Tax Alert: South Africa’s employment tax incentive
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)
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