3 April 2020 by and

COVID-19 outbreak tax relief measures: Expanding the employment tax incentive programme and the provision for deductible donations to disaster relief funds

The nationwide lockdown that became effective on 27 March 2020 in response to the COVID-19 outbreak means that many employees will not be reporting at work and employers are likely to experience reduced revenue and may have to consider reducing their staff complement.

In this article we mainly discuss the ETI proposal, but also briefly discuss the proposal regarding donations made to COVID-19 disaster relief funds.

ETI - Background

As stated in the he Explanatory Memorandum on the Disaster Management Tax Relief Bill, 2020 (Draft) (Draft EM), the employment tax incentive programme was introduced in January 2014 by the Employment Tax Incentive Act 26 of 2013 (ETI Act). Its aim was to encourage employers to employ young employees between the ages of 18 and 29, as well as employees of any age in special economic zones and industries indicated by the Minister of Finance, by reducing the cost of hiring these employees. The benefit for employers is that the incentive enables eligible employers to reduce the amount of employee’s tax due by them by the ETI amount claimed while leaving the wage received by the employee unaffected.

The ETI Act makes provision for an employer to claim the ETI in respect of a qualifying employee. In terms of the ETI Act a qualifying employee is an employee who is between the ages of 18 and 29 years at the end of any month in respect of which the ETI is claimed or an employee who is employed by an employer who is a qualifying employer in terms of section 12R of the Income Tax Act 58 of 1962 (Act). These employees must receive a remuneration of an amount that is R6,500 or less. What this means is that in terms of the ETI Act there are two types of employees in respect of which an employer can claim the ETI namely:

a) Those that are between 18 and 29 years old; and

b) Those of any age who are employed by an employer who is a qualifying company, in terms of section 12R of the Act.

In terms of section 12R one of the requirements for an employer to be regarded as a qualifying company is that the company must carry on a trade in a special economic zone designated by the Minister of Trade and Industry.

In terms of the ETI Act, the ETI may only be claimed in the first 24 months of the qualifying employee’s employment. In the first 12 months if the qualifying employee earns less than R2,000 then 50% of the monthly renumeration is claimable. If the employee earns R2,000 or more, but less than R4,500 then the amount claimable is R1,000. If the qualifying employee earns R4,500 or more, but less than R6,500 then the amount claimable is calculated in terms of the following formula: X = A – (B x (C - D)). Where X is the monthly ETI; A is an amount of R1,000; B is the number 0.5; C is the employee’s monthly renumeration and D is an amount of R4,500.

During the next 12 months following the first year, if the qualifying employee earns less than R2,000 then 25% of the monthly renumeration is claimable. If the monthly renumeration is more than R2,000, but less than R4,500, then the amount claimable is R500. If the monthly renumeration is more than R4,500, but less than R6,500 then the amount claimable is calculated in terms of the formula noted above with a variation in the values of A and B. In this case A is an amount of R500 and B is the number 0,25.

The maximum amount claimable per qualifying employee is limited to R1,000 in the first year and R500 in the second year of employment. According to the Guide for Employers in Respect of Employment Tax Incentive issued by the South African Revenue Service (SARS), if no employees’ tax (PAYE) is available to set off the ETI amount due to the employer, the employer is entitled to a reimbursement of the total ETI amount available at the end of each reconciliation period. The tax reconciliation period is at the end of every six months; that is the end of every August and February.

Proposal to expand the ETI

The 2020 Draft Disaster Management Tax Relief Bill (Draft Tax Relief Bill) proposes that the ETI programme be expanded to include employees that were ineligible to be qualifying employees because of their age and to also include employees in respect of whom the employer has already claimed the ETI for a period 24 months. The expansion of the ETI programme to include these employees is to be effective for a period of four months as from 1 April 2020 to 31 July 2020.

What the expansion entails is that employees, regardless of their age and how many years they have been employed by the employer, will be regarded as qualifying employees during this four-month period. Practically, if an employee has never been a qualifying employee because of their age or the employer has exhausted the ETI claims in respect of a qualifying employee then the employer can claim R500 in respect of these employees for a period of four months from 1 April 2020. Where the employer was already claiming the ETI in respect of an employee whether in the first or second year of employment, the employer can claim an additional R500. This means that a maximum ETI claimable in the first year of employment will be R1,500 and in the second year of employment, the maximum ETI claimable will be R1,000, during this four-month period.

It has also been proposed that as opposed to the employer receiving the ETI reimbursements twice a year, the reimbursement payments will be accelerated, and the employer will receive a monthly reimbursement. In order to give effect to this the, Draft Tax Relief Bill proposes that section 10 of the ETI Act be amended to allow the employer to claim an ETI reimbursement every month. This amendment is deemed to have come into operation on 1 March 2020 and applies in respect of renumeration paid on or before 31 July 2020.

This expansion will only apply to employers that were registered with SARS as at 1 March 2020 and will be deemed to have come into operation on 1 April 2020.

Proposal regarding COVID-19 disaster relief funds and deductible donations

According to the Draft EM, given the different types of funding structures and mechanisms that may be used by private donors to assist with COVID-19 relief measures and to ensure that no tax leakage undermines the intended assistance, Government proposes a streamlined special tax dispensation for funds established to assist with COVID-19 relief measures. The streamlined tax treatment is to ensure amongst other things, transparency and accountability of these different types of funding structures.

In light of this, it is proposed that the streamlined special tax treatment for funds established to assist with COVID-19 relief measures should be similar to the current special tax dispensation applicable to PBOs (public benefit organisations) that provide disaster relief as envisaged in sections 10(1)(cN) and 30 of the Act read together with Part I and Part II of the Ninth Schedule to the Act. Pursuant to this, the Draft EM states that it is proposed that, amongst other things, the following apply from 1 April 2020 to 31 July 2020:

  • COVID-19 disaster relief funds will on application and approval by the Commissioner for SARS, be deemed to be PBOs as contemplated in sections 10(1)(cN) and 30 of the Act, and subject to the same criteria prescribed to all PBOs in terms of those sections;
  • Receipts and accruals of such funds will be exempt from income tax and donations made to such funds will be exempt from donations tax; and
  • During the limited period of four months, donations made to a COVID-19 disaster relief fund will qualify for tax deduction in the hands of the donor, subject to the limitation provided in section 18A of the Act.
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