Are international employers overlooking the benefits of South Africa’s youth wage subsidy? Are international employers overlooking the benefits of South Africa’s youth wage subsidy?

Are international employers overlooking the benefits of South Africa’s youth wage subsidy?
02 Nov 2017

Although South Africa has been operating a youth wage subsidy or employment tax incentive (ETI) since January 2014, a good number of businesses operating in the country have so far failed to claim their ETI credits. As a result, the proposed extension to ETI provision until 28 February 2019, which was announced in October 2016 in the draft Taxation Laws Amendment Bill, has been broadly welcomed.

So what is the ETI and why was it introduced in the first place? ETI was implemented by the South African National Treasury as a means of reducing unemployment, alleviating the country’s skills shortages and creating new jobs.

It enables “tax-compliant” employers to claim a deduction in the amount of Pay-As-You- Earn (PAYE) taxation that they give to the South African Revenue Services (SARS). This deduction is based on certain criteria as long as various conditions are met. But it is available immediately and thereby has a positive impact Although South Africa has been operating a youth wage subsidy or employment tax incentive (ETI) since January 2014, a good number of businesses operating in the country have so far failed to claim their ETI credits. As a result, the proposed extension to ETI provision until 28 February 2019, which was announced in October 2016 in the draft Taxation Laws Amendment Bill, has been broadly welcomed. on an employer’s cash reserves.

Formal legislation covering ETI is found in the Employment Incentive Act No. 26 of 2013 (EICA). As ETI is claimed at the same time as PAYE monthly declarations are made, employers do not need to go through a special application process to access the benefits.

When ETI was first introduced in 2014, uptake was very slow. This situation was largely due to misunderstandings around compliance issues and how ETI was calculated. Notwithstanding, between 1 January 2014 and 31 March 2016, employers benefitted from the credits to the sum of R6.06 billion (US$450 million), a scenario that has, in turn, had a positive impact on the number of new jobs created in the country. (National Treasury reported figures, 2016)

Who qualifies for ETI?

There are a number of criteria that an employer needs to meet in order to claim ETI. They must:

• Be registered for PAYE or comply with the registration requirements for PAYE (Employers cannot register simply to claim ETI)
• Not be in government or operate as a public entity (listed in Schedule two or three of the Public Finance Management Act) or as a municipal entity
• Not be disqualified by the Minister of Finance as a result of not meeting the conditions prescribed or due to laying off employees
• Be ETI tax-compliant on the day they submit the ETI claim. (Employers need to sign the monthly employer declaration (EMP201) form to indicate that they are compliant. This means that all of their tax affairs, and not just PAYE, must be compliant and there should be no outstanding tax returns for any tax type nor any outstanding tax payments)
• Only claim deductions for “qualifying employees”.

Who are “qualifying employees”?

Qualifying employees are individuals who meet all of the requirements listed below. They must:
• Have a valid South African identity document, an identity document issued under the terms of the Refugee Act or an Asylum Seeker permit
• Be between the ages of 18 and 29 (There are exceptions to the age requirement for employers operating in special economic zones and industries designated by the Minister of Finance)
• Not be a domestic worker
• Not be a “connected person” to the employer in question
• Be taken on by the employer (or a person associated with the employer) on or after 1 October 2013
• Be paid a minimum wage of at least R2,000 (US$148) per month (where they are employed for 160 hours a month) and not more than R6,000 (US$445) per month. (If their employer is subject to wage-regulating measures, the minimum wage may vary, but it may not be less than the minimum wage prescribed by the regulating measure).

Employers are prohibited from terminating the services of existing non-qualifying employees in order to hire new ones who would meet ETI requirements. The penalties for doing so are very severe and would also result in the employer concerned becoming “disqualified” from receiving future ETI credits.

How is ETI calculated?

