HR Pulse

Employment Tax Incentive - Change in the definition of ‘Monthly Remuneration’ and increasing SARS focus

The Employment Tax Incentive (ETI) continues to play a role in the Government policy of creating employment opportunities for the youth of South Africa. The 2022 South African Budget highlights included a 50% increase in the maximum monthly value of the ETI claimed by employers, which was effective from 1 March 2022.

The 2021 Taxation Laws Amendment Act also included a late change in the definition of “monthly remuneration” for ETI purposes effective from 1 March 2022. The change may potentially increase the number of qualifying employees and encourage employers to introduce more candidates to their programs.

The ETI is a Government initiative to address the rate of youth unemployment in South Africa by providing them with an opportunity to obtain work experience and skills. The ETI was introduced in January 2014 and will be available to employers until 28 February 2029.

The program encourages employers to accept young unskilled labour by reducing the employer’s cost of hiring through the cost-sharing mechanism with government funding. The ETI amount is claimed by decreasing the monthly PAYE payable to the South African Revenue Services (SARS), by the incentive amount calculated for each qualifying employee. The incentive claimed is available over a 24month qualifying period of employment.

Ensuring that the monthly incentive is calculated accurately is critical in ensuring that the employer remains compliant. If the employer incorrectly calculates the ETI, the employer may be subject to various penalties and interest.

Remuneration for purposes of calculating ETI:

• Before 1 March 2022, monthly remuneration for ETI purposes was based on the definition of remuneration as defined in the Fourth Schedule of the Income Tax Act. Remuneration in the Fourth Schedule includes all cash amounts and taxable benefits.

Change in the definition of “Monthly Remuneration”:

• Effective 1 March 2022, monthly remuneration is remuneration as defined in the Fourth Schedule of the Income Tax Act, less non-cash benefits and less non-section 34(1)(b) (BCEA) deductions.

The below list outlines the non-section 34(1)(b) (BCEA) deductions that would reduce monthly remuneration:

• Repayment of an Advance
• Loan Repayment
• Staff Purchases
• Training Costs

The common non-cash benefits applicable to qualifying employees which would be excluded from monthly remuneration may include the following, but are not limited to:

• Housing
• Medical Aid Employer contributions
• Employer Contributions to Pension or Provident Fund

The below list includes some of the deductions (amongst others) that will not reduce monthly remuneration as they qualify as section 34(1)(b) BCEA deductions:

• Garnishee order
• Income Protection policy premiums
• Maintenance Order
• The effect of the change in the definition of “Monthly remuneration”

The change in the monthly remuneration definition will broaden the number of qualifying employees, allowing employers to claim more ETI.

Payroll software providers will have to amend their software and include a separate wage type that will specifically accumulate the correct wage elements and exclude those that have been specifically identified as excluded. The wage types per employer may differ substantially and this will be difficult to standardize or monitor. There is no one standard formula for all payroll users, therefore, creating uncertainties and further possible misstatements in the ETI claims.

Previously it would have been possible for SARS to determine if the ETI amount claimed was correct and whether the employee was a qualifying employee, from the taxable remuneration reported. The change may result in more SARS audits, and further administration for employers who consider introducing this incentive. The cost of administration may out-weigh the benefit, especially if penalties for non-compliance become a norm.

We believe this may not have been the intention of the legislated amendment.

Penalties and SARS Audits

Specific reference to the ETI abuse in the 2022 South African budget speech, highlighted that government proposes that the Employment Tax Incentive Act of 2013 be amended to include understatement penalties on ETI reimbursements that are improperly claimed.

It is worthwhile to note that SARS audits in respect of ETI claims continue to be a focus area and taxpayers should be aware of the high penalties and interest they may be exposed to where non-compliance is identified. The responsibility of accurately calculating the payment due to SARS remains that of the employer/ company.