Law

20 May 2019

The high levels of unemployment in South Africa, in particular unemployment in the youth, led to the introduction of the employment tax incentive (“ETI”) scheme created under the Employment Tax Incentive Act, No 26 of 2013 (“ETI Act”). The purpose of the ETI is to encourage employers to employ young job seekers. The incentive and tax benefit for the employer to hire these young and often inexperienced job seekers, lies in the fact that the employees’ tax, also referred to as Pay-As-You-Earn (“PAYE”), owed by the employer to the South African Revenue Services (“SARS”), is significantly reduced by the ETI amount claimed by the employer. This reduction in employees’ tax has the effect of reducing the cost of hiring such young job seekers, who are often less skilled and lack experience, without such reduction impacting the employee’s wages.

However, as is often the case with these types of schemes, it is necessary and crucial for the employer to understand not only the criteria set out under the ETI Act pertaining to the qualifying employee and employer, but also to understand the accounting and income tax aspects.

The ETI Act originally came into operation on 1 January 2014 and was legislated to end on 28 February 2019, after which date no further ETI credits would be capable of being claimed by qualifying employers. Given the success of the ETI scheme, Finance Minister Tito Mboweni, announce the extension of the ETI by ten years along with an increase of the income eligibility thresholds apropos the ETI.

There is no obligation to claim ETI. Therefore, one can choose to simply ignore ETI. If, however, ETI is claimed, it will constitute tax-free income for the qualifying employer claiming it, however, employers are cautioned as to the slightly heavier compliance burden placed upon them. It is accordingly imperative for the employer to understand the criteria set out in the ETI Act pertaining to qualifying employees and employers and the treatment of the ETI for accounting and income tax purposes.

In order to participate in the scheme, both the employer and the employee are required to qualify under the ETI Act.

Qualification criteria relating to the employer-

• The employer must be a private entity and registered with SARS for PAYE;
• The employer must not be involved in the national, provincial or local spheres of government; and
• The employer must not be disqualified from receiving the incentive by the Minister of Finance in terms of any labour relations dispute.

Qualification criteria relating to the employee –

• The employee must have a valid South African Identity Document, Asylum Seeker permit or an Identity Document issued in terms of the Refugee Act No. 130 of 1998;
• The employee must be between the ages of eighteen and thirty. This age restriction does not apply if the employee is employed in a Special Economic Zone, provided that the employer has a fixed place of business within one of the six designated SEZs and the employee renders services to that employer mainly within a SEZ. Furthermore, the age validation must take the month of birth into consideration, e.g. if the employee’s month of birth is April then the employer may only claim ETI from April going forward in the year in which the employee turns eighteen and up to March in the year in which the employee turns thirty).
• The employee must have been employed by the employer or an associated person of the employer, on or after 1 October 2013;
• The employee must be paid the minimum wage applicable to that employer or if a minimum wage is not applicable, must be paid a wage of at least R2,000 and not more than R6,500;
• The employee must not be a domestic worker; and
• The employee must not be a connected person to the employer.

The ETI Act contains various formulae for the determination of the ETI amount by which an employer may reduce its PAYE liability. Effective 1 March 2019, employers will be entitled to claim up to a maximum rate of R1,000 per month where the qualifying employee earns up to R4,500 per month. From an accounting perspective, the ETI amount must be reflected as income in the journal entries of the employer, which income is exempt from income tax in terms of an amendment to section 10(1)(s) of the Income Tax Act No. 58 of 1962.

Section 9 of the ETI Act makes provision for the carrying forward of the ETI amount (or a portion thereof), whereby such amount may be rolled over to the immediately succeeding month under the following circumstances-

• where the ETI amount exceeds the PAYE payable by the employer in the preceding month;
• if the employer failed to claim the ETI in the preceding month; and/or
• if the employer failed to submit any tax return or has any outstanding tax debts owing to SARS and which are not subject to an agreement or suspension arrangement entered into with SARS.

