The good, the bad and the employment tax incentive

One of the greatest challenges faced by South Africa is the high unemployment rate, which especially impacts the youth. High levels of unemployment have a profound impact on the socio-economic fabric of South Africa as a society. Chapter 4 of the Budget Review Documents states that youth unemployment in South Africa was at 56,2% for 20 to 29-year-olds in the third quarter of 2021. Even by emerging market economy standards, that figure is staggeringly high.

24 Feb 2022 3 min read 2022 Special Edition Budget Speech Alert Article

Given the high unemployment rates in South Africa, Government introduced the Employment Tax Incentive (ETI) in January 2014 as one of the tools to try increase employment. The preamble to the Employment Tax Incentive Act 26 of 2013 (ETI Act) sets out the key reasons why it was introduced:

Since the unemployment rate in the Republic is of concern to Government;

And since Government recognises the need to share the costs of expanding job opportunities with the private sector;

And since Government wishes to support employment growth by focusing on labour market activation, especially in relation to young work seekers;

And since Government is desirous of instituting an employment tax incentive.

Notwithstanding some of the negative publicity around certain ETI arrangements in the past 18 months, positive developments have also been seen in the latest statistics referred to by the National Treasury, which reflect modest positive effects on growth rates of youth employment in firms claiming the ETI, coupled with some of the anticipated significant negative effects not materialising. 

ETI increases

At its simplest, payment of the ETI is effected by eligible employers being able to reduce the employees’ tax liability ordinarily due by the amount of the ETI that they can claim, provided that they meet the requirements of the ETI Act. Currently, the maximum amount that an employer can claim in the first 12 months in which a qualifying employee is employed is R1,000, whereas the current maximum for the second 12 months of employment is R500.

In order to encourage businesses to employ young people, an increase of 50% in the value of the employment tax incentive, effective from 1 March 2022, has now been proposed. The ETI will therefore increase from a maximum of R1,000 to a maximum of R1,500 per month in the first 12 months, and from R500 to a maximum of R750 in the second 12 months of eligibility.

In addition, in order to better encourage small and medium firms to take up the ETI, it has been proposed that there should be improved targeting of the incentive to support jobs for long-term unemployed work seekers together with an expansion of the eligibility criteria for qualifying employees. These are welcome announcements on the back of the Minister of Finance’s encouragement to firms to take up the ETI in the 2022 Budget Speech.

However, the good news must be treated with some caution. In the last 18 months, certain arrangements making use of the ETI have been in the National Treasury and South African Revenue Service’s (SARS) crosshairs, which eventually culminated in a series of amendments to the ETI Act with effect from 1 March 2022. Many taxpayers have also been faced with verifications and audits of their ETI claims resulting in additional assessments issued by SARS reversing the ETI initially claimed by these employers. Interestingly, SARS has generally not imposed any understatement penalties in relation to the reversal of the ETI claims. However, it was announced by the minister that given the abuse of the ETI, Government proposes that the ETI Act be amended to impose understatement penalties on reimbursements that are improperly claimed. Any anomalies in the legislation (if any) will thus be closed.

The ETI is constantly being refined, expanded and tightened and it is important for employers claiming the ETI to keep their fingers on the pulse in order to ensure they remain within the bounds of the ETI Act and to answer Government’s call to assist with decreasing the high unemployment rate.

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