The New Employment Tax Incentive Bill (ETI)

Nov 19 2013
The New Employment Tax Incentive Bill (ETI)

Large numbers of unemployed are a problem for any country, but when young people leave the education system with a very poor chance of getting a job, their motivation to achieve is impacted from day one.

Statistics indicate that 50% of 15 to 25s are unemployed, and 29% of 25 to 34 year olds. The ETI Bill aims at the 18 to 29 year olds who are believed to be around 30% of the total unemployed which is sitting at approximately 25%.

The concept of introducing a subsidy for employers who take on young people is not a new one, but there has been significant resistance. The draft bill was released in September, and the formal bill was published on November 4th, 2013.

When is it happening?

  • Treasury has set a “go live” date of 1st January, 2014.
  • The bill has a so called “sunset” clause, i.e. it is in effect for three years only – January 1st, 2014 to 31st December, 2016.

What are the objections and opportunities for abuse?

  • There is a concern that companies will terminate existing employees in order to hire people who are eligible for the incentive
  • The bill is seen by the opposition to be a “watered down” version of the Wage bill proposed in 2010
  • It is also seen as unfair that people who are already employed will be excluded, leading to the fear that people will be dismissed and rehired to render them eligible

Response to the objections

  • Employee’s being displaced are a cause for the employer to be disqualified from receiving the tax benefit
  • Treasury has commented that there is general protection from abuse built into the bill

Which Employers Qualify?

  • Employers who are registered to withhold and pay employees tax (Para 15 of the Fourth Schedule of the Income Tax Act)

Which Employers are Disqualified?

  • Local, provincial or national government
  • Municipal entities
  • Public entities (Public Finance Act of 1999), although the Minister of Finance may designate exceptions
  • Employers who are found to have displaced employees in order to benefit from the incentive
  • Employers who do not comply with the training conditions (as yet unspecified)
  • Employers who do not meet the conditions based on the classification of trade (SIC)
  • Employers who are not in good standing with SARS on the last day of the month

Are there penalties for non compliance?

  • Yes
  • For non-compliance in terms of wage regulating measures, the claimed sums must be remitted to SARS as a penalty
  • Displacement includes a R30 000 penalty per displaced employee and possible disqualification from further tax incentives

Which Employees qualify?

  • Employment date is October 1st, 2013 or later
  • Employee is between 18 and 29 years old on the first day of the month and not yet 30 on the last day of the month
  • Has a South African Identification Card (Act No 68 of 1997)
  • Has a formal Asylum Seeker document (Act No 130 of 1998)
  • Should a company have an office in a Special Economic Zone (SEZ), and the employee (of any age) renders the majority of his/her services in that zone
  • Special industries, to be designated by the Minister of Finance in consultation with the Ministers of Labour and Trade and Industry

Which Employees do not qualify?

  • Domestic workers are specifically excluded
  • The employee may not be connected to the employer (Section 1 of the Income Tax Act)
  • If there is no minimum wage in place, an employee earning less than R2 000 is excluded

How is the tax incentive calculated?

Assuming qualification:
 
  • Year One : Employee remuneration of :
    • R2 000 or less - 50% of monthly remuneration
    • R2 001 to R4 000 - R1 000
    • R4 001 to R6 000 is based on a formula

Year Two: The incentive is halved :

 

How does an employer deal with part pay periods?

  • The incentive must be pro-rated to match the calculation of remuneration. For example, if an employee starts on the 15th of the month, and earns R2000 in the first month with the company:
  1. His remuneration must be grossed up to R4000 per month
  2. The ETI on this value calculated (R1000 in the first 12 qualifying months of employment)
  3. This results in a R500 ETI for the employer on this employee for this month

Does it run for 24 Months from Date of Employment?

  • Confirmation of this is required, but it appears that the Employer may claim for each employee for up to 24 months, even if they are not consecutive (ETI qualifying months, not months of employment)

What happens if an employee leaves the organisation? Assuming all other qualifying factors are in place

  • The next employer can start counting ETI qualifying months from the first month of employment, i.e. the employees first ETI month will be counted as month 1 for the new employer
  • If the employee goes to an “associated company”, previous ETI months must be taken into account
  • If the employee returns to the first company after an interruption in service, the company must start counting ETI months from where they left off when the employee was disengaged

What happens if the ETI is greater than PAYE?

  • The unclaimed amount may roll over to the following month
  • Note that these unclaimed amounts must be cleared every 6 months, aligned with the tax reporting periods.
  • It may not exceed R 6000 per qualifying employee (otherwise it would not have been cleared in the previous period.

There are still outstanding issues to be finalised before rolling out the Employment Tax Incentive, but the EMP 201 will now include ETI.

How will ETI be verified by SARS?

  • Employers must be able to prove their calculation of ETI in terms of each employee
  • Details of file submissions to SARS are still being finalised
  • It is currently assumed that these will be aligned with the bi-annual IRP5 reporting periods

Links and References