Chartered Accountant & Business Consultant - Meredith Harington

Employing the youth – how the Employment Tax Incentive can benefit you

Unemployment levels in South Africa are of the highest in the world. Rates consistently exceeding 20% include a large portion of our youth, the very generation that the future of our country depends on.

In an effort to address this challenge, the employment tax incentive (“ETI”) scheme created under the Employment Tax Incentive Act, No 26 of 2014 (“ETI Act”) was introduced with the purpose to encourage employers to employ young job seekers, by giving an incentive and tax benefit for the employer.

In this article we will consider the requirements of the scheme and how this can benefit your business. 

The benefit to employers is that the ETI will reduce the cost of hiring young people through a cost-sharing mechanism with the government, by reducing the amount of Pay-As-You-Earn (“PAYE”) owed to the South African Revenue Service (“SARS”) while leaving the wage received by the employee unaffected. This reduces the cost of hiring such young job seekers, often less skilled and lacking in experience.

The scheme came into operation on 1 January 2014 and was originally legislated to come to an end on 28 February 2019, after which date no further ETI credits would have been claimable by any employer. Given the positive outcomes noted in firms that have claimed the ETI in terms of increased employment growth rate, number of employees and employee retention rate, Finance Minister Tito Mboweni announced that the ETI will be extended by ten years. Employers will therefore be able to claim the ETI for qualifying employees until 28 February 2029.

In order to participate in the scheme, both the employer and employee are required to qualify under the ETI Act. Care must be taken that all qualification criteria have been met before claiming the ETI allowance, as SARS is entitled to impose a penalty equivalent to the full amount of the incentive received by the employer in respect of that employee if all requirements have not been met.

The employer must be a private entity and registered with SARS for PAYE; must not be involved in the national, provincial or local spheres of government; and must not be disqualified from receiving the incentive by the Minister of Finance in terms on any labour relations dispute.

The employee must have a valid South African Identification Document; must be between the ages of eighteen and thirty, or be of any age and employed in a Special Economic Zone and industry as indicated by the Minister of Finance; must have been employed by the employer or an associated person of the employer, on or after 1 October 2013; 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 R 2 500, and not more than R 6 500; must not be a domestic worker; and 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 R 1 000 per month for each qualifying employee earning up to R 4 500 per month during the first 12 months of employment. The incentive can be claimed for a maximum period of 24 months per qualifying employee, with the benefit reducing in the second 12 month period.

From an accounting perspective, the ETI amount is reflected as income in the accounting records 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. The ETI allowance will effectively reduce the employee cost expense in the income statement of the company, and be reflected as tax-free income on the tax computation.

It is important that employers who have taken advantage of the 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 to avoid any penalties being imposed. SARS have issued an extensive guide for employers in respect of the ETI should any further guidance be required.

We hope that by outlining the requirements and benefits of this tax incentive, more employers who are able will make use of this structure set in place by the government to help relieve the labour burden present in South Africa.

References: Go Legal, Cliffe Dekker Hofmeyr

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