Employment Tax Incentive (ETI) changes … curbing abuse of the system!

During the 2022 / 2023 Budget Speech, the Minister of Finance announced an increase in the ETI values which took effect from 1 March 2022.

In addition, and to specifically assist in curbing the abuse happening within the ETI system, some significant changes were proposed in the recent Taxation Laws Amendment Act, which was ultimately promulgated on 19 January 2022. The TLAA was then accompanied by a final Explanatory Memorandum, published on 25 January 2022.

Three areas of the ETI Act have been changed by the final TLAA. They are:

  1. The definition of an employee;
  2. The definition of monthly remuneration; and
  3. The remuneration qualifying condition (section 6(g) of the ETI Act).

Definition of an Employee

The definition of an employee in the ETI Act was changed (i.e. expanded) by inserting the following (see words in italics):

Prior to 1 March 2022After 1 March 2022
“ ‘employee’ means a natural person –

a) who works for another person; and
b) who receives, or is entitled to receive remuneration from that other person,

but does not include an independent contractor;”
 “ ‘employee’ means a natural person –

a) who works for another person; and in any manner directly or indirectly assists in carrying on or conducting the business of that other person:
b) who receives, or is entitled to receive remuneration from that other person; and
c) who is documented in the records of the other person as envisaged in the record keeping provisions in section 31 of the Basic Conditions of Employment Act, 1997 (Act No.75 of 1997)


but does not include an independent contractor;”

Note the following:

Subsection (c) ensures that there is a legitimate employment relationship by specifying that an employee must be recorded by his / her employer as required by section 31 of the BCEA (Basic Conditions of Employment Act). i.e.:

  • work must be done in terms of an employment contract;
  • remuneration must be paid to the employee in return for the work done (services provided);
  • the employee must be appropriately documented in the employer’s records in terms of section 31 of the BCEA.

It’s therefore clear from this that there must be a legal / genuine working relationship between the employee and the employer that is claiming the ETI.

As such a number of the schemes which involve an external training provider managing a group of employees on behalf of an employer for the purposes of providing these individuals with various skills and then submitting a schedule of costs upon which the employer then claims the monthly rebate are under serious scrutiny.

Remember that the penalty for non-compliance when claiming can be as high as 200% of the total ETI claimed for the year!!

Definition of monthly remuneration

The definition of monthly remuneration was also extended – see new wording (in italics), starting from “provided that” (referred to as ‘the proviso’):

Prior to 1 March 2022After 1 March 2022
“’monthly remuneration’ –

(a) where an employer employs and pays remuneration to a qualifying employee for at least 160 hours in a month, means the amount paid or payable to the qualifying employee by the employer in respect of a month; or;
(b) where the employer employs a qualifying employee and pays remuneration to that employee for less than 160 hours in a month, means an amount calculated in terms of section 7(5):’
“’monthly remuneration’ –

(a) where an employer employs and pays remuneration to a qualifying employee for at least 160 hours in a month, means the amount paid or payable to the qualifying employee by the employer in respect of a month; or;
(b) where the employer employs a qualifying employee and pays remuneration to that employee for less than 160 hours in a month, means an amount calculated in terms of section 7(5):’

Provided that in determining the remuneration paid or payable, an amount other than a cash payment that is due and payable to the employee after having accounted for deductions in terms of section 34(1)(b) of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997), must be disregarded;’

Note the following:

  • Paragraphs (a) and (b) haven’t been changed – their wording reflects the principle of work / reward as per labour law – i.e. “where an employer employs and pays remuneration to a qualifying employee”. As such, there must be a legitimate employment relationship between the employee and the employer.
  • It’s clear that the difference between paragraphs (a) and (b) is that paragraph (b) provides that remuneration must be ‘grossed-up’ if less than 160 hours are worked in the month – i.e. calculated as per section 7(5).
  • The ‘remuneration’ referred to in paragraphs (a) and (b) is remuneration as defined by the Fourth Schedule.

