An in-depth view of the Section 12H Tax Incentive

LabourNet

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With the official South African unemployment rate of 34.9% in the third quarter of 2021, Skills Development has become an even more important part of our country’s strategy to create jobs and develop the skills of the South African workforce which in turn will reduce poverty, improve the quality of life for workers, their prospects of being employed and labour mobility.

To encourage employers to participate in Skills Development the government has implemented numerous incentives (for a list of incentives refer to our recent B-BBEE and Skills Development Compliance article) of which one of those is the Section 12H Tax Incentive. This article is focused on providing an in-depth view of the incentive, the benefits of the incentive, who qualifies for it and how it is calculated.

What is the Section 12H Tax Incentive?

The Section 12H Tax Incentive provides employers, who implement formal learnerships and provide accredited workplace training (apprenticeships), with an additional tax deduction over and above their normal tax deductions. This additional deduction is intended to encourage employers to create jobs and train employees in a regulated environment.

The Section 12H Tax Incentive, which is stipulated in the Income Tax Act of 1962 as amended, was initially available for all learnership agreements entered into on or after the 1st of October 2001 up until the 1st of October 2016 during which all level of qualification were equally incentivised. After review in 2016, the Section 12H Tax Incentive was found sufficiently effective and therefore extended and amended with:

  • a new sunset clause of 1 April 2022,

  • the inclusion of different incentives for different levels of qualifications to encourage skills development in categories where demand is the highest and

  • the improvement of analysis mechanisms through the compulsory completion of the IT180 form by all employers who claim the Section 12H Tax Incentive.

Fortunately, in a recent Government Gazette on 19 January 2022 (No. 45787), the Income Tax Act of 1962 was amended yet again to extend the sunset clause of Section 12H Tax Incentive from 1 April 2022 with an additional 2 years thereby making the new deadline 1 April 2024.

This comes as a huge relief to many organisations who are facing not only increasing B-BBEE pressure but also financial constraints due the recent pandemic. It’s clear that this extension is due to the Governments continued focus and emphasis on educational spend and creation of employment opportunities, however it’s alarming to see that the amount of tax allowances claimed by employers has shown a massive decrease compared to 2017/2018 where R 721 million was spent on tax allowances compared to the 2019/2020 period where only R 415 million was spent as seen in the 2022 Budget Report. This decrease might be caused by the lack of proper awareness and knowledge of the process of claiming the Section 12H Tax Incentive which can negatively influence the decision on whether the 1 April 2024 deadline will be extended yet again. The focus of this article is therefore to create awareness and educate employers on how the incentive works.

What are the benefits of the Section 12H Tax Incentive?

The Section 12H Tax Incentive has as two types of allowances which are deductible by an employer in the year of assessment namely:

1. Commencement Allowance (also known as annual allowance)

  • An allowance per learner to which an employer is entitled to in any year of assessment in which a learner is registered on a learnership / apprenticeship

  • The annual allowance is subject to pro-rata per month if the registered learnership agreement does not cover a full 12 month period during any year of assessment. For example: if the employer’s year of assessment ends on 31 December 2021 and the employer starts a 12 month learnership agreement on 1 October 2021, the employer will be able to claim a pro-rata annual allowance for 3 months (3 / 12 X annual allowance) for the current year of assessment as only 3 months were completed within the year of assessment.

  • The remainder of the annual allowance is claimable in the following year based on how many months are completed in the following year. For example: if the rest of the 12 months are completed as per the afore mentioned example, then the pro-rata annual allowance for 9 months will be claimable (9 / 12 X annual allowance)

  • If the learner however doesn’t complete the full 12 month period the employer will only be able to claim for the completed period that the learnership programme was running during the year of assessment.

The annual allowance is subject to the NQF Level of the qualification and the disability status of the learner. The below table stipulates the applicable annual allowances:

2. Completion Allowance

  • An allowance per learner to which an employer is entitled to in any year of assessment in which a learner has successfully completed a learnership / apprenticeship. This means that an employer can’t claim the completion allowance in a subsequent year of assessment should the employer have failed to claim the completion allowance in the year of assessment when the learnership was completed.

  • It’s important that an employer should be able to submit sufficient evidence of the successful completion of the learnership agreement when applying the allowances and this can include confirmation from the SETA of completion, statement of results issued by the training provider or an evaluation report by a registered assessor on workplace experience gained.

  • For a learnership agreement equal to or exceeding 24 months, the completion allowance will be multiplied by the number of consecutive 12-month periods within the duration of the learnership agreement. For example: if a learnership agreement is 30 months long, the completion allowance will be multiplied by 2 since there are two full 12 month periods within the 30 month learnership agreement.

The completion allowance is subject to the NQF Level of the qualification and the disability status of the learner. The below table stipulates the applicable completion allowances:

What additional criteria exist to qualify for the Section 12H Tax Incentive?

The Employer:

An allowance under Section 12H may only be claimed by the “Lead employer” in the registered learnership agreement and not the “Host” Employer or any other party.

It’s also important to note that the allowance is not linked to the skills development levy (SDL) contributions made by an employer and therefore even companies who are exempt from paying levies may claim the Section 12H Tax Incentive.

Finally, the definition of “employer” as per Section 12H is very important in that a company will not be deemed an “employer” if the learner did not commence employment and doesn’t have an employment agreement in place with the employer.

The Learnership Agreement

The “registered learnership agreement”, as defined in Section 12H(1), is the tri-partite agreement which is registered in accordance with the Skills Development Act with a Sector Education and Training Authority (SETA) and is entered into by the learner, employer and training provider before the 1st of April 2024. In reality however, registrations of learnerships are frequently delayed because of a variety of reasons and therefore Section 12H(2)(c) and 2A(c) provides that learnership agreements which have not been registered from inception will be deemed to have been registered on the day they are entered into, provided they are registered within 12 months after the last day of the employer’s year of assessment.

Secondly, employers should avoid implementing a learnership agreement which contains the same education and training components as the previous registered learnership for the same learners.

Finally, the learnership agreement entered into must be in accordance with a trade carried on by the employer and because the type of trade is not specified in Section 12H this can be any lawful trade as long as the employer derives income from the trade.

The Learner

The definition of “learner” in Section 12H refers to a “learner” as defined by the Section 1 of the Skills Development Act which includes apprentices and therefore the Section 12H Tax Incentive is applicable to apprenticeships as well.

Furthermore, it’s important that employers avoid placing learners on yet another learnership if the learner previously failed to complete a registered learnership agreement with the same employer.

Reporting Requirements

Employers who are eligible for the annual / completion allowance must, for each year of assessment, submit any information relating to the learnership as required by the SETA with which the learnership agreement is registered in the form, manner, place and time indicated by the SETA.

Additionally, when claiming the Section 12H Tax Incentive, employers will also be expected to complete the IT180 form which is to be submitted to SARS for review with all relevant documents as referred to earlier in this article.

In conclusion

The Section 12H Tax Incentive is a valuable incentive to encourage employers to actively participate in upskilling our country’s youth and reduce unemployed which will result in them being more employable and financially empowered, ultimately leading to less strain and dependence on government and social grants.

To assist our country and in line with our goal to contribute to the upskilling of youth in our country, we would like to offer guidance and assistance to any organisation who wants to implement learnerships and apprenticeships within their organisation so that they can qualify for the Section 12H Tax Incentive.

 

For more information on the above topic, please contact the LabourNet Helpdesk at

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