Chapter 13. Archive: Clarification of ETI ‘Qualifying Months’
The purpose of the ETI Act (Employment Tax Incentive Act) is to encourage employers to hire young people between the ages of 18 and 29 by subsidising their wage cost.
The Employment Tax Incentive is therefore an employment incentive, not a training incentive.
This chapter focuses on a difficult and not well-known aspect of the ETI Act – the concept of what I referred to in 2014 as ‘ETI months’ but now more correctly referred to as ‘ETI qualifying months’ by SARS, or simply ‘qualifying months’ as used in this workbook.
The detail of the legislation that is relevant to the discussion of the concept of ‘qualifying months’ is included in the section at the end of this chapter for your convenience.
13.1 Summary of the ‘Qualifying Months’ Legislation
Before discussing the principles and application of the qualifying months legislation in the next two sections, this summary of the relevant sections of the ETI Act will give you the ‘big picture’.
1. Section 3:
‘Defines’ an “eligible employer” by stating that an employer is eligible to receive the incentive if:
• it is registered for PAYE withholding,
• is not excluded by the legislation (government organisations, public entities, and municipalities), and
• is not disqualified from receiving the incentive (no disqualifying criteria have as yet been published).
2. Section 4:
States that an employer is not eligible to receive the employment tax incentive in respect of an employee if the wage paid to that employee is less than the minimum wage amounts specified in sections 4(1)(a) and (b).
3. Section 6:
Provides that an employee is a “qualifying employee” if all seven of the conditions specified in section 6 are met.
4. Sections 7(2) and (3)
These two sections specify the two formulas that must be applied by payrolls to calculate the ETI amount.
• The first formula caters for the first 12 months during which an employee qualifies
• The second formula for the second 12 months during which an employee qualifies.
5. Section 7(4)
Specifies that if the employee was previously employed by an associated person in relation to the employer that employs the qualifying employee, the number of (qualifying) months that the qualifying employee was employed by the associated person must be transferred to the current employer and vice versa.
6. Section 9(4)
ETI amounts are claimed via the SARS EMP201 and EMP501 administration processes within each 6-month tax certificate cycle (March to August, and September to February).
In terms of section 9(4), ETI amounts that are not claimed within the 6-month cycle are forfeited irrespective of the reason that they were not claimed.
13.2 Qualifying Months – Principles
ETI Act Section 6
Section 6 provides the seven tests, all of which must be satisfied every month before an employee ‘qualifies’ to generate an ETI amount for an eligible employer for that month.
For every month in which an employee qualifies for ETI by meeting the seven conditions of section 6, the number of qualifying months must be increased by one.
Note that the sixth condition refers to the ‘minimum wage’ test of sections 4(1)(a) and (b), and the seventh condition is the ‘remuneration test’ (ETI monthly remuneration must be less than R6,500 for each month).
Whereas the first 5 tests are based on demographic employee information that does not change frequently, ‘wage’ and ‘remuneration’ (in particular) can, and does, fluctuate from month-to-month. These fluctuations can result in an employee ‘qualifying’ in certain months and not in other months.
It follows that qualifying months might not be consecutive, and the maximum of twenty-four qualifying months might be accumulated over a much longer period of service than twenty-four.
ETI Act Section 7
The preamble to section 7(2) introduces the concept of ‘qualifying months’:
“(2) During each month of the first 12 months in respect of which an employer employs a qualifying employee, …”.
Section 7(2) goes on to specify the formula that the payroll must use to calculate the ETI for each of the first 12 months in which the employee qualifies, and section 7(3) specifies the formula to be used for the second 12 qualifying months of the maximum of 24 qualifying months.
The payroll identifies the correct formula (first or second twelve months) from the number of the employee’s qualifying months in the payroll at that point, and then calculates the ETI amount for that month.
13.3 Qualifying Months – Application
New Employee Appointments
Qualifying months must be calculated by payrolls for every month in which the employee qualifies by satisfying all seven conditions of section 6, even if the employer did not claim ETI for that month.
This means that the eventual length of the 24-month ETI qualifying period is determined by the number of months that an employee qualifies, not the number of months in respect of which ETI is claimed for that employee.
If, for example, an employer does not claim the ETI for a qualifying employee in a month, that month still counts towards the 24 qualifying months that an employer may claim the ETI in respect of that qualifying employee, illustrated by the following example.
SARS ETI Guide Example 4 – Calculation of qualifying periods (Example 3 of the LAPD Guide)
Employee C was employed by an eligible employer, Employer D, on 1 January 2018 and met all the requirements of a qualifying employee as provided for under section 6 from 1 January 2018 to 31 December 2018.
Employer D was entitled to claim the ETI for Employee C during this period but only claimed the ETI for Employee C for 5 months during this 12-month period.
Result: Even though Employer D only claimed the ETI for 5 months during the period 1 January 2018 to 31 December 2018, the 7 months that Employer D was entitled to claim the ETI for Employee C but did not claim the ETI must still be included in the calculation of the 24 qualifying months. In December 2018, Employee C would be in the 12th qualifying month.