In the above circumstances, the employer can defer the ETI amount to the immediately succeeding month which would create a deferred tax asset on the balance sheet of the employer. Furthermore, section 10 of the ETI Act provides for a reimbursement from SARS of the excess ETI amount so carried forward at the end of each employees’ tax reconciliation period. Such reimbursement would result in the correction of the overstated tax expense in the income statement of the employer and as a current asset on its balance sheet.

Employers are cautioned that in circumstances where employers have claimed the ETI in respect of an employee who did not meet the criteria under the ETI Act, SARS is entitled to impose a penalty equivalent to the full amount (100%) of the employment incentive received by the employer in respect of that employee.

In conclusion, those employers who have taken advantage of the employees’ incentive tax relief should ensure that they have met the criteria for claiming the relevant ETI and have treated it correctly for tax and accounting purposes.

[1] Special Economic Zones (“SEZs”) are geographically designated areas within South Africa set aside for specifically targeted economic activities to promote national economic growth and export. This is achieved through support measures to attract foreign and domestic investments and technology. The six SEZs comprise, Coega, Dube Trade Port, East London, Maluti-A-Phofung, Saldanha Bay and Richards Bay.

[2] The term “associated person” in relation to an employer is defined in Section 1 of the ETI Act to include, where the (a)employer is a company, any other company which is associated with that employer by reason of the fact that both companies are managed or controlled directly or indirectly by the same persons; (b)where the employer is not a company, any company which is managed or controlled directly or indirectly by the employer or by any partnership of which the employer is a member or (c) where the employer is a natural person, any relative of that employer.

[3] As defined in section 1 of the Income Tax Act, 1962 read together with SARS Interpretation Note 67 (issue 3)

See also:

• Special Economic Zones – An efficient instrument to increase industrialisation
• Win for the employer: Judgment on the Employment Tax Incentive Act

Flying high at work

Provided By VDMA Attorneys

Topics Labour Law

15 May 2019

In September 2018 the Constitutional Court ruled that the private cultivation, possession and consumption of cannabis is legal. This ruling lead to great uncertainty from the South African public, especially regarding what is defined as ‘private’ and ‘personal’ use, which has now been answered by the Commission for Conciliation, Mediation and Arbitration (“CCMA”).

In the recent CCMA case Mthembu and Others v NCT Durban Wood Chips [2019] 4 BALR 369 the arbitrator had to decide whether the dismissal of four employees who tested positive for cannabis at work was fair. The employer’s business involves the use of dangerous machinery and vehicles, and the transport of large logs. After the employer conducted drug tests on all its employees, urine samples confirmed that four of the employees had tested positive for the use of cannabis, and the employer subsequently charged them with being under the influence of intoxicating substances whilst on duty.

Although the employees admitted to having smoked cannabis in their spare time at home the arbitrator advised that this does not give employees license to attend at work under the influence of cannabis. The employees were aware of the employer’s zero-tolerance stance on substance abuse which was contained in its substance abuse policy and the possibility of dismissal if they tested positive.

In light of the above-mentioned facts the arbitrator found that due to the dangerous nature of the employer’s workplace and the knowledge of the employer’s zero-tolerance policy on substance abuse, the dismissal was the appropriate sanction.

This case perfectly illustrates the need for legal development in relation to the private use of cannabis and highlights the fact that employers can still discipline and dismiss employees who report for duty under the influence of cannabis.

See also:

• Decriminalisation of cannabis – Residential Housing Estates and Sectional Title Schemes
• Taking your high from home to work – Considering the impact of cannabis on the workplace
• The Cannabis judgment: Implications for society and the workplace

Demystifying “non-refundable deposits”, “rouwkoop” and “penalty clauses” in sale of property agreements

Provided By Brian Kahn Inc Attorneys

Topics Dispute Resolution | Property Law

16 May 2019

The sale or purchase of a property is for many people one of the most important transactions that they will enter into in their lifetime. The parties to a Sale of Land Agreement will inevitably enter into a contractual relationship which will have legal consequences for both the purchaser and the seller. It is often the case that contracts are cancelled and this is when an understanding of certain clauses and their meanings becomes very important.