About the Proviso:

The requirements of the proviso must be applied first, before “grossing up” the reduced remuneration amount. This can in some cases result in reducing the remuneration value, thus creating the potential for further errors (and abuse!).

Some explanations – what do they mean:

  • “Provided that in determining remuneration paid or payable” – Fourth Schedule remuneration amounts that are not cash are the taxable fringe benefits specified by the Seventh Schedule to the Income Tax Act. In other words, if there are any taxable fringe benefits, they must be disregarded when calculating the value of ETI monthly remuneration.
  • “a cash payment that is due and payable to the employee” – the remuneration portion of cash net pay after deductions and not to the total cash remuneration before deductions.
  • “after having accounted for deductions in terms of section 34(1)(b) of the BCEA” – the cash payment that is due and payable must be increased by the value of any deductions in terms of BCEA section 34(1)(b) that were applied (i.e. made from) the employee’s remuneration  

In short – the monthly remuneration is therefore limited to cash amounts paid to the employee plus any amount that the employer has legally deducted under section 34(1)(b) of the BCEA.

Monthly Remuneration – The Calculation Steps:

  1. Determine Fourth Schedule remuneration;
  2. Less fringe benefits (i.e. non cash items);
  3. Less section 34(1)(b) of the BCEA deductions;
  4. The result must be used for grossing-up purposes – i.e. where the employee has worked less than 160 hours in the month.

Qualifying requirements as per Section 6 (g) of the Act (abbreviated)

Prior to 1 March 2022After 1 March 2022
“an employee is a qualifying employee if the employee –

(a)
(i) is not less than 18 years old and not more than 29 years old ….
(ii) is employed by an employer operating through a fixed place of business ….
(iii) is employed by an employer in an industry designated ….

(b)
(i) is in possession of an identity card referred to in section 14 of the Identification Act, 1997 ….
(ii) is in possession of an asylum seeker permit issued to the employee in terms of section 22(1) of the Refugees Act, 1998 ….

(c) in relation to the employer, is not connected ….

(d) is not a domestic worker ….

(e) was employed by the employer or an associated person on or after 1 October 2013 ….

(f) is not an employee in respect of whom an employer is ineligible to receive the incentive ….
 
Proviso added to Section 6:

(g) “Provided that the employee is not, in fulfilling the conditions of their employment contract during any month, mainly involved in the activity of studying, unless the employer and employee have entered into a learning programme as defined in section 1 of the Skills Development Act, 1998 (Act no 97 of 1998), and, 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.”

Note the following:

  • This section of the Act (i.e. Section 6) defines what conditions must be met in order for that employee to be classified as a “qualifying employee” for the purposes of the ETI Act.
  • There is a definite requirement to measure the actual hours spent studying and employed – i.e. the emphasis is on “mainly involved in the activity of studying” VS providing services to the employer. As such, if the employee is mainly involved with studies (i.e. more than 50% of the time), then the employee does not qualify as a qualifying employee for ETI purposes.   
  • The end of the proviso does not apply to learning programs defined in the SDL Act. So, where the employer and the learner have a learning program in place as defined in the SDL Act, the employer is not obliged to monitor (i.e. track) the actual hours. On the other hand, however, where no learning program (i.e. as defined in the SDL Act) has been agreed upon between the learner and the employer, the employer must track the actual hours.   

A reminder of the ETI formula:

FormulaMonthly Remuneration up to
R 1 999.99
Monthly Remuneration
R 2 000.00 – R 4 499.99
Monthly Remuneration
R 4 500.00 – R 6 499.99
Formula – 1st 12 months  75% of Monthly Remuneration R 1 500.00R 1 500.00 – (75% X (Monthly Rem – R 4 500)
Formula – 2nd 12 months37.5% of Monthly RemunerationR 750.00R 750.00 – (37.5% X (Monthly Rem – R 4 500)

References:

  1. The Payroll Authors Group of SA (PAGSA) – used with their consent
  2. Taxation Laws Amendment Act (20 of 2021)