Note:
If an employer did not participate in the ETI project for some years, and then decided to participate from a certain month, the qualifying months of the qualifying employees in that initial month does not start with one month. It must start with the number of qualifying months that accumulated during the years of employment prior to the month in with the employer joined the ETI project.
Associated Persons
In line with the Seventh Schedule, the ETI Act defines an associated person in relation to an employer that is a company to be any other company which is associated with that employer as a result of both companies being managed or controlled, directly or indirectly, by substantially the same persons.
If a qualifying employee changes employment from one associated person employer to another, then the qualifying months accumulated by the last employer must be carried forward to the new employer. The latest employer must accumulate qualifying months using the number of months carried forward from the previous employer as the starting point and must not use zero qualifying months as the starting point.
If this was not the case, it would be possible for two companies that are associated persons to shuffle 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.
Re-appointment of a Qualifying employee
Carrying the ‘associated persons’ concept forward, a single employer is obviously an associated person to itself. Therefore, the above principle is applied to a qualifying employee that has left the services of an employer, only to be re-employed by the same employer at a later stage.
The qualifying months recorded for the employee when the employee left the services of the employer must be used as the starting point for further accumulation of qualifying months when the employee re-joins the employer.
Seasonal Workers and ‘Casuals’
It is fairly common practice that seasonal workers, as well as so-called ‘casuals’ or ‘temps’, are employed by an employer for short periods of employment broken by periods of unemployment.
The above ‘re-appointment of a qualifying employee’ rule must be applied to these broken periods of employment with the same employer – the qualifying months must continue from where they were at the end of the previous period of employment and must not start from scratch with one qualifying month.
EMP201 Claims, Qualifying months, Tax certificates, and SARS audits
As discussed in the ‘New Employee Appointments’ subsection above, the number of qualifying months is determined from the number of months in which the employee qualified by meeting all seven conditions of section 6, not by the number of months that ETI is claimed by the employer.
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 system, and it is the employer’s responsibility to complete the EMP201 accurately and to submit it timeously.
Irrespective of whether or not the employer submits an EMP201 containing the ETI claim for a certain month, the payroll must increase the number of qualifying months by one month and record the ETI information for the tax certificate for that month irrespective of the fact that the ETI was not claimed by the employer.
This can result in a mismatch between the number of months the payroll records as being a qualifying month in which ETI should have been claimed, and the number of months that ETI was actually claimed.
In terms of section 9(4) of the ETI Act, the employer can ‘catch up’ months that were not claimed by submitting a ‘catch-up’ EMP201 that consolidates the ETI claims for the current month plus the unclaimed months, as long as the months being retrospectively claimed fall within the same 6-month tax certificate cycle.
But the point is that the payroll must accumulate qualifying months for each month in which an employee qualifies, irrespective of what happens to the money (the ETI claim).
Expanded ETI Relief
As a result of the four months of Covid lockdown in 2020 and the civil unrest in July 2021, the qualifying conditions of section 6 were relaxed to allow more employees to qualify, thereby increasing the ETI. This improved the company’s cash flow, reduced retrenchments and business closures, and preserved jobs.
During those special tax relief periods, the principle of calculating, recording, and applying qualifying months in payrolls was no different to ‘normal’ months.
13.4 Relevant Extracts from the Employment Tax Incentive Act
Section 3. Eligible employers.—
An employer is eligible to receive the employment tax incentive if the employer—
(a) is registered for the purposes of the withholding and payment of employees’ tax by virtue of paragraph 15 of the Fourth Schedule to the Income Tax Act; and
(b) is not—
(i) the government of the Republic in the national, provincial or local sphere;
(ii) a public entity that is listed in Schedule 2 or 3 to the Public Finance Management Act, 1999 (Act No. 1 of 1999), other than those public entities that the Minister of Finance may designate by notice in the Gazette on such conditions as the Minister of Finance may prescribe by regulation;
(iii) a municipal entity defined in section 1 of the Local Government: Municipal Systems Act, 2000 (Act No. 32 of 2000); and
(c) is not disqualified from receiving the incentive—
(i) by the Minister of Finance in accordance with section 5 (1) (b), due to the displacement of an employee by virtue of section 5 (2); or
(ii) by not meeting such conditions as the Minister of Finance, after consultation with the Minister of Labour, may prescribe by regulation, including—
(aa) conditions based on requirements in respect of the training of employees; and
(bb) conditions based on the classification of trade in the most recent Standard Industrial Classification Code issued by Statistics South Africa.
Section 4. Compliance with wage regulating measures.—
(1) An employer is not eligible to receive the employment tax incentive in respect of an employee in respect of a month if the wage paid to that employee in respect of that month is less than—
(a) the higher of the amount payable by virtue of a wage regulating measure applicable to that employer or the amount contemplated in section 4 (1) of the National Minimum Wage Act, 2018 (Act No. 9 of 2018), or Schedule 2 to that Act; or
(b) if the amount of the wage payable to an employee by an employer is not subject to any wage regulating measure or not subject to section 3 of the National Minimum Wage Act, 2018 (Act No. 9 of 2018), or exempt under section 15 of that Act —
(i) where the employee is employed and paid remuneration for at least 160 hours in a month, the amount of R2 000 in respect of a month; or
(ii) where the employee is employed and paid remuneration for less than 160 hours in a month, an amount that bears to the amount of R2 000 the same ratio as 160 hours bears to the number of hours that the employee was employed for and paid remuneration by that employer in that month.
