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Employment Tax Incentive

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The Employment Tax Incentive Act, Act 26 of 2013, was signed into law on 17 December 2013 and is effective from 1 January 2014 and applies to any employee, who qualifies, employed from 1 October 2013.  This act, commonly known as the Youth Wage Subsidy is an easy act to follow but does have some areas of concern. It must also be noted that no employer will be able to receive the employment tax incentive after 1 January 2017.

1. Eligible Employers

Any employer who is registered for PAYE (to withhold tax from an employee) as per the 4th schedule of the Income Tax act is eligible to receive the employment tax incentive with the following exceptions:

  • National, provincial or local government of the Republic of South Africa;
  • Public entities listed in Schedule 2 or 3 to the Public Finance Management act, unless the entity designated by the Minister of Finance by notice in the Government Gazette;
  • Municipal entities defined in section 1 of the Local Government Municipal Systems Act.

In addition, the following employers will be disqualified from receiving the incentive:

  • Those disqualified by the Minister of Finance for displacing employees for the purpose of receiving the incentive;
  • Those who do not meet conditions as the Minister of Finance, after consulting the Minister of Labour, prescribes by regulation including –
    • Conditions based on the training of employees;
    • Conditions based on the classification of trade in the most recent Standard Industrial Classification Code issued by Statistics South Africa.

Eligible employers who do not comply fully with the provisions set out in the act, or try to dismiss and re-hire, or use any means to displace employees to gain the incentive will be penalised and may be disqualified by the Minister of Finance from receiving the incentive. It is important that the “spirit” of the employment tax incentive act is adopted by employers. The penalty per displaced employee is R 30 000 that will be paid to SARS.

2. Qualifying Employees

The purpose of the employment tax incentive act is to encourage employers to provide first time employment to the youth of South Africa. Historically “first time” job seekers had little success in finding employment out of school with only 5% being successful. To qualify an employee is a qualifying employee if the employee:

  • Is between the ages of 18 and 29 years of age at the end of any month for which the incentive is claimed;
  • Is employed by an employer who has a fixed place of business within a special economic zone designated by the Minister of finance and the employees renders services to the employer mainly within that zone; or
  • Is employed by an employer in an industry designated by the Minister of Finance, after consultation with the Minister of Labour and the Minister of Trade and Industry, by notice in the Government Gazette;
  • Is in possession of a valid South African Identity Document; or
  • Is in possession of an asylum seeker permit;
  • With relation to the employer, is not a connected person to the employer (e.g. not a family member of the owner.);
  • Is not a domestic worker;
  • Was employed by the employer or associated person of the employer on or after 1 October 2013;
  • Is not an employee of any employer excluded from receiving the employment tax incentive.

3. Determining the Amount of the Incentive

It is important to take note that when a new employee, who qualifies for the employment tax incentive, is appointed, that the employee must be appointed at the minimum wage of that particular industry. If an industry does not have a stipulated minimum wage, then the minimum wage to qualify will be R 2 000 per month.

From 1 January 2014, each month that an employer employs a qualifying employee, the tax incentive can be calculated with respect to each qualifying employee. In respect to each month that an employee qualifies for the incentive the calculation is based on the total remuneration of the employee. In the first 12 months that the employee qualifies, the amount of the tax incentive based on their remuneration is –

  • R 2 000 or less, an amount of 50% of the monthly remuneration;
  • More than R 2 000 but less than R 4 001, an amount of R 1 000;
  • More than R 4 000 but less than R 6 001, an amount determined by the following formula:
  • X = A – (B x (C – D))
  • In which formula –
    • “X” is the monthly employment tax incentive;
    • “A” is the amount of R 1 000;
    • “B” is the number 0.5;
    • “C” is the employee’s monthly remuneration;
    • “D” is the amount of R 4 000.
  • More than R 6 000, an amount of Nil.

In the second 12 months that the same employee is employed the amount of the tax incentive based on their remuneration is-

  • R 2 000 or less, an amount of 25% of the monthly remuneration;
  • More than R 2 000 but less than R 4 001, an amount of R 500;
  • More than R 4 000 but less than R 6 001, an amount determined by the following formula:
  • X = A – (B x (C – D))
  • In which formula –
    • “X” is the monthly employment tax incentive;
    • “A” is the amount of R 500;
    • “B” is the number 0.25;
    • “C” is the employee’s monthly remuneration;
    • “D” is the amount of R 4 000.
  • More than R 6 000, an amount of Nil.

If an employee was previously employed on or after 1 January 2014 by an associated person to the company then the 12 month period is calculated from the employee’s original date of employment.

If an employee is only employed for part of a month, then the remuneration received in respect of that month must then be calculated to what will be received in a full month, or to the ratio of a full month. Remember that the incentive must be the ratio for that month, or calculated at the full month and then calculated to the ratio of the time actually worked.

