The Employment Tax Incentive (ETI) Scheme

In a nutshell, the Employment Tax Incentive (ETI) scheme is a legislated guideline that encourages employers to hire “young people”, with the promised advantage being a reduced cost of employment paid back (via PAYE tax savings reimbursements) to the employer. The employees’ earnings will remain unaffected

[i].

The strategic reason for the ETI therefore, encourages employers to hire young, less experienced work-seekers[ii] — a job-creation vision outlined in South Africa’s National Development Plan[iii].

The incentive ends on 31 December 2016 — as per the ETI Act, “an employer may not receive the employment tax incentive from 1 January 2017.”[iv]

The big (National) picture so far

According to the National Treasury, the implementation of the Employment Tax Incentive Act has resulted in 270 000 young people getting jobs ever since its inception, …with National Treasury spokesperson Jabulani Sikhakhane stating that around 29 000 different employers had made use of the incentive …since it came into effect”.[v]

Conflicting statistics do exist. During a National Council of Provinces (NCOP) address made by Cyril Ramaphosa—as reported by the SABC—the deputy president was reported to have said that “preliminary data [indicated] that 31 825 employers [had] claimed billions of rand and about 274 000 employees have benefitted [as at June 2015][vi].”

National Treasury (Jabulani Sikhakhane) have reportedly said that “more time is required to adequately assess the overall success of the policy as it is dependent on the number of new jobs created and the future opportunities and progression of employees who were hired as a result of the incentive. …[and that] the incentive will then be up for review in 2016 where adjustments may be made to improve its impact and effectiveness.”[vii]

One more year left to take advantage of ETI

At first glance, to the HR and Payroll professional, this may appear to be a fairly straightforward piece of legislation that is easy to understand, comprehend and implement. In reality though, this is not (entirely) so. With a little applied effort however, potential employers still have a full year to benefit from the ETI incentive scheme.

Whilst unpacking the many issues and considerations relevant to the ETI incentive scheme, employers and business owners will encounter many determining factors when contemplating the adoption of the scheme for their organisation. However, the primary question on your mind is likely to be, whether the ETI scheme is a savings strategy worthwhile pursuing for your organisation?

A quintessential low-down on the ETI scheme

For starters, be sure to establish whether you’re a qualifying employer. This can easily be done right here, on the South African Revenue Service’s (SARS) website.

Next, you need to be aware of important recent changes[viii] (effective 1 March 2015) relevant to ETI qualifying criteria for the wage definition and the remuneration definition.

Qualifying Criteria

Of primary value, is the importance of complying with initial employee qualifying criteria:[ix]

  1. An employee must be 18 to 29 years of age (in relevant calendar month)
  2. Only in special cases, if an employee (regardless of the 18 to 29 age restriction), “is employed by an employer operating through a fixed place of business located within a special economic zone [SEZ] designated by notice by the Minister of Finance in the Gazette and that employee renders services to that employer mainly within that special economic zone”[x].
  3. An employee must have a valid
    1. SA ID; or
    2. An asylum seeker permit[xi]; or
    3. now newly added (as per a 2015 Tax Act amendment) — have an ID in terms of Refugees Act (backdated to January 2014).
  4. Should have been employed on or after 1st October 2013
  5. They should not be connected person to the employer
  6. They cannot be a domestic worker
  7. An employee may not earn more than R6,000 per month[xii]
  8. An employee may not be an independent contractor[xiii]
  9. Employee should at least earn a minimum wage/salary under, one of the two following conditions:
    1. If earning a minimum wage according to a wage regulating measure:
      1. such as a relevant sectoral determination, bargaining council agreement, or a collective agreement
    2. If earning a minimum wage where there is no wage-regulating measure:
      1. a wage of at least R2000 per month (earnings for ordinary hours of work — i.e. basic salary, basic wage)

Calculations and examples

It is important for relevant personnel working in an HR and/or payroll environment, to familiarise themselves with the (extensive) calculations and examples relevant to the processing of reimbursements due to the employer. Paymaster Payroll recommends using the following handy (PDF) resource made available by the National Treasury department — “it serves well to simplify the complex set of examples and calculations used in the ETI Act itself” says Ian Hurst, CEO at Paymaster Payroll Solutions.

