By Rob Cooper, Director of Legislation at Sage VIP Payroll & HR
Around 50% of South Africans under 25 years old and of working age are unemployed. This situation, which has persisted for many years, has dire implications for the country’s future unless it is reversed.
Numerous international studies show that school leavers who do not find jobs within a couple of years become virtually unemployable and contribute to social instability. This reality has prompted Government to put a Youth Subsidy in place to alleviate the problem, after years of debate and fierce opposition from trade unions.
The Employment Tax Incentive Act was introduced as draft legislation on 20 September 2013 and was signed into law by President Zuma only three months later—perhaps an all-time record for getting new legislation through the Parliamentary process.
Purpose of the Employment Tax Incentive
The tax incentive encourages employers to hire young people by reducing the PAYE that the employer is liable to pay to SARS based on the number of young people employed. This reduces the cost of employment to the employer while leaving the employee’s earnings unaffected.
The young person benefits from having a job and an opportunity to improve him or herself, and the country will hopefully benefit by reducing its rate of youth unemployment. The incentive will reduce the business’s cost of employment since the incentive amount is exempted from income and the additional profit is not subject to company tax.
Time Frame of the ETI Project
The Employment Tax Incentive legislation will be in effect for an initial three-year period from January 2014 to December 2016. It is likely that the law will be amended during this time to improve its effectiveness, and depending on its success, the scheme might be extended beyond the initial three years.
Overview of the Legal Framework
For the employment tax incentive (ETI) to be calculated in the payroll in a particular month, two criteria must be fulfilled:
1. An Eligible employer
2. Qualifying employees.
If the employer is eligible to benefit from the Employment Tax Incentive, the payroll will use the formulas provided by the legislation to calculate an ETI amount for every qualifying employee at the end of each month and to report the ETI total for the month. The total ETI reduces the company’s PAYE liability payable to SARS. This incentive is claimed using the new EMP201 form introduced in January 2014.
If the total ETI amount is not claimed or can only be partially claimed at the end of a month, the unclaimed or excess ETI amount can be rolled over to the next month. The rollover can be repeated for a maximum of six months, linked to the cycle used for the submission and reconciliation of tax certificates (February and August).
SARS will reimburse the employer if there is an ETI amount owing to the employer at the end of the six-month cycle. At the time of writing this article, the details of the reimbursement process had not yet been made available.
If the employer is not tax compliant at the end of a certain month, the tax incentive is not allowed for that month, but is carried forward to the next month. SARS does not want to allow a reduction of tax to a company that is not tax compliant in other areas.
Eligible employers and qualifying employees are defined in the Employment Tax Incentive Act and I will discuss this further part 2 of this series.