Non-refundable or forfeiture clause

Sellers are sometimes sold on the idea of including a non-refundable deposit clause in the Contract of Sale. More often than not, sellers are under the impression that they will be entitled to all of the non-refundable deposit or monies already paid to the conveyancer on account of the purchase price if the purchaser breaches a Deed of Sale and such breach results in the cancellation thereof.

The seller will, however, then find out that after cancellation of the contract due to breach, that not all amounts may be retained as liquidated damages or as a non-refundable deposit.

In terms of our case law, Matthews v Pretorius (1984) (3) (SA547W) and the Conventional Penalties Act 15 of 1962 (“the Act”), any penalty or liquidated damages contained in a contractual obligation shall be subject to the provisions of the Act which affords the Court the discretion to, on hearing a claim for a penalty or a non-refundable deposit, find that it might be out of proportion to the prejudice suffered by the creditor and the Court may reduce the penalty to such extent as it may consider equitable under the circumstances, taking in due consideration the interests of all concerned.

This means that any forfeiture stipulation resulting from the cancellation of an agreement, including non-refundable deposits, as well as the retention of certain monies already paid by a purchaser as liquidated damages, will be subject to the measurement as described in the Conventional Penalties Act.

Estate agents should be very careful not to create an expectation with the seller that he or she will be entitled to all of the non-refundable deposit or monies already paid to the conveyancer on account of the purchase price if a purchaser breaches a Deed of Sale of immovable property and such breach results in the cancellation thereof.

The role of conveyancers is important to understand as well. It is not expected from conveyancers to act as a Judge and Jury when dealing with monies in their trust account when a dispute arises about who should be the rightful recipient of such monies once the Deed of Sale is cancelled. Unless and until such time as an agreement has been reached between the parties or a competent Court has made an order, it cannot be expected of conveyancers to pay the monies to either party.

Breach of contract

The relationship between a purchaser and seller is governed by the Contract of Sale. The breach of contract occurs generally when a party to a contract without lawful excuse fails to honour his or her obligations under the contract.

When a contract is cancelled in terms of the breach clause of the said contract, the aggrieved party would normally have the right to claim damages from the guilty party. When claiming damages, the aggrieved party must note that the Conventional Penalties Act will also be applicable to the amount of damages that may be claimed.

In the instance of the seller, the seller’s damages will often only be liquidated once the property is resold and the seller’s claim will only be for the deficit between the amount of resale and the original contract sum of the cancelled agreement.

Rouwkoop

A rouwkoop clause in its pure form comes from our common law. It is derived from the Dutch words meaning “regret and purchase”. Such a clause entitles a party to a contract to pay a sum of money in order to be allowed to withdraw from the contract. It essentially sets a purchase price for freedom from the contract payable by the purchaser. If the purchaser then withdraws from the contract and pays the agreed rouwkoop amount, he will be acting in accordance with the terms of the agreement and his withdrawal will not constitute a breach of contract. (It is not regarded as a penalty.) This is clearly very distinguishable from a penalty clause which would come into operation only where there was a breach of contract.

Unfortunately, many sale agreements confuse the position in law whereby the forfeiture clause is merged with a rouwkoop clause, which provides that if the purchaser breaches the agreement and the seller cancels the agreement as a result thereof, the purchaser will forfeit his or her deposit as rouwkoop.

In a decision of Royal Anthem Investments 129 (Pty) Ltd v Yuen Fan Lau and Shun Cheng Liang (941/2012) (2014) (ZASCA 19) (26 March 2014), the Court had to interpret a rouwkoop clause in a Deed of Sale which read as follows: “Will have the right to cancel the agreement and to keep other amounts payable as rouwkoop, or by means of any pending decision by a Court of the real damages suffered”.

