Rhona van Taak Knowledge base – ETI 2 – The Payroll Authors Group of South Africa

05Dec

Qualifying employee
Sections 6(a) to (g) of the ETI Act specify the seven conditions that must be met before an employee qualifies to generate the ETI for an eligible employer.
The draft TLAB of 28 July 2021 added a short proviso that applies to the whole of section 6.

Comments submitted to SCOF (the Standing Committee on Finance) and their response on the proposed amendment to section 6 in the draft TLAB:

Towards the end of 2021, SCOF (the Standing Committee on Finance) received comments that expressed the concern that the amendment to section 6 proposed in the draft TLAB could result in legitimate ETI claims no longer qualifying for the incentive.

Instances where the employer provides on the job training, where the employer and employee have entered a learnership or apprenticeship program, or where the employee is on a secondment, may no longer qualify for the incentive.

It was suggested that consideration should rather be given to clarifying that the employee should be given a cash payment in in consideration for services rendered.

The Standing Committee on Finance accepted the comments as being valid, and responded as follows:

The incentive is intended to apply to all legitimate arrangements where the employee is not only engaged in the activity of studying, but rather gaining valuable work experience. In the event that some of the employee’s duties involve some sort of training or studying, the costs of said training or studying should ideally be borne by the employer.

To ensure that the employee’s remuneration package is not solely allocated to costs associated with any required training or studying, qualification for the incentive shall further be based on the employee receiving a cash payment in lieu of services rendered.

Changes will be made to the 2021 Draft TLAB to reflect this intention.

Changes to the proviso to section 6 effective from 1 March 2022:

To give effect to their response to the comments, SCOF extended the proviso to section 6 by adding the last portion that starts with the word “unless” to the final TLAB.
The wording of the final proviso in the TLAA of 19 January 2022 that has been inserted in section 6 is underlined:
Section 6. An employee is a qualifying employee if the employee—
[subsections (a), (b), (c), (d), (e), (f), and (g) i.e. the 7 x qualifying tests, are not listed here to keep it short]
Provided that the employee is not, in fulfilling the conditions of their employment contract during any month, mainly involved in the activity of studying, unless the employer and employee have entered into a learning programme as defined in section 1 of the Skills Development Act, 1998 (Act No. 97 of 1998), and, in determining the time spent studying in proportion to the total time for which the employee is employed, the time must be based on actual hours spent studying and employed.

Comments on the proviso
‘Mainly’ is interpreted to mean ‘more than 50%’.
The proviso specifies that “mainly involved in the activity of studying” (as opposed to ‘mainly’ providing services to the employer), must be measured “based on actual hours spent studying and employed”.
Keeping track of these hours will no doubt add a significant administration burden on the employer’s shoulders.

SARS have kindly interpreted the portion of the proviso that was added from “unless” to accommodate learnerships:
The way that we read the last part of the proviso to section 6, namely “in determining the time spent studying in proportion to the total time for which the employee is employed, the time must be based on actual hours spent studying and employed”, it does not apply to learning programmes as defined in section 1 of the Skills Development Act (legitimate learnership agreements).
This is also in accordance with the purpose of the amendments – to curb the training related ETI abuse. We do not want to discourage legitimate learnership agreements.
In other words, the words:
“unless the employer and employee have entered into a learning programme as defined in section 1 of the Skills Development Act, 1998 (Act No. 97 of 1998)”,
removes the employee from the “mainly” proviso, and the employer of the learner is not required to track the actual hours worked and studying.
However, the words:
“in determining the time spent studying in proportion to the total time for which the employee is employed, the time must be based on actual hours spent studying and employed”,
are applicable when the employer and employee have not entered a learning programme as defined in section 1 of the Skills Development Act.
In this case, the employer is required to track the actual hours worked and studying.
ETI legislation breakdown (outside Covid tax relief periods)

An employer must apply the test prescribed in the ETI Act, in order to determine if ETI can be claim for a specific employee.

These tests are:
1. Is the employer an eligible employer (s3)
2. Does the employer comply with a wage regulating measure (s4)
3. Is the employer disqualified due to displacement (s5)
4. Is the employee a qualifying employee (s6)

When all the above-mentioned tests are satisfied, the employer must determine the ETI amount in respect of the relevant employee (s7).

1. Eligible employer
a. Is the employer register for PAYE at SARS
b. Is the employer NOT a government employer in the national, provincial or local spheres
c. Is the employer NOT disqualified from receiving ETI
If all the above is satisfied, the employer is an eligible employer

2. Does the employer comply with a wage regulating measure in respect of the specific employee
a. Is the amount of wage paid to the employee NOT lower than the highest of-
(i) A wage regulating measure (if applicable) and
(ii) National minimum wage; OR
b. If a. above is not applicable (there is no wage regulating measure AND the employer is exempt from paying the national minimum wage) —
(i) If the employee was employed and paid for at least 160 hours, the amount must not be less than R2000
(ii) If the employee was employed and paid for less than 160 hours, the amount must not be less than R2000 ÷ 160 x hours employed and paid
Wage regulating measure is either a —
• s23 (Labour Relations Act) collective agreement, or
• s51 (Basic Conditions of Employment Act) sectoral determination; or
• s31 (labour Relations Act) binding bargaining council agreement including extended agreements 9s32)

Section 4 of the ETI Act refers to the “higher of” a wage regulating measure or the National Minimum Wage. Therefore, if an employee is subject to a wage regulating measure that is lower than the National Minimum Wage, the National Minimum Wagemust be used as the qualifying criteria.

