In March 2023 SARS issued a new draft guide to the Employment Tax Incentive. It’s a lengthy 56 pages and can be downloaded from the SARS website.
The employment tax incentive was introduced by the Employment Tax Incentive Act 26 of 2013 which was promulgated on 18 December 2013. This Act has since been amended on a number of occasions. This guide provides general guidance on the incentive.
In order to curb apparent abuse of the ETI, amendments to the definition of “employee”, “monthly remuneration” and section 6 (qualifying employees) were introduced by the Taxation Laws Amendment Act 20 of 2021. These amendments are effective from 1 March 2022 and applicable in respect of years of assessment commencing on or after that date.
The ETI is an incentive that may be claimed by eligible employers and is aimed at encouraging such employers to employ young employees between the ages of 18 and 29, and employees
of any age in SEZs and in any industry identified by the Minister by notice in the Government Gazette. The ETI commenced on 1 January 2014 and will end on 28 February 2029.
An eligible employer can, however, only claim the ETI for a maximum of 24 months per qualifying employee. The 24 months need not be consecutive.
If a qualifying employee is employed on 1 March 2028, the eligible employer will only be allowed to claim the ETI for 12 months for that qualifying employee (if the employee is a qualifying employee in each month) as the ETI will no longer be available from 1 March 2029.
The 24-month period is determined with reference to the period that a qualifying employee is employed and not the periods during which the ETI is actually claimed for that employee. If, for example, an employer does not claim the ETI for a qualifying employee in a month, that month still counts towards the 24 qualifying months that an employer may claim the ETI in respect of that qualifying employee.
Determination of the employment tax incentive
This has been subject to updates in 2017, 2019, and again in 2022. The current status is given in the table below.
Employment tax incentive and the learnership allowance
In addition to the ETI, an employer may be eligible for a deduction of a learnership allowance during a year of assessment if the requirements of section 12H of the Income Tax Act are
Process for claiming the employment tax incentive
Submitting the monthly employees’ tax return (EMP201) and payment of the liability.
The Fourth Schedule requires every employer to submit a monthly return to SARS declaring, amongst others, the amount of employees’ tax that was deducted or withheld from employees’ remuneration during that month. The return must be accompanied by payment of the employees’ tax deducted or withheld. The return and payment must reach SARS by no later than seven days after the end of the month in which the employees’ tax was deducted or withheld, or, if the seventh day falls on a Saturday, Sunday, or public holiday, the last business day before that Saturday, Sunday or public holiday.
In essence, the ETI is paid to the eligible employer through the employees’ tax system by allowing the eligible employer to reduce the employees’ tax that the eligible employer must pay over to SARS every month. The ETI is in essence deductible from the total employees’ tax payable by the eligible employer for the relevant month – regardless of whether the employees’ tax was deducted or withheld from qualifying employees or non-qualifying employees. In other words, the eligible employer’s total employees’ tax liability for the month is simply reduced by the total ETI that the employer qualifies for during that month.
A penalty under the ETI Act can be levied in two instances, namely, non-compliance and displacement of employees.
Under section 4(2) an employer that pays a qualifying employee less than the monthly wage prescribed in section 4(1) is ineligible for the ETI. Should the employer nevertheless claim ETI
in these circumstances, the employer must pay a penalty to SARS of 100% of the ETI received for that employee.
Although the ETI Act does not address the repayment of the ETI amount incorrectly claimed in consequence of the qualifying employee earning less than the minimum wage prescribed under section 4(1), the incorrectly claimed ETI will be recoverable by SARS under Chapter 11 of the TA Act.
The ETI incorrectly claimed will be disallowed and a penalty will be levied by issuing an additional assessment under section 92 of the TA Act.
Displacement of employees
An employer that is found to have unfairly dismissed an employee in order to obtain a benefit under the ETI must pay a penalty of R30 000 for each employee so displaced. In addition, such an employer may be disqualified by the Minister by notice in the Government Gazette from receiving any future incentive.
In determining the disqualification, the Minister may take into account:
- the number of employees that have been displaced by an employer; and
- the effect that the disqualification may directly or indirectly have on the employees of the employer.
SARS will issue an additional assessment to levy the penalty and thereafter follow the collection process under the TA Act. SARS is not afforded any discretion to raise a displacement penalty lower than the R30 000 imposed under section 5(1)(a).
Late payment penalty and interest
An employer who has incorrectly claimed the ETI would not have been entitled to reduce the monthly employees’ tax payment due by the employer. That employer will have accordingly underpaid employees’ tax and must pay a “percentage-based penalty” levied under Chapter 15 of the TA Act. Paragraph 6 of the Fourth Schedule prescribes that the penalty payable is equal to 10% of the unpaid employees’ tax.
Section 222(2) of the TA Act provides that the understatement penalty is the amount resulting from applying the highest applicable understatement penalty percentage in accordance with
the table in section 223 of the TA Act to each shortfall determined under sections 223(3) and 223(4) of the TA Act to each “understatement”.
Implications for other taxes
The ETI is a tax incentive that is available to eligible employers by allowing them to reduce their liability for employees’ tax under the Income Tax Act. Any excess ETI that the eligible employer is unable to recover from any employees’ tax due by the eligible employer is, subject to certain limitations, payable by SARS from the National Revenue Fund.
The ETI amount retained by the employer from the total employees’ tax liability is regarded as an appropriation, grant-in-aid subsidy, or contribution transferred by a public authority as contemplated in the definition of “grant”. As such, any ETI claimed by an eligible employer that is a VAT vendor will be treated as consideration received in respect of a deemed supply made to a public authority under section 8(5A). As such, the ETI grant amount will be subject to VAT at the zero rate under section 11(2)(t) of the VAT Act to the extent that it is in respect of the taxable activities conducted by the enterprise.
With effect from 1 January 2014, any amount of ETI received by an eligible employer under the ETI Act that reduces the employee’s tax payable by that employer is exempt from income tax under section 10(1)(s))of the Income Tax Act.