The Court in this instance found that the deposit was not an amount as envisaged by the rouwkoop clause in the true intention of the rouwkoop clause history. A penalty clause will only come into operation when there was a breach of the contract.

Conclusion

From the said case law and the provisions of the Act above, it is clear that:

• Non-refundable deposits are a myth and together with forfeiture clauses, subject to scrutiny by the Courts. Unless the parties to the agreement can come to an agreement regarding the penalty, the Court must be sought to quantify the amount payable as a penalty.
• A rouwkoop clause in a Deed of Sale must be clearly distinguished from the penalty clauses above as it is not subject to the provisions of the Conventional Penalties Act.

So, be sure to demystify the myth before you enter into one of the most important transactions of your life. Consult with an attorney.

See also:

• Payments under an Instalment Sale Agreement of immovable property
• Property law, contracts and the Constitution
• Sectional title schemes for beginners

Do not try the Race Card with the Labour Appeal Court...jy sal 2de kom...

The race card: Not the joker in the pack

Provided By Cliffe Dekker Hofmeyr

AN OVERVIEW OF OUR LAW FIRM At Cliffe Dekker Hofmeyr (CDH) We Believe The Right Partnership Can Lead To Great Things. The Partnerships We Cherish And Value Most Are Those We Have Forged Through Tim... More

By Michael Yeates

Topics Labour Law

29 Apr 2019

In the matter of Legal Aid South Africa v Mayisela and Others LAC (CA9/17) [2019] ZALAC [Delivered 5 February 2019), the Labour Appeal Court (LAC), in considering a judgment granted in favour of the employee in a review application by the Labour Court, held that an employee who was dismissed for gross insubordination committed misconducted by failing to obey lawful and reasonable instructions as well as by making false accusations of tacit racism and harassment by the employer.

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After a disciplinary enquiry, an employee was found guilty of 17 charges and was dismissed. The employee referred the matter to the CCMA, where the commissioner found that the dismissal was substantively and procedurally fair. The Labour Court set aside that award and remitted the matter to the CCMA for reconsideration by a different commissioner. Thereafter, a different commissioner also found that the employee’s dismissal was both procedurally and substantively fair. On review, the Labour Court held that the dismissal was substantively unfair. All the charges against the employee related to gross insubordination, gross insolence and falsely making tacit accusations of racism and harassment against the employer.

The gross insubordination charges related largely to the employee’s failure to obey reasonable instructions to attend several meetings, and mainly a meeting to discuss his poor performance review by the employer. The employee took umbrage at receiving a low performance score and requested an explanation for the score. In response, the employer tried to arrange several meetings to discuss the score and to allow the employee an opportunity to change such score. The employee however, refused to avail himself for any such discussions and demanded the employer’s explanations be in writing. He further stated his intentions to raise constitutional issues with various constitutional bodies on the basis that he felt vilified as an African under the guise of poor performance. The Labour Court was sympathetic and found that because there was no evidence of any internal regulation or policy entitling the employer to call such a meeting, the calling of the meeting was inappropriate and unreasonable.

The LAC on the other hand, found that ‘the right or prerogative of management to request a meeting to discuss performance is self-evidently inherent in every employment relationship. An employer has the authority to determine how issues of performance should be addressed.’ The LAC held that an employer has the authority to determine how issues of performance should be addressed and that it is not open to an employee to dictate how the employer should deal with the issues.

The charge of falsely making tacit accusations of racism was based on an email in relation to arranging the meeting to discuss the employee’s poor performance review. In the email the employee implied that the employer was racist by stating that “Africans are being vilified in the region under the coded name of poor performance.” The Labour Court found that the employee was entitled to raise the matter and even take it to the Parliamentary Portfolio Committee.