ETI can only be claimed for a maximum of 24 months for each employee, and ETI credits decrease in value after the first 12 months. The likely value of an ETI credit can be calculated using the table below:

Remuneration per month

First 12 months

Second 12 months

 

R0 – R2,000

50% of monthly remuneration

25% of monthly remuneration

R2,001 – R4,000

Fixed at R1,000

Fixed at R500

R4,001 – R6,000

Formula:

X = A – (B * (C-D) )

X = tax rebate

A = R1,000

B = 0.5

C = monthly remuneration

D = R4,000

Formula:

X = A – (B * (C-D) )

X = tax rebate

A = R500

B = 0.25

C = monthly remuneration

D = R4,000

 

Employers can reduce their PAYE liability based on the value of the ETI credit. During the full claim period, there are 28 ETI critical events in relation to any single employee that must be managed. As a result, it is crucial for payroll managers to ensure that they have processes in place to mitigate the risk associated with these events.

From 1 March 2015, in situations where employees do not work a full 160 hours per month, the hours they do work are used to apportion ETI credits. An example may help to explain:

Imagine that an employer has 10 “qualifying employees” who each earn R2,100 (US$156), bringing the employer’s total PAYE bill to R80,000 (US$5,937) per month. If these figures relate to the first 12 months period, the employer would be entitled to a credit of R10,000 (US$742) or 10 * R1,000 (US$74) because the employees fall into the second remuneration bracket in the table above.

Therefore, the employer would only need to pay SARS R70,000 (US$5,193) to cover PAYE – that is, the R80,000 PAYE liability less the R10,000 ETI credit. From the employer’s perspective, this amounts to a 47.6% reduction in direct labour costs.

Wages for 10 employees for

12 months

R252,000

Less: ETI Credit (Incentive) for

12 months

R120,000

Actual cost of employment for

12 months

R132,000

 

So it is easy to see why employers should take advantage of the full benefits of ETI legislation.

“The Tax Administration Act places the “burden of proof ” on employers, making it essential that they maintain accurate records in support of each ETI credit claimed.”

 

Burden of proof

The Tax Administration Act places the ‘burden of proof ’ on employers, making it essential that they maintain accurate records in support of each ETI credit claimed. As a minimum, the following information should be readily available during a SARS audit:

• Proof such as employment contracts/copies of payslips/payroll reports generated via software packages that employees were paid the minimum wage as prescribed by regulation, or if no minimum wage was paid, that employees were given at least R2,000 per month
• Evidence that no returns were outstanding or taxes were due on the date of each submission – for example, employers can obtain tax clearance certificates at least every six months
• Detailed computations each month on each employee in the form of reports generated by payroll software
• Copies of employment contracts and identity documents together with company policies relating to working hours and salaries.

How does ETI reimbursement work?

Most employers who qualify to claim ETI will never receive a physical refund from SARS. As mentioned previously, the credit is offset against the PAYE owed when the monthly EMP201/PAYE return form is submitted.

However, if the ETI credit is greater than the amount of PAYE owed, SARS will pay a one-off reimbursement. Refunds only take place every six months, following the tax filing period and after SARS has reviewed any documents that may be requested as part of the validation process.

Conclusion

The aim of ETI credits is to enable employers to release working capital into their business in order to help them grow. Cutting employment costs also makes companies more competitive at a local and global level. But ETI credits can also be used to finance training and education programmes for employees.

As a result, payroll managers would be advised to promote these benefits in order to demonstrate the “value add” that they can bring to the business. By the way, SARS also benefits from the ETI process – because taxpayers need to have all their tax affairs in order if they are to claim the ETI credit, compliance levels increase.

But there are also a number of risks involved in administering ETI. Ensuring that payroll software is able to track all of the required qualifying criteria is an important means of controlling that risk. Special care must be taken if transferring employees between group companies in order to ensure that ETI is administered correctly.

ETIs are essentially cash benefits that already belong to eligible employers. All they need to do is claim them - and payroll managers have an important role here in ensuring that they access the maximum number of credits in the time that is left.

 

After graduating with a degree majoring in taxation, accounting and managerial accounts and finance, Sharon gained considerable experience in the fields of training, tax issues and financial ICT management, including mergers and acquisitions. She progressed to a position within South African Revenue Services before moving on to Anglo American Property Services, where she became group financial director with responsibility for ICT and payroll. Sharon joined Praxima Payroll Systems in 2001 and steered the company through the development of its own software. It is now a provider of payroll services to some of the largest legal practices in South Africa. She moved to Celergo to take up the role of head of operations UK. She was tasked with rightsizing its operations and refining the payroll processes to improve productivity. Sharon was asked to take on the COO role at Praxima Holdings in 2013 and has helped the company extend its footprint into Africa and beyond. She is a registered tax practitioner and member of CIPP and GPA.

