Employment Tax Incentive – “Qualifying Months” and reporting challenges

Employment Tax Incentive – “Qualifying Months” and reporting challenges

Human Resources, Legislation, Payroll / eTorQue

When the Employment Tax Incentive scheme was introduced into legislation after only a very short public comment period there was concern that this was a political stunt. Like with any new legislation public comment is critical to identify possible challenges in terms of the wording, interpretation and practical implementation of the legislation. As this process was not adequately followed it was no surprise that there have been several significant amendments to the ETI Act over the years since 2014. This is not to mention the numerous versions of the SARS PAYE-GEN-01-G05 ETI Guide and the four issues of the LAPD-ET-G01-Guide-to-the-Employment-tax-Incentive. Further complicating matters is the introduction of the additional ETI deductions offered by SARS because of the effect of COVID on the economy as well as the concessions linked to the civil unrest in July 2021.

The swift introduction of the ETI Act also took payroll suppliers by surprise and the roll out of the legislation and subsequent training created significant challenges for employers. We have seen first-hand the challenges that employers have faced, and it would be fair to say that ETI has created a significant administration burden for employers.  This has created risk of non-compliance and there is also the constant threat of SARS audits.

Some of the areas of ETI where we see the most challenges are:

The ‘Qualifying Months’ Principle

The legislation specifies the formula that the payroll must use to calculate the ETI for each of the first 12 months in which the employee qualifies and also the formula to be used for the second 12 qualifying months of the maximum of 24 qualifying months. It is important that one ‘qualifying month’ must be determined and accumulated by the payroll for every month in which an employee qualified to generate an ETI amount for an eligible employer.

As qualifying tests are based on ‘wage’ and ‘remuneration’ that can fluctuate from month-to-month.  these fluctuations can therefore result in an employee ‘qualifying’ in certain months and not in other months. This means that qualifying months need not be consecutive. The payroll then applies the correct formula (first or second twelve months) according to the number of qualifying months accumulated for the month and calculates the ETI amount for that month. When the payroll identifies that 24 qualifying months have been utilized,  the ETI benefit will be stopped.

Qualifying months must be calculated and accumulated by payrolls for every month in which the employee qualifies, even if the employer did not claim ETI for that month. This means that the eventual length of the 24-month ETI calculation period is determined by the number of months that an employee qualifies, not the number of months in which the ETI is claimed for that employee. This is a concept that is often misunderstood by payroll administrators and employers.

Another challenge relating to qualifying months occurs when an employee is transferred between associated companies. If a qualifying employee changes employment from one associated company to another, then the qualifying months accumulated by the last employer must be carried forward to the new employer. Without this condition it would be possible for two companies that are associated to move employees from the one company to the other to remain indefinitely within the first 12-month bracket, or to escape the limitation of the maximum of 24 qualifying months for an employee.

Similarly, if an employee leaves employment but is reemployed at a later stage, the qualifying months recorded for the employee when the employee left services of the employer must be used as the starting point of the further accumulation of qualifying months when the employee is reemployed. This logic is particularly applicable to the use of seasonal workers or casuals.

Reporting challenges

Reporting ETI on the EMP 201 is a challenge to many employers. While there is a direct link between the payroll’s ETI calculations and the ETI information reported on the tax certificate, there is no direct link (or upload) between the payroll and the EMP201. The EMP201 administration is independent of the payroll, and it is the employer’s responsibility to complete the EMP201 timeously and accurately.  If the employer, for whatever reason, does not claim the ETI on the EMP201 for a certain month, the payroll has increased the number of qualifying months by one month and recorded the ETI information for the tax certificate for that month, irrespective of the fact that the ETI was not claimed.

It is possible that this mismatch between the number of qualifying months and the total ETI claimed can be rectified before the end of the 6-month tax certificate cycle if the employer claims the unclaimed ETI in a later month, as long as this retrospective claim falls within the same 6-month tax certificate cycle. Add the last-minute changes relating to COVID and the civil unrest and this significantly complicates the auditing of such claims and can give administrators sleepless nights.

The plight of the employer has not been ignored though. The Payroll Authors Group of SA has discussed these difficulties with the policy makers and has submitted proposals to amend the legislation with a view to simplifying the administration and largely removing the risk of inadvertent non-compliance. The timeframe on any changes is not known at this point, meaning that employers will continue to run the gauntlet with SARS until common sense prevails.