The Employment Tax Incentive (ETI) is a significant government program implemented in January 2014 with the primary objective of encouraging the employment of young individuals aged between 18 and 29. This initiative seeks to alleviate the financial burden associated with hiring young workers and stimulate job creation by offering tax incentives to qualifying employers. Designed to foster economic growth and provide valuable opportunities for the nation’s youth, the ETI holds the potential to shape a more inclusive and thriving workforce in South Africa.
In this article, we will explore the key aspects of the Employment Tax Incentive, its eligibility criteria, and the benefits it holds for both employees and employers.
What is the Employment Tax Incentive (ETI)?
The Employment Tax Incentive (ETI) is a government program introduced in January 2014 with the primary objective of encouraging the employment of young individuals between the ages of 18 and 29. This initiative aims to reduce the cost of hiring young workers and stimulate job creation by providing tax incentives to qualifying employers.
What is an Employee in terms of the Employment Tax Incentive Act (2013)?
In the context of the Employment Tax Incentive Act (2013), an employee is defined as a natural person who works for another individual or entity and receives or is entitled to receive remuneration for their services. To be eligible for the ETI benefits, the employee must be between the ages of 18 and 29.
What is an Employer in terms of the Employment Tax Incentive Act (2013)?
Under the Employment Tax Incentive Act (2013), an employer is any entity or person that employs young workers aged 18 to 29 and fulfils the Act’s criteria to claim the ETI benefits. To avail themselves of the tax incentives, employers must meet certain conditions.
Why was the term “qualifying employee” introduced in relation to the Employment Tax Incentive Act (2013)?
Over time, some schemes have emerged where taxpayers claim the ETI for individuals who do not actually work for them, deviating from the definition of “employee” as defined in the ETI Act. These schemes involve eligible participants (qualifying employees) being recruited by a recruitment agency and employed by a participating employer for fixed-term periods ranging from 12 to 24 months.
During this period, eligible participants are typically trained by a contracted training institution, often enrolling in Sector Education and Training Authority (SETA) accredited courses. The remuneration stated in the eligible participant’s contract is paid to the training institution instead of the participant, and the training provider’s fee may also include a learnership stipend. The eligible participants may be exposed to work-based exercises and activities through an independent company, which compensates the training provider or recruitment company for the placement.
In January 2022, the Treasury clarified the policy position on the definition of “employee” and the requirements to be considered a “qualifying employee” under the ETI Act. The amendments emphasize that substance over legal form will be considered when assessing an employer’s eligibility to claim the ETI. This means that actual work must be performed based on an employment contract, and the employee must be duly documented in the employer’s records, in accordance with the record-keeping provisions in Section 31 of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997). Moreover, the employee must receive cash remuneration from the employer for services rendered.
These amendments took effect on the 1st of March 2022 and apply to years of assessment commencing on or after that date. The changes aim to ensure that the ETI is rightfully claimed only for genuine employment arrangements, promoting transparency and fairness in the program’s implementation.
What are the conditions that need to be met for an employee to be classified as a “qualifying employee” in terms of the Employment Tax Incentive Act (2013)?
To be classified as a “qualifying employee” eligible for ETI benefits, the following conditions must be met:
- The employee must be between 18 and 29 years old.
- The employer must possess a valid tax clearance certificate.
- The employee’s monthly remuneration must fall within the prescribed threshold.
- The employee must have a valid South African ID or, if a foreign national, a valid work permit.
- The employee must not be a connected person to the employer (e.g., a close family member or business partner).
How does the Employee Tax Incentive work?
The ETI functions as a cost-sharing mechanism between the government and employers. Qualified employers can claim the incentive by reducing the amount of Pay-As-You-Earn (PAYE) tax they pay to the South African Revenue Service (SARS) based on the number of qualifying employees they employ. The incentive amount is determined by a sliding scale, depending on the employee’s monthly remuneration and age. The tax savings are then used by the employer to offset a portion of the employee’s salary.
What benefits does the ETI hold for employees?
The ETI offers several advantages for eligible employees, including:
- Increased Employment Opportunities: The incentive encourages employers to hire more young workers, leading to improved employment prospects for the target age group.
- Unaffected Wages: The employee’s wage remains unaffected as the tax incentive is provided to the employer separately.
What benefits does the ETI hold for employers?
The ETI provides several benefits for qualifying employers, such as:
- Reduced Tax Liability: Employers can claim a tax reduction based on the number of qualifying employees they hire, thereby lowering their overall tax burden.
- Financial Incentive to Hire: The ETI acts as a financial incentive for businesses to hire young workers, making the recruitment of this age group more appealing.
- Enhanced Cash Flow: The tax savings resulting from the ETI can improve the employer’s cash flow, enabling further investments in business growth.
Conclusion
The Employment Tax Incentive (ETI) stands as a vital tool in promoting youth employment and economic development in South Africa. By providing tax incentives to employers who hire young individuals, the ETI encourages job creation and enhances the employability of the nation’s youth.
The Employment Tax Incentive (ETI) program acts as a catalyst for progress, paving the way for a thriving workforce that benefits both employees and employers alike. By continually supporting and refining initiatives like the ETI, South Africa can forge a path towards economic prosperity and create a dynamic and vibrant landscape for its young workforce.
