Employment Tax Incentive Part 2

The meaning of “employee” for purposes of the Employment Tax Incentive Act

Source: SARS’ Draft Interpretation Note of March 2023

Please read the previous article “Draft Guide to the Employment Tax Incentive” in conjunction with this article.


The ETI Act has been introduced to provide an incentive in order to encourage employment creation. The Explanatory Memorandum on the Employment Tax Incentive Bill, 2013, states that
“In response to the high rate of youth unemployment, Government wishes to implement an incentive mainly aimed at encouraging employers to hire young and less experienced work seekers Government’s aim is that the incentive should assist in the generation of sustainable employment opportunities that enjoy protection under labour law legislation.”

The incentive provided for under the ETI Act is fundamentally based on an employer-employee relationship. The ETI Act does not define “employer”. Section 3 is, however, unambiguous as to who are eligible employers. An employer is eligible to receive the ETI only if the employer is registered for purposes of withholding and paying over to SARS the employees’ tax under paragraph 15 of the Fourth Schedule. The ETI Act, however, defines “employee”.

Besides the requirements contained in this definition, a number of criteria must be met before a person will be considered to be an employee for purposes of the ETI Act.

In some instances, taxpayers become party to composite arrangements which are arguably aimed at abusing the incentive. These composite arrangements typically involve a learning institution, an organisation, and a person for a limited period of either 12 or 24 months. Under the arrangement, the organisation is responsible for paying an agreed-upon training fee to the learning institution, on behalf of that person.

Contractually, the parties refer to this training fee as the person’s basic remuneration.

The learning institution is responsible for providing the person with training, mostly in the form of an accredited SETA training course, as well as all the lectures, and training facilities for the duration of the arrangement. In some cases, practical field training is included. Notwithstanding that an employment contract may have been entered into under this composite arrangement, no work is carried out by the person for the organisation.

Under these arrangements, the person generally does not render any services to the organisation and does not obtain practical work experience. The person receives accredited education in the form of training courses through an accredited learning institution. Under some arrangements, the person may be exposed to work-based exercises and activities by another organisation (not the primary organisation) which pays only a fixed monthly fee. These fees are paid to the learning institution and not to the person.

The number of persons contracted is often more than what is reasonably necessary to conduct the organisation’s business.

In an attempt to curb the apparent abuse of the ETI a number of amendments were introduced to the ETI Act, namely:

  • an amendment to the definition of “employee” by inserting additional requirements;
  • the inclusion of the proviso to the definition of “monthly remuneration”; and
  • the inclusion of the proviso to section 6.

Section 6

Qualifying employees.

An employee is a qualifying employee provided that the employee is NOT, in fulfilling the conditions of their employment contract during any month, MAINLY INVOLVED in the activity of studying, unless the employer and employee have entered into a learning programme as defined in section 1 of the Skills Development Act, 1998 (Act No. 97 of 1998), and, in determining the time spent studying in proportion to the total time for which the employee is employed, the time must be based on actual hours spent studying and employed.

The term “employee” is defined in and for purposes of the ETI Act. The definition of “employee” in paragraph 1 of the Fourth Schedule or in any other Act will not apply for purposes of the ETI.

Under the definition of “employee”, the person must:

  1. be a natural person;
  2. work for another person and in any other manner directly or indirectly assist in carrying on or conducting the business of that other person;
  3. receive or be entitled to receive remuneration from that person.
  4. be documented in the records of that other person as envisaged in the record-keeping provisions in section 31 of the Basic Conditions of Employment Act; and
  5. not be an independent contractor.

All the abovementioned requirements must be met for the person to be considered an “employee” as defined in section 1(1).

It is important to note that the ETI is an incentive and thus when dealing with provisions creating tax privileges a strict interpretation of the provisions should be applied.

The third requirement (above) of the definition of “employee” is that the person should receive or be entitled to receive remuneration from the employer for which work is performed
and for assisting in carrying on or conducting the business of that employer. If the person works for a person but receives remuneration from another person for the work performed, the person will not meet the requirement of the definition of “employee”.

The term “remuneration” is not separately defined in the ETI Act. Having regard to section 1(2), and read together with the definition of “monthly remuneration”, the term bears the meaning ascribed to it in paragraph 1 of the Fourth Schedule.

The word “remuneration” is defined in the Fourth Schedule as any amount of income that is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend, paid in cash or otherwise, and is not dependent on whether the amount is paid or payable for services rendered. The definition is subject to a number of inclusions and exclusions.

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