The ‘Employment Tax Incentive Bill’ has arrived!

HRTorQue Outsourcing’s payroll department will be ready for the implementation on 1 January 2014!

The principle of giving employers a tax incentive to encourage them to employ young people has been applied successfully, in various forms, in many countries around the world.

• Employees benefit from having a job and hopefully skills upliftment.

The proposed employment tax incentive will encourage employers to hire young people by reducing the amount of PAYE payable to SARS, thereby reducing the cost of employment to the employer while leaving the employee’s earnings unaffected.

• Employers who employ qualifying youths benefit from a reduction of PAYE.

The effective date of the legislation and rollout:

• The effective date of the legislation is proposed to be the 1st January 2014.
• Despite making application via the Payroll Author’s group of South Africa to have the date postponed to the 1st March 2014, we have been informed that this request has not been granted. We have it on good authority that the legislation will be effective and will need to be working in the payrolls, from the 1st January 2014.
• It will apply to the Month end payroll for January 2014.
• It will apply to the EMP201 for January, to be submitted by the 7th February 2014.
• It will apply to the tax certificates for January and February 2014.
• It will apply to the EMP501 reconciliation for February 2014.
• There is a 3 year period envisaged for the employee tax incentive project; i.e. 1st January 2014 until the 31st December 2016.
• This means that any tax incentive amount that has not been deducted as at 31st December 2016 will be forfeited.

Which employees “qualify” for the incentive?

• Young people employed on or after the 1st October 2013 and who are not less than 18 years of age and not more than 29 years of age on the last day of the month;
• Who are in possession of an RSA 13 digit bar coded ID document or
  Are in possession of a valid Asylum Seeker document (at the time of writing, this document we are still waiting for the definition of a valid Asylum Seeker document from Home Affairs);
• Works mainly in a SEZ (special economic zone, see explanation below), and the employer has a fixed place of business in the SEZ;
• Is employed by an employer in an industry specified by the Minister of Finance, Minister of Labour and Minister of Trade and Industry. This will be defined by the SIC code, and the list is not currently available;
• The “wage” as defined in Section 1 of the BCOE act 1997, must be at least the minimum wage for that sector, or R2000 a month if there is no minimum wage, and a maximum “remuneration”, as defined in the Fourth Schedule of the Income tax act, without exclusions, of R6000 per month;
• The incentive is not allowed if the young person is related or connected to the employer in any way, and domestic workers are specifically excluded, or if the person is paid less than the minimum wage or R2000 per month.
• An employee is defined as per the LRA definition (essentially a natural person who “works” and is paid “remuneration”), but it excludes independent contractors. This translated means a “natural person” who works directly for another person and gets paid by that person. This definition includes casual workers, seasonal workers and (after the introduction of the proposed amendments to the BCOE Act and LRA), will include workers supplied by a labour broker to a company after 3 months of service at the company.

Which employers qualify for the incentive?

• Private Sector Employers that are registered for PAYE.
• BUT, the employer is not available for the ETI if they are non-tax compliant on the last day of month (i.e. they have failed to submit returns, have tax debt etc.)
• At the time of writing this document I am still awaiting clarity on the process for employers who are not currently registered for PAYE where their employees do not qualify to pay tax. It appears that they will be able to register for PAYE, but because there is no PAYE due on a monthly basis, they will not be able to set off the incentive against any PAYE. It seems as if they will be able to submit a “claim” and be reimbursed the incentive owning to the employer every 6 months. I will clarify this process as soon as I have more detail in this regard.

Which employers do not qualify for the incentive?

• Local, provincial or national government.
• Municipal entities.
• Public entities – unless the Minister of Finance specifically regulates to include one.

What do we understand by SEZ’s – Special Economic Zones?
To encourage economic activity within Special Economic Zones, the same incentive will be available to an employer who conducts his/her business in one of these zones, with the added advantage that the incentive is not limited to young people but is available to all employees who qualify in terms of the other requirements. These zones will be designated by the Minister of Trade of Industry. At the time of writing this article that list was not available.

The Calculation of the Value of the Incentive

The calculation starts in January 2014 and ends in December 2016.

