Employment Tax Incentive

Rob Cooper, tax expert and director of legislation updates and proposed legislation at Sage VIP.

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Statistics have consistently shown that about 50% of our young people under the age of 25 are unemployed, and that unemployed youths account for about 30% of total unemployment, says Rob Cooper, tax expert and director of legislation updates and proposed legislation at Sage VIP.

Young people without work create a long litany of social problems, but the opposite is equally true - having a job will keep the youngster off the street, bring some money back to the family, and hopefully, some working skills as well as life skills will rub off.

To reduce the high rate of unemployment among young people, a Wage Subsidy was proposed in the 2010 Budget, followed by discussion documents, more budget proposals, a change of name to the Youth Subsidy, then Nedlac, and even more discussions. Opposition came from Labour, whose main concern is that the subsidy will provide unethical employers with an opportunity to 'displace' older workers with younger cheaper workers.

Finally, the subsidy has been kick-started back into life with the issue of the draft Employment Tax Incentive Bill (ETI) on 20 September 2013.

Principles of Employment Tax Incentive

The proposed Employment Tax Incentive will encourage employers to hire young people by reducing the amount of PAYE payable to SARS, thereby reducing the cost of employment to the employer, while leaving the employee's earnings unaffected.

To prevent abuse, employers will be excluded from the tax incentive in respect of employees who are paid below minimum wage requirements, or if they are found guilty by a competent court of replacing an older worker with a younger subsidised worker for no other reason than to benefit from the tax incentive.

Although our labour law will treat a dismissal on grounds of being replaced by a younger, cheaper person as unfair, in order to allay the fears which Labour has, strong measures are included in the draft legislation to prevent 'displacement' of older workers. These include permanent exclusion from the incentive and a fine of 150% of the total of the tax incentive that the employer received during the 12 months prior to the unfair dismissal.

Scope of the draft legislation

Only private sector employers that are registered for PAYE can benefit from the tax incentive, but the minister of finance can include specified public entities if he so wishes. Restricting the incentive to the private sector is logical if one considers that it contributes about 82% of GDP and employs over 70% of those in formal employment outside of agriculture.

Note that a company that only employs individuals who earn below the income threshold is not required to register for PAYE because there is no PAYE to be withheld. These employers will unfortunately be excluded from benefiting from the tax incentive, and consequently will not be motivated to employ young people.

Only young people between the ages of 19 and 29 who have a South African ID and who earn remuneration (as defined by the Fourth Schedule to the Income Tax Act) that is between the minimum wage for that specific sector (or R2 000 remuneration per month if there is no minimum wage) and a maximum of R6 000 remuneration per month will 'qualify' for the incentive.

Further, only those individuals who have been employed on or after 1 October 2013 will qualify for the incentive, and if they qualify in other respects will generate the tax incentive for the employer. The incentive itself can only be calculated for qualifying employees from the effective date of the legislation, which at this stage is proposed to be 1 January 2014. There is no provision for a retrospective calculation of the incentive back to October 2013.

By including youths appointed after 1 October 2013, the legislators are encouraging employers to appoint youths when they need them and not to wait until the incentive kicks in, taking into account that thousands of school leavers will be entering the job market towards the end of the year.

The incentive is not allowed if the young person is related or connected to the employer, and domestic workers are specifically excluded.

Further, to encourage economic activity within Special Economic Zones (SEZ), the same incentive will be available to an employer who conducts his business in one of these zones (still to be specified), with the added advantage that the incentive is not limited to young people but is available in respect of all employees who qualify in terms of the other requirements.

Interestingly, an employee is defined as per the Labour Relations Act (LRA) definition (essentially a natural person who 'works' and is paid 'remuneration' but excluding independent contractors) and not according to the Fourth Schedule definition, whereas the incentive is calculated on remuneration as defined by the Fourth Schedule.

Using the LRA definition of an employee excludes legal entities and directors earning 'deemed' remuneration, but would include casual workers, seasonal workers and fixed-term contractors. The position is uncertain for those workers supplied by a labour broker who, after three months of service at a client, become deemed employees of the client in terms of the near-final amendments to the Labour Relations Act.

Incentive calculation

The tax incentive is calculated each month on the employee's monthly remuneration for that month. If the employee doesn't work the full month, remuneration is grossed-up, the incentive is calculated and then grossed-down.

Remuneration is as defined for the Fourth Schedule to the Income Tax Act without any exclusions and includes the 80% or 20% of the travel allowance and the company car fringe benefit.

Using the monthly remuneration value means that employees who earn close to the limit of R6 000 pm will be included for the tax incentive in some months when below the limit, and excluded in other months when above it.

For a qualifying employee for the first 12 months in respect of which an incentive is claimed, the monthly value of the incentive will be 50% of the monthly remuneration of an employee up to R2 000, and R1 000 for employees with remuneration between R2 000 to R4 000 per month. The value of the incentive will decrease from R1 000 to zero for qualifying employees with remuneration between R4 000 and R6 000.

For a qualifying employee for the second 12 months in respect of which an incentive is claimed, the monthly value of the incentive will be 50% of the incentive value for the first 12 months. The maximum tax incentive is therefore R1 000 for the first 12 months of eligibility for the incentive, and R500 for the second 12 months of eligibility for the incentive.

Note that if the employer is not tax compliant at the end of a certain month, the tax incentive is not allowed in respect of that month, but is carried forward to the next month. Understandably, SARS does not want to allow a reduction of tax to a company that is not tax compliant in other areas.

Roll-over of incentive amounts

If the total incentive for a month exceeds the PAYE for the month, the excess may be carried forward to the next month. Also, if the employer was not allowed to reduce the employees' tax payable due to tax compliance issues (tax returns outstanding or SARS debt incurred), the incentive amount may be carried forward to the next month and added to the tax incentive calculated for that month.

However, the total of the excess amounts that are rolled-over is limited to the number of qualifying employees in service on either 1 March or 1 September multiplied by R6 000. These periods coincide with the current bi-annual tax certificate submission periods.

Reimbursement of incentives

The reimbursement provisions are not included in detail in the draft legislation in the interests of not slowing down the implementation process, but will be added to the law shortly after the initial promulgation.

In principle, the intention is that incentive amounts that could not be claimed by the employer are rolled forward and reimbursed every six months, but limited to a maximum of R6 000 for every qualifying employee as at the end of the reconciliation period.

Effective dates

The effective date of the legislation is proposed to be 1 January 2014, and incentives for qualifying employees may only be calculated from the effective date. There is no provision for a retrospective calculation of the incentive.

The starting date of January 2014 seems to be optimistic, and among other comments, the Payroll Authors Group of South Africa has requested that the date is postponed to 1 March 2014.

An initial three-year period for the employment tax incentive project is envisaged. Employers will not be allowed to deduct any incentive amount from employees' tax after 1 January 2017. This means that any tax incentive amount that has not been claimed as at 31 December 2016 will be forfeited.

The way forward

The draft legislation is open for public comment until 11 October and can therefore still be changed. Public comments will be considered in October, with the intention of submitting the final legislation to Parliament towards the end of October. Promulgation is expected soon afterwards.

Despite the fact that about 500 000 school leavers enter the job market every year, of which only a small minority are able to get work, all previous attempts to introduce a youth subsidy have failed. Those who have been the driving force behind the introduction of the Employment Tax Incentive are to be thanked for their perseverance.

While the Employment Tax Incentive scheme poses some challenges to payroll system suppliers, employers and SARS, the fact that we are at last doing something to help the unemployed youth of our country is to be welcomed.