Micaela Paschini | Tax Attorney | Tax Consulting SA | mail me |
In a significant move to strengthen the integrity of the Employment Tax Incentive (ETI) scheme, the government has proposed amendments to Sections 1(1) and 5(3) of the Employment Tax Incentive Act, No. 26 of 2013.
The ETI, introduced in 2013, aims to encourage employers to hire young job seekers by reducing the cost of employment through a government-supported cost-sharing mechanism.
Initial strategy
The ETI has been a pivotal part of the government’s strategy to tackle youth unemployment since it commenced on 1 January 2014.
Set to expire on 28 February 2029, the ETI has helped many young South Africans enter the workforce by making it more affordable for employers to hire them, without reducing their wages. However, in recent years, there has been growing concern over the misuse of the ETI, which has led to the uptick in ETI disputes.
Some training institutions have been exploiting the scheme through aggressive tax strategies, claiming the incentive for students classified as employees under the ETI Act who never receive direct cash payouts. Instead, these institutions deduct training fees from the wages of these individuals, effectively shifting the burden of training costs onto them.
This practice is in direct opposition to the intended purpose of the ETI, which is to create genuine employment opportunities and fair wages for young people. Therefore, this unfavourable set of circumstances has had an effect on the entirety of the ETI taxpayer population, with South African Revenue Service (SARS) auditing and disallowing multiple ETI claims.
Why change the current dispensation?
The misuse of the ETI undermines the policy’s objective of reducing youth unemployment and fostering economic participation.
With millions of young South Africans excluded from the workforce, the country faces high levels of unemployment, economic marginalisation, and a lack of essential skills and experience necessary for economic growth. The ETI was designed to address these issues by incentivising employers to hire young job seekers, providing them with valuable work experience and a living wage.
National Treasury’s proposed legislative amendments
To combat the abuse of the ETI, National Treasury has proposed refinements to the legislation. These amendments include punitive measures specifically targeting employers who engage in abusive practices. The goal is to ensure that the ETI is used as intended, genuinely supporting the employment and development of young South Africans.
The proposed amendments are set to come into effect on 1 March 2025 and will apply to all years of assessment commencing on or after that date. While the amendments to the ETI may not spell immediate hardship, the practicalities thereof may result in long lasting hardship to employers who may have incorrectly applied the ETI.
In conclusion
The government’s proposed amendments to the ETI Act represent a crucial step in preserving the integrity of the ETI. By addressing the incorrect utilisation of the ETI, these changes aim to ensure that the scheme continues to provide genuine employment opportunities for young South Africans, helping to reduce youth unemployment and promote economic growth.
This is not the first time that amendments to the ETI Act have tightened up on punitive measures for those who misuse the ETI, but a consistent increase in stringency has been observed with each amendment passed. However, this year, the proposed penalties are particularly severe. Treasury is sending a clear message that misuse of the ETI will no longer be tolerated and will result in serious financial repercussions in future.
While certain relief mechanisms, such as settlements, disputes, and compromises, are available to taxpayers, these are not designed to aid willful non-compliance. Employers must take the impending amendments seriously and should carefully consider their circumstances and consult with a tax professional to determine the best course of action.
Related FAQs: Employment tax incentive amendments
Q: What are the employment tax incentive amendments in South Africa?
A: The Employment Tax incentive (ETI) Amendments come into effective 1 March 2025 and are changes made to the Employment Tax Incentive Act that aim to encourage the hiring of young work seekers and reduce the cost of hiring for employers in the private sector.
Q: Who qualifies as a qualifying employee under the ETI?
A: A qualifying employee is typically a young person aged between 18 and 29 who is employed by an eligible employer and meets specific criteria outlined in the Employment Tax Incentive Act.
Q: How can an employer claim the ETI?
A: An employer can claim the ETI by submitting their payroll information to the South African Revenue Service (SARS) and ensuring they meet all eligibility criteria set forth in the taxation laws amendment act.
Q: What must be met for an employer to qualify for the ETI?
A: To qualify for the ETI, an employer must meet certain conditions, including employing qualifying employees, adhering to the basic conditions of employment act and ensuring the employees are registered for tax.
Q: What is the incentive amount that an employer can claim?
A: The incentive amount varies depending on the number of qualifying employees and their age. Employers can receive a specified amount per qualifying employee per month, which is designed to reduce their overall tax liability.
Q: How does the ETI support youth employment?
A: The ETI encourages employers to hire young work seekers by providing financial incentives that offset the cost of hiring, thereby improving employment prospects for hundreds of thousands of youths in South Africa.
Q: Can an employer benefit from the ETI if they employ young workers under learnership agreements?
A: Yes, employers can benefit from the ETI when employing young workers under learnership agreements, as these agreements are included in the incentives aimed at promoting youth employment.
Q: How does the ETI complement existing government incentives?
A: The ETI complements existing government incentives by providing additional financial support to employers, thus enhancing the overall effectiveness of the employment and learnership tax incentives aimed at stimulating job creation in the private sector.
