to the definition of an “employee” in the Employment Tax Incentive Act (ETI Act) to address the issue of “ETI schemes”. These schemes involve the recruitment of eligible participants by a recruitment agency and their employment by a participating employer for a fixed term period. The participants are then trained by a training institution, with the participating employer paying the remuneration stated in the participant’s contract to the training institution instead of directly to the participant. In some cases, the participants are also utilized by an independent company for work-based exercises and activities.

To curb the abuse of ETI schemes, the amendments to the ETI Act clarify that the substance of the employment relationship will be considered, rather than just the legal form. The work must be performed in accordance with an employment contract and the employee must be documented in the employer’s records as required by the Basic Conditions of Employment Act. Additionally, the employee must receive cash remuneration from the employer in exchange for their services.

These amendments were made in response to the growing concern over taxpayers using training institutions to claim the ETI for students. By specifying the requirements for claiming the ETI, the amendments aim to prevent the misuse of the incentive and ensure that it is used as intended – to encourage employers to hire young people and subsidize their wage costs.

The changes to the ETI Act were finalized in October/November 2021 by the Standing Committee on Finance and published in the Taxation Laws Amendment Act (TLAA) on 19 January 2022. The effective date of these amendments is 1 March 2022.

It is important for employers and payroll suppliers to accurately calculate the monthly remuneration for ETI purposes. Incorrect calculations can result in an incorrect reduction of the employer’s PAYE liability. The Payroll Authors Group of South Africa (PAGSA) has worked closely with the South African Revenue Service (SARS) to provide guidance on the calculation of ETI monthly remuneration. A Non-Binding Private Opinion (NBPO) was issued by SARS on 7 March 2022, and an example of the calculation of ETI monthly remuneration has been included in this newsflash as guidance for payroll suppliers.

The challenges faced by payroll suppliers in implementing the new ETI requirements in a timely manner have been communicated to SARS by PAGSA. The limited time between the publication of the TLAA and the effective date of the amendments has put pressure on all parties involved.

In conclusion, the amendments to the ETI Act aim to curb the abuse of ETI schemes by specifying the requirements for claiming the incentive. Employers and payroll suppliers should ensure that they accurately calculate the monthly remuneration for ETI purposes to avoid any incorrect reduction of PAYE liability. The guidance provided by PAGSA and the NBPO issued by SARS can assist in this process.