The LAC disagreed and held that ‘employees who allege tacit racism should do so only on the basis of persuasive objective information leading to a compelling and legitimate inference, and in accordance with grievance procedures established for that purpose. Unfounded allegations of racism against a superior by a subordinate subjected to disciplinary action or performance assessment, referred to colloquially as “playing the race card”, can illegitimately undermine the authority of the superior and damage harmonious relations in the workplace.’

The LAC concluded that the employee’s actions, besides being insubordinate, reveal a poor level of judgment which supports the conclusion that the employee was not suited to the post he occupied. This case illustrates the LAC’s strict stance on employees making false accusations of racism in order to get away with insubordination and trying to dictate performance reviews. It is clear from this judgment that such behaviour in the workplace will not be condoned under the guise of serious societal and workplace issues.

Strict liability: Dog owners (and insurers) beware!

Provided By Cliffe Dekker Hofmeyr

AN OVERVIEW OF OUR LAW FIRM At Cliffe Dekker Hofmeyr (CDH) We Believe The Right Partnership Can Lead To Great Things. The Partnerships We Cherish And Value Most Are Those We Have Forged Through Tim... More

By Willie Van Wyk

Topics Dispute Resolution | Insurance Law

04 Mar 2019

The prevalence of crime in South Africa prompts many home owners to have vicious dogs in the hope of safeguarding their property and deterring burglars. However, dog owners and their insurers should be wary of attracting liability under the actio de pauperie (the actio) for harm caused by domesticated animals. Under this actio, a victim of a dog bite can claim damages from a dog owner without having to prove fault.

In the recent Eastern Cape High Court matter of Cloete v Van Meyeren case no. 732/2017 “the Cloete-case”, the plaintiff instituted a claim for damages against a dog owner under the actio de pauperie. The plaintiff had been attacked when three dogs escaped from their owner’s property, after a third-party intruder had opened the locked gate. In the circumstances, the dog owner denied liability. However, the plaintiff did not do anything to provoke the dogs and he was lawfully present in the public road where the attack took place. As a result of the attack, the plaintiff lost his left arm and instituted a claim for R2,4 million.

The court found in favour of the plaintiff on the separated issue of liability in the judgment of 27 November 2018.

Having regard to the facts of this case, the court had to revisit the history of the actio de pauperie with specific reference to one of the recognised defences available to dog owners. Other defences to claims under the actio de pauperie fall outside the scope of this alert.

The recognised defence

The defence was confirmed in the seminal judgment of Lever v Purdy 1993 (3) SA 17 (AD), where a dog owner was absolved of liability on the basis that control of the animal had been delegated to a third party who failed to adopt reasonable precautionary measures to prevent the animal from injuring the victim when he could and should have done so. In order to succeed with the recognised defence, a dog owner would have to prove that he delegated control of the animal and that the controller was negligent in exercising control over the dog. Should this defence succeed, the victim may have a claim in delict against the controller under the actio legis aquiliae.

Extension of the defence

In the Cloete-case, it was argued on behalf of the dog owner that the recognised defence should be extended to include negligence of an intruder, who did not exercise control over the dogs, but merely left the gate open. This argument finds support in the dictum of Le Roux v Fick (1879) 9 Buch 29 where it was said that, “… an actio de pauperie lay in all cases of damage caused by animals when the damage was brought about through the fault of the party using the animal or of some third party” (our emphasis). The possibility of an extension of the recognised defence was also mentioned obiter in the Lever-case.

Although Lowe, J in the Cloete-case acknowledges that the proposed extension finds some, though tenuous, support in Le Roux v Fick, the court ultimately held that an extension of the pauperian defence, to include a defence founded on a third party’s negligence who was not in control of the dogs (our emphasis), is not justified by logic nor by the existing rules in respect of pauperian liability.