 

Although South Africa has been operating a youth wage subsidy or employment tax incentive (ETI) since January 2014, a good number of businesses operating in the country have so far failed to claim their ETI credits. As a result, the proposed extension to ETI provision until 28 February 2019, which was announced in October 2016 in the draft Taxation Laws Amendment Bill, has been broadly welcomed.

So what is the ETI and why was it introduced in the first place? ETI was implemented by the South African National Treasury as a means of reducing unemployment, alleviating the country’s skills shortages and creating new jobs.

It enables “tax-compliant” employers to claim a deduction in the amount of Pay-As-You- Earn (PAYE) taxation that they give to the South African Revenue Services (SARS). This deduction is based on certain criteria as long as various conditions are met. But it is available immediately and thereby has a positive impact Although South Africa has been operating a youth wage subsidy or employment tax incentive (ETI) since January 2014, a good number of businesses operating in the country have so far failed to claim their ETI credits. As a result, the proposed extension to ETI provision until 28 February 2019, which was announced in October 2016 in the draft Taxation Laws Amendment Bill, has been broadly welcomed. on an employer’s cash reserves.

Formal legislation covering ETI is found in the Employment Incentive Act No. 26 of 2013 (EICA). As ETI is claimed at the same time as PAYE monthly declarations are made, employers do not need to go through a special application process to access the benefits.

When ETI was first introduced in 2014, uptake was very slow. This situation was largely due to misunderstandings around compliance issues and how ETI was calculated. Notwithstanding, between 1 January 2014 and 31 March 2016, employers benefitted from the credits to the sum of R6.06 billion (US$450 million), a scenario that has, in turn, had a positive impact on the number of new jobs created in the country. (National Treasury reported figures, 2016)

Who qualifies for ETI?

There are a number of criteria that an employer needs to meet in order to claim ETI. They must:

• Be registered for PAYE or comply with the registration requirements for PAYE (Employers cannot register simply to claim ETI)
• Not be in government or operate as a public entity (listed in Schedule two or three of the Public Finance Management Act) or as a municipal entity
• Not be disqualified by the Minister of Finance as a result of not meeting the conditions prescribed or due to laying off employees
• Be ETI tax-compliant on the day they submit the ETI claim. (Employers need to sign the monthly employer declaration (EMP201) form to indicate that they are compliant. This means that all of their tax affairs, and not just PAYE, must be compliant and there should be no outstanding tax returns for any tax type nor any outstanding tax payments)
• Only claim deductions for “qualifying employees”.

Who are “qualifying employees”?

Qualifying employees are individuals who meet all of the requirements listed below. They must:
• Have a valid South African identity document, an identity document issued under the terms of the Refugee Act or an Asylum Seeker permit
• Be between the ages of 18 and 29 (There are exceptions to the age requirement for employers operating in special economic zones and industries designated by the Minister of Finance)
• Not be a domestic worker
• Not be a “connected person” to the employer in question
• Be taken on by the employer (or a person associated with the employer) on or after 1 October 2013
• Be paid a minimum wage of at least R2,000 (US$148) per month (where they are employed for 160 hours a month) and not more than R6,000 (US$445) per month. (If their employer is subject to wage-regulating measures, the minimum wage may vary, but it may not be less than the minimum wage prescribed by the regulating measure).

Employers are prohibited from terminating the services of existing non-qualifying employees in order to hire new ones who would meet ETI requirements. The penalties for doing so are very severe and would also result in the employer concerned becoming “disqualified” from receiving future ETI credits.

How is ETI calculated?

ETI can only be claimed for a maximum of 24 months for each employee, and ETI credits decrease in value after the first 12 months. The likely value of an ETI credit can be calculated using the table below:

Remuneration per month

First 12 months

Second 12 months

 

R0 – R2,000

50% of monthly remuneration

25% of monthly remuneration

R2,001 – R4,000

Fixed at R1,000

Fixed at R500

R4,001 – R6,000

Formula:

X = A – (B * (C-D) )

X = tax rebate

A = R1,000

B = 0.5

C = monthly remuneration

D = R4,000

Formula:

X = A – (B * (C-D) )

X = tax rebate

A = R500

B = 0.25

C = monthly remuneration

D = R4,000

 

Employers can reduce their PAYE liability based on the value of the ETI credit. During the full claim period, there are 28 ETI critical events in relation to any single employee that must be managed. As a result, it is crucial for payroll managers to ensure that they have processes in place to mitigate the risk associated with these events.