EXAMPLE

Employee A is 24 years of age and is employed for the first time by a company who is eligible for the employee tax incentive. Employee A is a qualifying employee who earns R 4 500 per month. The tax incentive will be calculated as follows for the month:
                        A = R 1 000
                        B = 0.5
                        C = R 4 500
                        D = R 4 000
        X = R 1 000 – (0.5 x (R 4 500 – R 4 000))
            = R 750.

The total employment tax incentive amount calculated for the month is withheld from the tax payment to SARS at the end of each month. SARS will not see this as a short payment on the EMP201. The new EMP201 has been set up for the employer to show what amount is being deducted.

PLEASE CLICK HERE TO ACCESS A COPY OF THE NEW EMP201

PLEASE NOTE

An employer may not deduct more than the tax owing to SARS each month through the PAYE system. If a rebate is necessary this will be paid by SARS in August and February each year. It has not been announced as yet how this re-imbursement will be handled. The amount that is in excess of the tax liability of the company may be rolled over to the following month if there is enough tax to cover the incentive and roll over amount. This roll over is limited to R 6 000 per qualifying employee as at the end of the employers 6 month reconciliation period.

It is also important to note that an employee may only claim for the incentive for the first 24 months the employee qualifies for the incentive. After the 24 months is complete the incentive for that employee will cease.

ITEMS TO NOTE

The employment tax incentive bill is set on monthly remuneration only. This means that weekly and fortnightly paid payrolls must use the equivalent monthly amount when calculating the tax incentive. This can and will cause fluctuations and may even cause a qualifying employee in one month not to qualify in the following month, particularly in a five week month or where a bonus etc. is paid in a particular month. These months will not add to the employees qualifying months during the period of the tax incentive.

Full remuneration as described in Schedule 4 of the Income Tax Act, Act no 58 or 1962, must be used when calculating the employment tax incentive. This means that remuneration items like overtime, commission and bonuses can cause a qualifying employee to go over the R 6 000 limit.

If an employer has failed to submit any returns to SARS as laid out in legislation, or has any tax debt, they may not withhold the tax incentive calculated unless:

  • An agreement has been entered into with SARS (Section 167 and 204 of  the Tax Administration Act);
  • The debts has been suspended (Section 164 of  the Tax Administration Act);
  • Does not exceed the debt amount listed in Section 169(4) of the Tax Administration Act.

If an employer has failed to comply as per the above, and makes the relevant corrections so that there is now compliance, or if the incentive was not claimed for a month, this amount can be added to the claim in the following month, as long as there is enough tax liability to cover it. The employment tax incentive can be rolled over for up to a six month period as described above.

4. Displacement

It is important to note that there are severe penalties to be observed where an employee is “displaced” for the purpose of a company being able to employee a qualifying employee to receive the incentive. This means that where an employer dismisses an employee in a manner deemed to be automatically unfair in terms of section 187(f) of the Labour Relations Act, and the employer replaces an employee so dismissed with a qualifying employee, the employer would be liable for penalties.

In terms of section 5 of this Act, an employer deemed to have displaced an employee:

  • Must pay a penalty to SARS amounting to R30 000 per displaced employee; and
  • May be disqualified from receiving the employment tax incentive by the Minister of Finance.

Employers are thus cautioned not to terminate older employees simply to replace them with young employees qualifying for the incentive, as the penalties involved far outweigh the benefits that could be derived from gaining the incentive for such employees.

5. Outstanding Issues

There are still a number of issues that have to be looked at by SARS and Treasury regarding the act. Until these issues are resolved, it is imperative that the eligible employers still try to make use of the employment tax incentive scheme, even though they may initially get the implementation a little wrong.

Some of the areas where there are still concerns:
  • If an employee works for two different eligible employers, who are unaware that about the other employment or the terms of the employment, and the employee earns R 2 000 at each employer, there is a chance of an over claim for the tax incentive, because the amount the incentive should be calculated against is R 4 000. Each employer will claim R 1 000 for the incentive making the incentive R 2 000 where it should have only been a total of R 1 000.
  • An eligible employer employs a casual at R 300 for one day’s work. If this is grossed up as per the legislation, then the employee falls outside the employment tax incentive. Is this correct?
  • As mentioned earlier, it is illegal, or against the Employment Tax Incentive Act, to “displace” an employee in order to hire a younger employee. What if the company now has to dismiss an employee due to non-performance and this employee claims at the CCMA that this was displacement in order for a younger employee to replace him/her. Or, an employee who is a qualifying employee needs to be dismissed after three months due to non-performance, could result in the employer paying the 12 months salary for unfair dismissal. And this may happen where a company has tried to give an inexperienced employee a chance but is now seen as the “bad guy” when they have to dismiss this same employee. This is a problem that needs to be discussed and sorted out. The unions are not totally behind the Employment Tax Incentive Act because they say the act will be used to displace employees.