(2) If an employer receives the employment tax incentive in respect of an employee despite not being eligible by reason of subsection (1), that employer must pay a penalty to the South African Revenue Service in an amount equal to 100 per cent of the employment tax incentive received in respect of that employee in respect of each month that the employer received the employment tax incentive.
(3) For the purposes of this section “wage regulating measure” means—
(a) a collective agreement as contemplated in section 23 of the Labour Relations Act;
(b) a sectoral determination as contemplated in section 51 of the Basic Conditions of Employment Act, or
(c) a binding bargaining council agreement as contemplated in section 31 of the Labour Relations Act, including where such agreement is extended by reason of a determination of the Minister of Labour in terms of section 32 of that Act.
(4) For the purposes of this section, “hours” means “ordinary hours” as defined in section 1 of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997).
Section 6. Qualifying employees.—
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 at the end of any month in respect of which the employment tax incentive is claimed;
(ii) is employed by an employer that is a qualifying company as contemplated in section 12R of the Income Tax Act, and that employee renders services to that employer mainly within the special economic zone in which the qualifying company that is the employer carries on trade; or
(iii) is employed by an employer in an industry designated by the Minister of Finance, after consultation with the Minister of Labour and the Minister of Trade and Industry, by notice in the Gazette;
(b)
(i) is in possession of an identity card referred to in section 14 of the Identification Act, 1997 (Act No. 68 of 1997), issued to that employee after application for the card in terms of section 15 of that Act;
(ii) is in possession of an asylum seeker permit, issued to that employee in terms of section 22 (1) of the Refugees Act, 1998 (Act No. 130 of 1998), after application for the permit in terms of section 21 (1) of that Act; or
(iii) is in possession of an identity document issued in terms of section 30 of the Refugees Act, 1998 (Act No. 130 of 1998);
(c) in relation to the employer, is not a connected person as defined in section 1 of the Income Tax Act;
(d) is not a domestic worker as defined in section 1 of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997);
(e) was employed by the employer or an associated person on or after 1 October 2013 in respect of employment commencing on or after that date;
(f) is not an employee in respect of whom an employer is ineligible to receive the incentive by virtue of section 4; and
(g) receives remuneration in an amount less than R6 500 in respect of a month.
Section 7. Determining amount of employment tax incentive.—
(1) During each month, commencing from 1 January 2014, that an employer employs a qualifying employee, the amount of the employment tax incentive available to that employer is the sum of the amounts determined in respect of each qualifying employee of that employer stipulated in subsections (2) and (3) and section 9.
(2) During each month of the first 12 months in respect of which an employer employs a qualifying employee, the amount of the employment tax incentive in respect of that qualifying employee, if the monthly remuneration of the employee is— … [calculation formula follows]
(3) During each of the 12 months after the first 12 months that the same employer employs the qualifying employee, the amount of the employment tax incentive in respect of that qualifying employee, if the monthly remuneration of the employee is—… [calculation formula follows]
(4) If a qualifying employee was previously, on or after 1 January 2014, employed by an associated person in relation to the employer that employs the qualifying employee, the number of months that the qualifying employee was employed by the associated person must be taken into account by that employer for the purposes of this section as if that employee had already been employed by that employer for that number of months.
“Associated person”, in relation to an employer—
a. where the employer is a company, means any other company which is associated with that employer by reason of the fact that both companies are managed or controlled directly or indirectly by substantially the same persons;
b. where the employer is not a company, means any company which is managed or controlled directly or indirectly by the employer or by any partnership of which the employer is a member; or
c. where the employer is a natural person, means any relative of that employer;
Section 9. Roll-over of amounts.—
(1) Subject to subsection (4) and section 10 (3), if in any month the amount of the employment tax incentive available to an employer exceeds the amount payable by the employer in respect of employees’ tax, the amount of the employment tax incentive by which the employees’ tax may be reduced in the succeeding month must be increased by adding the amount of that excess to the amount of the employment tax incentive that is available in that succeeding month.
(2) If an employer does not reduce employees’ tax in the amount of the employment tax incentive despite that amount being available to that employer, the sum of the amounts by which the employer would have been entitled to reduce employees’ tax must be treated as an excess contemplated in subsection (1) in the first month that the employer reduces employees’ tax in the amount of the tax incentive available to the employer.
(3) If, by virtue of section 8, an employer may not reduce employees’ tax in the amount of the employment tax incentive available to that employer, the sum of the amounts by which the employer would have been entitled to reduce employees’ tax payable by that employer if the employer had not been subject to section 8 must be treated as an excess contemplated in subsection (1) in the first month that the employer is not subject to section 8.
(4) Any amount as contemplated in subsection (2) or (3) on the first day of the month following the end of the period for which the employer is required to render a return in terms of paragraph 14 (3) (a) of the Fourth Schedule to the Income Tax Act, must be deemed to be nil in respect of each qualifying employee employed by the employer on that date.