For the first 12 months for any qualifying employee the calculation is as follows:

• 50% of monthly remuneration up to R2000 (this is not to be confused with the qualifying wage rate of R2000 or minimum wage).
• R1000 if the monthly remuneration is between R2001 and R4000 a month.
• R1000 is the maximum ETI for any employee, the value of the incentive decreases from R1000 to zero for qualifying employees with remuneration between R4001 and R6000 per month.
• ETI = R1000 – (0.50 x (Monthly remuneration – R4000)) (from R4001 to R6000 a month).
• ETI = zero for employees with remuneration greater than R6000.

For the second 12 months for any qualifying employee the calculation is as follows:

• 25% of monthly remuneration up to R2000 (this is not to be confused with the qualifying wage rate of R2000 or minimum wage).
• R500 if the monthly remuneration is between R2001 and R4000 a month.
• R500 is the maximum ETI for any employee, the value of the incentive decreases from R500 to zero for qualifying employees with remuneration between R4001 and R6000 per month.
• ETI = R500 – (0.50 x (Monthly remuneration – R4000)) (from R4001 to R6000 a month).
• ETI = zero for employees with remuneration greater than R6000.

So what we understand the Bill to say is that there are a possible 24 ETI deductions over a 36 month period for an employer employing a qualifying employee. The tax incentive is calculated on the employee’s remuneration for each month (i.e. there is no annulisation but if a short month was worked it would be pro-rated). The same “counting” principal applies to the months where the employee was employed by an “Associated Employer”.

What do we interpret the Bill to say about roll-over and reimbursement of ETI Amounts from previous tax periods?

If the ETI cannot be claimed (partly or in full) in a month because:

• The PAYE was less than the ETI
• The Employer neglected to claim the ETI that they were entitled to or
• The Employer was not “tax compliant” for a month or months

The Unclaimed ETI can be:

• Rolled over to the succeeding months
• For a period of 6 months, which ends in February and August
• Limited to an amount of R6000 per qualifying employee at the end of a 6 month period (at the time of writing this document, we had a number of unanswered questions around this area, that we are waiting for clarity on)

Reimbursement of ETI after 6 months:

• Employer must claim the accumulated ETI
  In a “form and manner” still to be specified
  The “rolled over” amount is cleared every 6 months by reimbursement
  This would happen outside of payroll systems, by manual calculation

What documentation do we understand will be needed to be submitted to SARS?

The EMP201 will be amended for submission by 7 February 2014 and will contain an additional field:

• SDL
• UIF
• PAYE (Gross)
• ETI (for the month) – New field, the ETI will reduce the Gross PAYE if it is greater, if not it will reduce to zero. This field can be “supplemented” by any ETI amounts that have been “rolled forward” from previous months in a 6 month cycle (see notes on “rolled forward” ETI interpretations).

February 2014 Tax Certificates will have new fields:

• That indicate that the employer is eligible and has qualifying employees
  • Employer SIC codes – see notes on SIC and ETI
  • Employer SEZ codes – see notes on SEZ and ETI
• That indicate the employee “qualifies” by reflecting:
  • Employee SIC code
  • Employee SEZ code
  • Employee ETI amount

February EMP501 document will have new fields, not yet defined.

There is a new CSV file required by SARS, which will contain all the information relating to the records, for qualifying employees in respect of whom the ETI has been calculated.

• The layout is not yet finalised.
• They will not be required monthly, but the payroll software and the employer will need to keep records to submit when required.
• The file will require the following fields:
  • Employee ID number; Period of Reconciliation, March to February financial fields per month: month, remuneration, wage, theoretical ETI amount.

Practical steps to ensure that you are ready for the ETI and ensuring your documentation is ready to justify the incentive to SARS:

You will submit the incentive claim amount monthly to SARS and your PAYE will be reduced if you are tax-compliant. All the supporting documentation and calculations must be available and correct in case of queries.

We will ensure that the payroll software is ready to do the necessary calculations, but we will not know who is eligible. You will be required to let your payroll administrator know if you have employee’s who qualify for ETI on the 1st January 2014. The specifications of this advise will follow as soon as possible.

You need to ensure that your letters of appointment or contracts are correct, and that your HR processes are aligned to correct report the following information regarding this new Bill:

• Type and duration of employment
• Nature of employment (remember it includes casual workers and seasonal workers)
• Dates employment start
• Wage – understand what this means, and document it correctly
• Remuneration – understand what this means and document it correctly

We will be sending out a further communication which will clarify the areas we are waiting for clarity on. Once we have this information we will define exactly how we require this information to be provided from our payroll clients.

If you need help or further clarity in this area, please contact Karen: [email protected] or 082 8911 722.