Employee Tax – Employment tax incentive

employee taxThe Employment Tax Incentive Act, 2013 (the ETIA) was published in the Gazette on 18 December 2013 and gives effect to the proposals to subsidise the cost of hiring younger workers as first announced by Government in 2010. According to the Media Statement on the Draft Employment Tax Incentive Bill, this new incentive is aimed at encouraging employers to hire young and less experienced work seekers, as stated in the National Development Plan. The ETIA represents the first phase of the incentive and after a review of the effectiveness of the incentive, a second phase which could include additional policy features and possible refinement may be implemented after two years. In this article we discuss the legislative provisions of the first phase of the employment tax incentive.

The incentive will operate by reducing the monthly employees’ tax payable by the qualifying employer in terms of the Fourth Schedule to the Income Tax Act No 58 of 1962 (the Act). Thus if the employer hires a qualifying employee, the employer can reduce the employees’ tax payable by that employer to the South African Revenue Service (SARS) by the amount of the incentive. In other words, the full amount of employees’ tax must still be deducted or withheld from the remuneration of all the employees of the employer, but the employer may deduct the amount of the employment tax incentive for which the employer is eligible from the amount of employees’ tax to be paid over to SARS.

The incentive will be available for the first two years of employment of “qualifying employees” as defined in the ETIA and will cover three different categories of employees, i.e. employees between the ages of 18 and 29 years, employees who are employed by an employer located within a special economic zone and employees who are employed by an employer in a designated industry. If the employer is operating in a special economic zone or a designated industry, there will be no age limitation for qualifying employees.

To qualify for the incentive the employee must also be in possession of a South African ID document or an asylum seeker permit and must receive monthly remuneration that is not more than R6 000 per month. For this purpose, remuneration is as defined in the Fourth Schedule to the Act. The employee must also not be a connected person in relation to the employer e.g. they must not be a relative of the employer. Furthermore, this incentive does not apply to domestic workers.

The determination of the incentive amount to be deducted from employees’ tax will be done on a monthly basis and will not result in any additional monetary benefit for the qualifying employee.
For the first twelve months of employment the amount of the incentive will be as follows:

  • 50 per cent of an employee’s monthly remuneration up to R2 000 per month. (This would only be applicable if the minimum wage prescribed by the relevant sector   determination or bargaining council agreement was less than R2 000 per month.)
  • For an employee with a monthly remuneration of between R2 000 and R4 000, the incentive will be R1 000 per month.
  • For employees with monthly remuneration of between R4 000 and R6 000 the value of the incentive will be between R1 000 and zero per month, as determined in terms of a formula.

For the second twelve months the value of the incentive will be half of the amounts mentioned above.

An employer will be eligible to receive the employment tax incentive if the employer is registered with SARS for the purposes of employees’ tax. This excludes employers which do not have to register as an employer with SARS e.g. because all their employees are below the tax threshold, although it is envisaged that the scope of the incentive may be extended in future. Public sector employers are generally excluded from the incentive, but the Minister of Finance may allow certain public entities to participate by notice in the Gazette and on such conditions as may be prescribed by regulation.

An employer can be disqualified from receiving the employment tax incentive due to any of the following:

  • Non-compliance with the minimum wage payable by virtue of a wage regulating measure i.e. a collective agreement or sectoral determination or bargaining council agreement, or if there is no wage regulating measure if the employer does not pay remuneration to that employee of at least R2 000 per month.
  • If it has been found that the employer has “displaced” (i.e. the dismissal of that employee constitutes an automatically unfair dismissal in terms of section 187(f) of the Labour Relations Act) an employee in order to hire a new “qualifying employee”.
  • If the employer has not met such conditions as may be prescribed by the Minister of Finance by regulation.

In addition, where an employer has received the employment tax incentive despite not being eligible by reason of non-compliance with a wage regulating measure, the employer must pay a penalty to SARS of 100% of the employment tax incentive received in respect of that employee. Where it has been determined that an employee has been displaced the employer will be obliged to pay a penalty to SARS of R30 000 and may be disqualified from receiving the employment tax incentive.

It is important to note that an employer may not reduce the employees’ tax payable by that employer in respect of a month by the amount of the employment tax incentive if, on the last day of that month, the employer has failed to submit any tax return or has any tax debt that is outstanding and which is not subject to an agreement entered into with SARS. In these circumstances the employer will be allowed to carry forward the incentive to the next month, subject to certain limits.

The employer cannot deduct more than the total employees’ tax which is due to SARS in a particular month. However, the incentive amount may be rolled over to the next month where the incentive available exceeds the employees’ tax otherwise due in a month, but subject to certain limits. The ETIA also provides for a reimbursement from SARS of the excess amount of the incentive so carried forward at the end of each employees’ tax reconciliation period, although this reimbursement will only be available from a date to be announced in the Gazette.

The ETIA also covers the situation where an employee who qualified for the incentive moved from one employer to another associated employer or where an employee was only employed for part of a month.

The commencement date of the employment tax incentive is 1 January 2014 and the incentive will cease on 1 January 2017. The incentive will apply to all qualifying employees who are employed on or after 1 October 2013.

ENS Africa
ITA: Fourth schedule (definition of ‘remuneration’)
Labour Relations Act: Section 187(f)