Tax Alert – Employment Tax Incentive

The Employment Tax Incentive Act 26 of 2013 (ETI) was promulgated on 18 December 2013. The purpose of the ETI is to encourage youth employment and reduce unemployment, and will remain in place until 1 January 2017.

The ETI came into operation on 1 January 2014 and will apply to qualifying employees employed on or after 1 October 2013 by eligible employers, which in effect means that the first claims for the incentive will be submitted with the January 2014 employees’ tax monthly return on or before 7 February 2014.

An employer is eligible for the ETI if the employer:

• is registered for employees’ tax; and

• is not government or a quasi-government entity.

 An employee is a qualifying employee if the employee:

• is between the ages of 18 and 29;

• has a SA ID document or asylum seeker permit;

• is not a connected person to the employer;

• is not a domestic worker;

• was employed on or after 1 October 2013; and

• earns more than a prescribed minimum wage or R2 000 per month where a minimum wage is not prescribed and no more than R6 000 per month.

 The incentive takes the form of a reduction in the employees’ tax payable by the employer. For the first year of employment, the incentive is an amount of up to R1 000 per month, depending on the earnings of the employee. For the second year of employment the monthly incentive reduces to a maximum of R500. For the third and subsequent years of employment there is no further incentive.

Initially, the incentive is limited to the aggregate employees’ tax payable by the employer for any month with any excess rolled over to the subsequent month. The rollover is subject to a capped amount of R6000 and the cap must be applied at the end of each bi-annual employee’s tax return submitted. In the future any excess will be refunded to the employer once the relevant provisions have been made operative.

Qualifying employers should be aware that the incentive gives rise to additional administration and risks such as the following:

• Ensuring that the sliding scale formulae have been correctly applied for the first and second years and to the correct monthly remuneration;

• Ensuring that the employee is a qualifying employee in respect of age and status;

• Ensuring that the required employees’ personal details are retained;

• Ensuring that the employer is not prevented from claiming the ETI in terms of regulations that may be published;

• Ensuring that any months worked at an associated person are taken into account for purposes of determining the incentive.

Employers will be disqualified from claiming the incentive for a particular month if it has any outstanding tax returns or tax debts at the end of such month. As the incentive is reduced from the employees’ tax liability, employers are at risk that should they not qualify for the incentive for whatever reason, they would have understated and underpaid their employees’ tax which would make them liable for the tax, 10% late payment penalties, possible understatement penalties and interest.