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Linking the “S” in ESG to Employment Tax Incentives

By Nirvasha Singh, Partner, Carryn Alexander Partner & Amanda Nkwanyana, Associate from Webber Wentzel.

While companies need to focus on their environmental and governance principles to meet their ESG requirements, they should not ignore the integral role of non-financial factors, which make up the “S” in ESG.  The 2022 Global Investor Study shows that global investors are more interested in investing in businesses that meet their personal values and principles, with an increased focus on companies’ social contributions

According to the Quarterly Labour Force Survey for Q1 2022, the unemployment rate for South Africans aged between 15 and 24 was 63.9%. This is almost double the national average and is an acute social and economic problem.

The Employment Tax Incentive (ETI), introduced in January 2014, is aimed at encouraging the training and employment of young South Africans to address youth unemployment.  The ETI regime reduces the employer’s cost of hiring young people through a cost-sharing mechanism with Government, thereby meeting the company’s short-term operational needs, as well as its social responsibility, while providing young South Africans with the work experience that they need to secure permanent job opportunities.

During President Cyril Ramaphosa’s 2022 State of the Nation Address, it was announced that the value and the criteria for participation in the ETI regime would be increased.  The details of this were further expanded in Finance Minister Enoch Godongwana’s 2022 Budget Speech.

Employers can now qualify for the following reduction in employees’ tax (aka Pay-As-You-Earn (PAYE)) without affecting the qualifying employee’s wages:

Monthly RemunerationETI per month during the first 12 months of employing the qualifying employeeETI per month during the second 12 months of employing the qualifying employee of employment of the qualifying employee
ZAR0 – ZAR1 99975% of monthly remuneration37.5% of monthly remuneration
ZAR2 000 – ZAR4 499ZAR1 500ZAR 750
ZAR4 500 – ZAR6 499Formula:  X = A – (B x (C – D)) A = represents an amount of ZAR1 500 B = represents 75% C = represents employee’s monthly remuneration D = represents the amount of ZAR4 500Formula:  X = A – (B x (C – D)) A = represents an amount of ZAR750 B = represents 37.5% C = represents employee’s monthly remuneration D = represents the amount of ZAR4 500

The Guide for Employers in Respect of Employment Tax Incentive, available on SARS’ website, sets out the conditions for complying with the ETI requirements. These conditions are summarised below.

How to qualify

Employers who are registered for PAYE with SARS are eligible to claim the ETI, provided they meet certain conditions. To qualify for the ETI, the PAYE-registered employer must employ a person between the ages of 18 and 29 who holds a South African ID, asylum seeker’s permit or ID document issued under the Refugees Act.

Qualifying employers can deduct the ETI, for a maximum period of 24 months per qualifying employee, from the total amount of PAYE owed and paid to SARS through the PAYE system.

The value of the ETI is dependent on the value of the monthly remuneration that is paid to each qualifying employee.  However, there is no limit upon the number of qualifying employees that employers can hire.

Be aware that an employer may be disqualified by the Minister of Finance from receiving the ETI if the employer:

  • displaces an employee through an unfair dismissal in terms of the Labour Relations Act and replaces that employee with a qualifying employee for whom the employer claims the ETI; or
  • fails to meet the conditions of employment which the Minister of Finance may prescribe, including those related to the training of employees and conditions that are based on the classification of trade.

Noteworthy conditions

  • Qualifying employees must earn a monthly wage of between ZAR 2 000 and ZAR 6 500 for working 160 hours per month. If an employee worked less than 160 hours in a month, the ETI must be calculated pro rata.
  • If an employer is subject to a wage regulating measure, it must meet such measure or forego claiming the incentive for that employee. 
  • Employees must meet the qualifying criteria on an ongoing basis.
  • When a qualifying employee was not employed for a full month, the ETI calculation in respect of that employee must be apportioned.
  • Independent contractors, domestic workers and employees who are “connected” to the employer do not qualify.
  • During their employment, the employees must not be mainly involved in studying, unless the employer and employee are involved in a learning programme as envisaged in the Skills Development Act.  In determining the time spent studying in proportion to the total time for which the employee is employed, the time must be based on actual hours spent studying and employed.

Penalties

If an employer claims an ETI for an employee who was paid less than the wage regulating measure or ZAR 2 000 a month, SARS is entitled to impose a penalty equal to the full value of the ETI claimed.  The result would be an underpayment of PAYE, which would be subject to a further 10% penalty and interest in terms of the Fourth Schedule to the Income Tax Act, read with the Tax Administration Act.

A ZAR 30 000 penalty will also be levied for every employee that is displaced to employ an employee who qualifies for purposes of claiming the ETI.

Recent amendments to prevent fraud

The ETI regime is not intended to provide employers with financial gain. In late 2020, SARS and National Treasury advised that they intended to implement necessary interventions to address concerns about employers who were implementing schemes to abuse the ETI by either gaining financially from the incentive or by just providing or securing education components without providing substantive employment and related cash compensation.

To address this, in the Taxation Laws Amendment Act 2021, National Treasury amended the definition of “employee” in the ETI Act and the requirements for being considered a “qualifying employee”. These amendments came into effect on 1 March 2022.  Employers must therefore be conscious of the fact that while the ETI regime incentivises you for meeting your “S” in ESG, the substance of the employment relationship will be scrutinised when assessing your eligibility for the ETI.  

To avoid being subject to time-consuming and costly SARS verifications and audits, employers must ensure that actual “work” is performed by qualifying employees in terms of the employment contract; records are kept on those employees in compliance with section 31 of the Basic Conditions of Employment Act; and the employees must be paid the minimum cash remuneration of ZAR 2 000 in lieu of services rendered.

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