Reimbursements

At the end of the period for which the employer is required to render a SARS return, reimbursements are processed by completing the ETI field on an employer’s monthly EMP201 submission.

Once processed and approved by SARS, the employer receives the reimbursement from the National Revenue Fund which is treated as a drawback from revenue charged to the fund.[i]

Employer tax debts affect their ETI reimbursements

ETI reimbursements with not be paid out if the employer has failed to submit a return in terms of section 1 of the Tax Administration Act (on the basis required by section 25 of that Act).

This excludes tax debt—

  • to which an agreement has been entered into, in accordance with section 167 or 204 of the Tax Administration Act; or,
  • tax debt that has been suspended in terms of section 164 of the Tax Administration Act; or,
  • tax debt that does not exceed the amount referred to in section 169(4) of the Tax Administration Act.

 Avoid unnecessary penalties

To avoid unnecessary penalties imposed by SARS, be sure not to claim ETI if the employee earns less than the minimum wage (or less than R2 000 where a minimum wage is not applicable). Offending employers will be liable for a penalty equal to 100% of the employment tax incentive received and will have under-payment of employees’ tax and possible interest in penalties in terms of the Tax Administration Act.

Lastly, be sure not to deliberately ‘displace’ (i.e. to get rid of, to fire, or to dismiss) an employee with the specific intention of employing an ETI-eligible individual. Upon investigation, should the offending employer be found guilty of such a contravention, the entity will be liable for a penalty of R30 000 in respect of that employee.

Still have uncertainties or questions?

For those who remain unclear on anything related to the ETI, you are invited to email Ian Hurst at Paymaster Payroll Solutions. Alternatively, contact the National Treasury on its dedicated ETI email address[ii] for further enquiries and information.

 

Endnotes & Sources

[i] Section 10.(2), Act No. 26 of 2013: Employment Tax Incentive Act, 2013. Government Gazette, volume 582, No. 37185, 18 December 2013.

[ii] National Treasury ETI contact email address: mailto:employment.incentive@treasury.gov.za

[i] http://www.vippayroll.co.za/support/employment-tax-incentive-act/

[ii] http://c.ymcdn.com/sites/sait.site-ym.com/resource/resmgr/2014_SARS/Employment_Tax_Incentive_lea.pdf

[iii] The National Planning Commission’s National Economic Development Plan — Vision 2030, page 112-114; 134. Available online: http://www.poa.gov.za/news/Documents/NPC National Development Plan Vision 2030 -lo-res.pdf [Accessed 12 November 2015]

[iv] Act No. 26 of 2013: Employment Tax Incentive Act, 2013. Government Gazette, volume 582, No. 37185, 18 December 2013.

[v] http://sanews.gov.za/south-africa/employment-tax-incentives-leads-270-000-new-jobs

[vi] http://www.sabc.co.za/news/a/8a49180048c7de4bbb8fffa9ee5d8a7f/Ramaphosa-lauds-Employment-Tax-Incentive-scheme-20151706

[vii] http://sanews.gov.za/south-africa/employment-tax-incentives-leads-270-000-new-jobs

[viii] Owing to the Taxation Laws Amendment act 2015, promulgated on 20th January 2015 (effective March 2015) — source: http://www.vippayroll.co.za/support/employment-tax-incentive-act/ [Accessed Saturday, 07 November 2015]

[ix] Source: http://www.vippayroll.co.za/support/employment-tax-incentive-act/

[x] Section 6.a.ii, Act No. 26 of 2013: Employment Tax Incentive Act, 2013. Government Gazette, volume 582, No. 37185, 18 December 2013.

[xi] NOTE: If an employee is employed with a passport and work permit, but has no asylum seeker permit, do they still qualify for the incentive? No. Only RSA 13-digit ID, asylum seeker permits or an ID in terms of Section 30 of the Refugees Act are acceptable documents. Source: http://www.vippayroll.co.za/support/employment-tax-incentive-act/

[xii] https://www.simplepay.co.za/help/employment-tax-incentive-eti

[xiii] https://www.simplepay.co.za/help/employment-tax-incentive-eti