Changes to the ETI Formulas to Increase the Value of the Employment Tax Incentive

In the Budget Review of 23 February 2022, the Minister of Finance announced changes to the ETI calculation formulas that increase the value of the ETI amount by up to 50%, effective from 1 March 2022.

Background:
The State President announced in the State of the Nation Address in February 2022 that the value and criteria for participation in the Employment Tax Incentive (ETI) would be increased to encourage hiring by smaller businesses, particularly of young people. The intention to change three areas of the ETI Act was highlighted in the announcement.

2022 Budget Review:
The 2022 Budget Review implemented the increase in the value of the ETI by including the new calculation formulas in the draft Rates Bill and making them effective from 1 March 2022. The Minister of Finance has the authority to propose changes to the ETI Act in the Budget Review, with an effective date of up to 12 months from the proposed date.

Change to the ETI Calculation Formulas:
However, an error was discovered in the initial Rates Bill issued on 23 February 2022, where the percentages in the formula for the “R4,500 to R6,500” bracket were not increased by 50% as intended. This error was corrected in the revised Rates Bill issued on 25 February 2022. The correct formulae are now in effect from 1 March 2022.

Old ETI Calculation Formulas (up to 28 February 2022):
– Monthly Remuneration: R0 to R1,999.99
– First 12 Months: 50% of Monthly Remuneration
– Second 12 Months: 25% of Monthly Remuneration
– Monthly Remuneration: R2,000 to R4,499.99
– First 12 Months: R1,000.00
– Second 12 Months: R500
– Monthly Remuneration: R4,500 to R6,499.99
– First 12 Months: R1,000 – (50% x (monthly remuneration – R4,500))
– Second 12 Months: R500 – (25% x (monthly remuneration – R4,500))

New ETI Calculation Formulas (from 1 March 2022):
– Monthly Remuneration: R0 to R1,999.99
– First 12 Months: 75% of Monthly Remuneration
– Second 12 Months: 37.5% of Monthly Remuneration
– Monthly Remuneration: R2,000 to R4,499.99
– First 12 Months: R1,500.00
– Second 12 Months: R750
– Monthly Remuneration: R4,500 to R6,499.99
– First 12 Months: R1,500 – (75% x (monthly remuneration – R4,500))
– Second 12 Months: R750 – (37.5% x (monthly remuneration – R4,500))

Tax Certificate Reporting:
The PAYE BRS version 21.0.0 provides the rules for tax certificate submissions by payrolls for the 2023 tax year. SARS will update the validation rules in the BRS for the monthly ETI fields to accommodate the increased ETI values resulting from the new formulas.

Importance of the ETI Formula Changes:
The changes to the ETI formulas, along with changes to the definition of “monthly remuneration” in the ETI Act, were released in a rushed manner, leaving payroll suppliers with limited time to implement the changes before the first ETI calculation runs for March. Delays in implementing the new formulas may cause issues with tax year submissions.

Still to be resolved:
There are two issues that require interpretation by SARS resulting from the changes made to the definition of “monthly remuneration” in the ETI Act. These issues relate to the exclusion of fringe benefits from ETI monthly remuneration and the application of BCEA section 34(1)(b) deductions to ETI monthly remuneration. Formal interpretations from SARS are awaited.