Discussion

The competing interests of dog owners seeking to protect their property, on the one hand; and the interests of dog bite victims in having a remedy to claim damages without having to prove fault, on the other hand; must be carefully considered to determine the necessity of an extension of the recognised defence. The Cloete-case made reference to the case of Brahman and Another v Dippenaar 2002 (2) SA 477 (SCA), where it is specifically stated that it is the court’s duty to expand or curtail the operation of the actio where circumstances warrant same. It follows that it is open to a court to extend the aforesaid recognised defence, should it be deemed necessary, having regard to public policy considerations.

An application for leave to appeal was heard on 21 February 2019 and leave to appeal was denied. A petition to the SCA for leave to appeal may be in the interests of legal certainty for both dog owners and insurers.

Equal pay: Comparison do’s and don’ts

Provided By Cliffe Dekker Hofmeyr

AN OVERVIEW OF OUR LAW FIRM At Cliffe Dekker Hofmeyr (CDH) We Believe The Right Partnership Can Lead To Great Things. The Partnerships We Cherish And Value Most Are Those We Have Forged Through Tim... More

By Hugo Pienaar

Topics Constitutional Law & Civil Rights | Labour Law

21 Feb 2019

A brief explanation of the role of comparators in equal pay claims.

An equal pay claim generally ensures that two people doing equal work are paid equally. It is brought by the claimant, an employee, either as an unfair discrimination claim, or an equal treatment claim. Both claims require comparators to be selected by the claimant. The claimant must then compare their position to that of the chosen comparator in order to prove that there is a pay disparity, where after the employer may raise certain defenses as set out in Regulation 7 of the Employment Equity Act, No 55 of 1998 (EEA) or s198D of the Labour Relations Act, Act, No 66 of 1995 (LRA).

How do you choose a comparator?

Presently, South African law requires that the comparator must be employed by the same employer.

In the United Kingdom (UK), claimants may use questionnaires, apply to the tribunal or approach the relevant trade union for information relating to potential comparators. There are no such similar procedures in South Africa.

For a South African claimant, it is important to ensure that the chosen comparator reflects the choice of claim that you are bringing. A s6 EEA claim would require a comparator to have different terms and conditions of employment despite performing the same or substantially the same work or that such work is of equal value. The claimant must prove discrimination on a listed or an arbitrary ground.

A s198D LRA claim would require a permanent employee to be chosen when the claimant is a “temporary employment service employee” or a fixed-term employee and it must be proven that the inequality is not justifiable on the basis of seniority, experience, merit, quality or quantity of work performed etc. It is not required to prove discrimination. This remedy only applies to employees earning below the BCEA threshold and employed for a period of longer than three months.

Stuck with your comparator?

South African law and academia are quiet about what happens to comparators once chosen.

The UK is a good source of information which can aid the interpretation of our legislation. The Constitution of the Republic of South Africa, Act, No 108 of 1996 states that the courts must prefer any reasonable interpretation of any legislation that is consistent with international law over any alternative interpretation that is inconsistent with the same.

In the UK, an employee can name more than one comparator, though the House of Lords have warned tribunals that picking too many may be seen as abusing the equal pay procedure. This may be of application to South Africa.

Once chosen, can one change comparators?

In the UK case of Prest & Ors v Mouchel Business Services Ltd & Anor, the tribunal found that the actual substitution of comparators did not matter as long as the work done by the new comparator was comparable to the work done by the claimant, so that the nature of the claim did not change.

Additionally, the UK tribunals have also held that pay will not fall back to its previous level if your comparator leaves the employment. This shows that the claim is linked to the actual employment held by the comparator, not to the individual.

When one applies this international law to South Africa, employees should be able to choose more than one comparator, substitute comparators (provided the nature of the claim is not changed) and experience no pay decreases if the comparator leaves employment.

See also:

• Resolution of class action equal pay disputes
• Unfair discrimination – What is the burden of proof?
• South African Human Rights Commission identifies issues with affirmative action and employment equity provisions
• The pay differential war – Equal pay for equal work