From 1 March 2015, in situations where employees do not work a full 160 hours per month, the hours they do work are used to apportion ETI credits. An example may help to explain:

Imagine that an employer has 10 “qualifying employees” who each earn R2,100 (US$156), bringing the employer’s total PAYE bill to R80,000 (US$5,937) per month. If these figures relate to the first 12 months period, the employer would be entitled to a credit of R10,000 (US$742) or 10 * R1,000 (US$74) because the employees fall into the second remuneration bracket in the table above.

Therefore, the employer would only need to pay SARS R70,000 (US$5,193) to cover PAYE – that is, the R80,000 PAYE liability less the R10,000 ETI credit. From the employer’s perspective, this amounts to a 47.6% reduction in direct labour costs.

Wages for 10 employees for

12 months

R252,000

Less: ETI Credit (Incentive) for

12 months

R120,000

Actual cost of employment for

12 months

R132,000

 

So it is easy to see why employers should take advantage of the full benefits of ETI legislation.

“The Tax Administration Act places the “burden of proof ” on employers, making it essential that they maintain accurate records in support of each ETI credit claimed.”

 

Burden of proof

The Tax Administration Act places the ‘burden of proof ’ on employers, making it essential that they maintain accurate records in support of each ETI credit claimed. As a minimum, the following information should be readily available during a SARS audit:

• Proof such as employment contracts/copies of payslips/payroll reports generated via software packages that employees were paid the minimum wage as prescribed by regulation, or if no minimum wage was paid, that employees were given at least R2,000 per month
• Evidence that no returns were outstanding or taxes were due on the date of each submission – for example, employers can obtain tax clearance certificates at least every six months
• Detailed computations each month on each employee in the form of reports generated by payroll software
• Copies of employment contracts and identity documents together with company policies relating to working hours and salaries.

How does ETI reimbursement work?

Most employers who qualify to claim ETI will never receive a physical refund from SARS. As mentioned previously, the credit is offset against the PAYE owed when the monthly EMP201/PAYE return form is submitted.

However, if the ETI credit is greater than the amount of PAYE owed, SARS will pay a one-off reimbursement. Refunds only take place every six months, following the tax filing period and after SARS has reviewed any documents that may be requested as part of the validation process.

Conclusion

The aim of ETI credits is to enable employers to release working capital into their business in order to help them grow. Cutting employment costs also makes companies more competitive at a local and global level. But ETI credits can also be used to finance training and education programmes for employees.

As a result, payroll managers would be advised to promote these benefits in order to demonstrate the “value add” that they can bring to the business. By the way, SARS also benefits from the ETI process – because taxpayers need to have all their tax affairs in order if they are to claim the ETI credit, compliance levels increase.

But there are also a number of risks involved in administering ETI. Ensuring that payroll software is able to track all of the required qualifying criteria is an important means of controlling that risk. Special care must be taken if transferring employees between group companies in order to ensure that ETI is administered correctly.

ETIs are essentially cash benefits that already belong to eligible employers. All they need to do is claim them - and payroll managers have an important role here in ensuring that they access the maximum number of credits in the time that is left.

 

After graduating with a degree majoring in taxation, accounting and managerial accounts and finance, Sharon gained considerable experience in the fields of training, tax issues and financial ICT management, including mergers and acquisitions. She progressed to a position within South African Revenue Services before moving on to Anglo American Property Services, where she became group financial director with responsibility for ICT and payroll. Sharon joined Praxima Payroll Systems in 2001 and steered the company through the development of its own software. It is now a provider of payroll services to some of the largest legal practices in South Africa. She moved to Celergo to take up the role of head of operations UK. She was tasked with rightsizing its operations and refining the payroll processes to improve productivity. Sharon was asked to take on the COO role at Praxima Holdings in 2013 and has helped the company extend its footprint into Africa and beyond. She is a registered tax practitioner and member of CIPP and GPA.

 

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