Employment Tax Incentive Act Amendments – Curbing ETI Abuse
Before discussing the details of the amendments to the ETI Act (Employment Tax Incentive Act) to curb ETI abuse that are effective from 1 March 2022, I would like to thank National Treasury for their help from a policy perspective, and to thank SARS for putting up with my many emails, for their support during the past weeks, and for their clarification of the new ETI requirements.
Included in the appendix to this Newsflash is the result of our discussions with SARS in the form of an NBPO (Non-Binding Private Opinion) that was issued by SARS dated 7 March 2022.
The issuing of the NBPO was followed by an investigation by the PAGSA Exco into the practical application of the NBPO, resulting in an example of the calculation of ETI ‘monthly remuneration’ that is included, after approval by SARS, in a later section of this newsflash as guidance for the payroll supplier members of the PAGSA.
The correct calculation of ETI ‘monthly remuneration’ is of huge importance to all parties.
If ‘monthly remuneration’ is incorrectly calculated, the ETI amount will be calculated incorrectly, resulting in an incorrect reduction of the employer’s PAYE liability on the EMP201.
Apologies to our payroll supplier members that it has taken some time to reach the point where we are now with this Newsflash. It has been a difficult time for payroll suppliers – how can you change a payroll system when you don’t know what the changes are?
The challenges that payroll suppliers face with the timeous implementation of the new ETI requirements has been formally communicated to SARS by the PAGSA.
The final changes to the ETI Act were made in October/November 2021 by the Standing Committee on Finance and were published in the TLAA (Taxation Laws Amendment Act) that was issued on 19 January 2022, accompanied by a final Explanatory Memorandum that was issued a week later on 25 January 2022.
The limited amount of time available between the publication of the TLAA on 19 January 2022 and the effective date of 1 March 2022, coupled to the fact that ETI is calculated monthly, has put a lot of pressure on everybody.
Purpose of the ETI Act
The purpose of the ETI Act is to encourage employers to hire young people between the ages of 18 and 29 by subsidising their wage cost.
The ETI is therefore an employment incentive, not a training incentive.
As an aside, Government subsidises the cost of training employees in two ways that I am aware of:
1.Learnership Incentive (Allowance)
If the studies are in the form of a SETA-provided learnership in terms of the Skills Development Act, the Learnership Incentive (as it is now called) has been available from 2001 to assist employers with these costs.
2.Bursaries and Scholarships
Bursary schemes reduce the taxable value of the fringe benefit that results from the payment by the employer on behalf of the employee to a recognised training institution for the training of either the employee, or the relatives of the employee.
The bursary training expenses paid by the employer on behalf of the employee are allowed as a deduction in the hands of the employer.
Background to ‘ETI Schemes’
Several years ago SARS became aware of what is now referred to as ‘ETI Schemes’, and after investigation, the action that Treasury and SARS decided to take first appeared in the public domain in the 2021 Budget Review, as follows:
“Some taxpayers have devised certain schemes using training institutions to claim the ETI for students. To counter this abuse, it is proposed that the definition of an “employee” be changed in the Employment Tax Incentive Act (2013) to specify that work must be performed in terms of an employment contract that adheres to record‐keeping provisions in accordance with the Basic Conditions of Employment Act (1997).
The Problem with ‘ETI Schemes’
According to the final Explanatory Memorandum issued by National Treasury and SARS on 25 January 2022, these schemes while varying in nature, are broadly along the following lines.
“Eligible participants are recruited by a recruitment agency and employed by a participating employer for a fixed term period of 12 to 24 months.
Participating employers engage with the recruitment agency to recruit eligible participants. Contracts signed by the eligible participants indicate the receipt of remuneration while ‘employed’ by the participating employer.
Once ‘employed’, participants are trained by a training institution (over the 12 to 24 month period) and, in some cases, enrolled in Sector Education and Training Authority (SETA) accredited courses.
The training institution is contracted by the participating employer at a cost equal to the remuneration stated in the eligible participant’s contract. The remuneration stipulated in the contract is paid to the training institution as opposed to being paid to the eligible participant.
In some cases, the eligible participants are exposed to work-based exercises and activities by an independent company.
The independent company is able to utilise the eligible participants for a fixed monthly fee, which similar to the remuneration, is not paid to the eligible participant.
Once the training programme is completed, the eligible participant may work for the participating employer for the remainder of the 12 to 24 month period.
In accordance with said scheme, the participating employer is then able to claim the ETI for the 12 to 24 month period that the eligible participant is supposedly ‘employed’ by the employer.”
Intention of the Amendments to the ETI Act
Quoting further from the Explanatory Memorandum of 25 January 2022.
In order to address the above-mentioned contraventions, it is proposed that changes be made in the ETI Act to clarify that substance over legal form will be considered when assessing an employer’s ability to claim the ETI.
As such, ‘work’ must actually be performed in terms of an employment contract and the employee must be documented in the employer’s records as envisaged in the record keeping provisions contained in section 31 of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997).
Further to the above, the employee must, in lieu of services rendered, receive cash remuneration from the employer.
The last (underlined) sentence of the final Explanatory Memorandum of 25 January 2022 was not in the Explanatory Memorandum issued on 28 July 2021 for public comment.
It was added to the final Explanatory Memorandum to explain the new proviso to the definition of ETI monthly remuneration in the ETI Act (discussed below) that was added by the Standing Committee on Finance just before the final TLAB (Taxation Laws Amendment Bill) was tabled in the National Assembly for approval towards the end of 2021.
The Solution to ‘ETI Schemes’
The TLAA issued on 19 January 2022 made changes