HOURS is ordinary hours as defined in s1 of Basic Conditions of Employment Act.
• The SARS Non Binding Private Opinion issued to the PAGSA confirms that ‘wage’ as referred in the ETI Act is as defined in the Basic Conditions of Employment Act. In terms of this definition, wage is: “The amount of money paid or payable to an employee in respect of ordinary hours of work, or if they are shorter, the hours an employee ordinarily works in a day or week”.
• The use of the term ‘money’ means that wage can only be an amount paid in cash i.e. that appears on the earnings side of the payslip, and does not include payments in kind, being benefits or employer-paid contributions of any nature. This makes it clear that other types of payments to the employee such as a housing allowance or the provision of a house, do not constitute wage as has been suggested by some.

3. Is the employee a Qualifying employee
a. Is the employee between 17 and 30 years old on the last day of the month; OR
b. Does the employee render service in a special economic zone where a qualifying company carries on trade; OR
c. Is the employee employed by an employer in a designated industry;
AND
a. Do the employee have an identity card OR asylum seeker permit OR ID document
AND
a. Is not a connected person to the employer
AND
a. Is not a domestic worker
AND
a. Was employed by employer or associated employer after 30 September 2013
AGE:
• “With regards to the age requirement under section 6(a)(i) of the ETI Act, an employee will qualify in the month in which they turn 18 and will cease to qualify in the month in which they turn 30.”
For example, if an employee turns 29 on 31 January, this person will qualify for ETI for January and the next 11 months as he has not yet turned 30. This employee will cease to qualify in January of the following year when the employee turns 30.
• Note that the qualifying age test is applied at the end of each month based on the employee’s age in that calendar month.

4. Calculating ETI for each qualifying employee. Where all 3 the above-mentioned tests are satisfied, the employer may calculate the ETI amount in respect of each qualifying employee (s7).

a. The employer must first determine the “monthly remuneration” amount:
(i) If the employee was employed and paid for at least 160 hours, the total remuneration paid to him for the month will be used
(ii) If the employee was employed and paid for less than 160 hours, the remuneration must be gross-up by ÷ hours employed and paid x 160

b. However, to determine which part of section 7 must be used, the qualifying month of the qualifying employee must first be determined.
ETI Qualifying months
• refers to months in which an employee qualified to generate ETI for an eligible employer.
• Assuming that the employee qualifies, each ‘qualifying month’ must be recorded from the start date of employment of the employee, irrespective of whether or not the employer claimed ETI via the EMP201 process.
• Where the employee does not qualify due to the remuneration being more than the R6500 (s6(g), that specific month during the employment period do not count as a qualifying month.
The PAGSA requested a ruling from SARS, and SARS confirmed and also referred to paragraph 3.3 of the Guide to the Employment Tax Incentive (Issue 3) that states as follows: “The 24-month period is determined with reference to the period that a qualifying employee is employed and not the periods during which the ETI are actually 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.”
In this regard, see also example 4 in the SARS ETI Guide (Issue 3).
• The same principle applies to employees who ‘come and go’ (such as seasonal workers).
• The employer must count ‘qualifying months’ from the first period of employment in which the employee qualified for ETI, and continue counting the ‘qualifying months’ in each subsequent period of employment for which there is an ETI value.
Refer to example 17 in the SARS ETI Guide.
• The qualifying months counted by an associated employer must be taken into account

c. If the qualifying month count is 1-12, then ETI must be calculated as follows:
• Remuneration 0-1999: ETI is 50% of the remuneration
• Remuneration 2000-4499: ETI is R1000
• Remuneration 4500-6500: ETI is: R1000 – (0.5 x (monthly remuneration – R4500))

d. If the qualifying month count is 13-24, then ETI must be calculated as follows:
• Remuneration 0-1999: ETI is 25% of the remuneration
• Remuneration 2000-4499: ETI is R500
• Remuneration 4500-6500: ETI is: R500 – (0.25 x (monthly remuneration – R4500))

e. After the ETI amount was calculated as above, the ETI so calculated must be gross-down if the remuneration was not received for at least 160 hours by: ETI calculated ÷ 160 x hours remunerated

5. The SUM total (ETI available) of the ETI for all employees (as determine according to 4(d) above) must be claimed against the PAYE payable for that specific month.

a. In cases where the ETI available exceeds the PAYE for the specific month, the ETI available in that specific month which exceeds the PAYE should be treated as an excess ETI

b. In cases where the tax affairs of the employer are not in order (e.g. outstanding returns or debts (s8)), the ETI available in that specific month will be treated as an excess ETI
Excess ETI b/f ETI calculated for month ETI available to employer ETI claimed against PAYE Excess ETI c/f
0 + 10000 = 10000 — 2000 = 8000
8000 + 11000 = 19000 — 0 = 19000
19000 + 8500 = 27500 — 6500 = 21000

6. Excess ETI (s9)

a. Where the available ETI could not be claimed due to the tax affairs of the employer not being in order, the excess amount may be claimed in the first month when the tax affairs are in order unless it is the month of September or March (month after reconciliation period end date).

b. Where the available ETI was not be claimed although it could have been claimed in a previous month, the excess amount may be claimed in the next month unless it is the month of September or March (month after reconciliation period end date).

7. ETI refunds by SARS

a. The excess ETI indicated on the EMP501 reconciliation for the period ending August and February of each tax year will be refunded by SARS if —
• The bank details are correct on the SARS record
• The employer is tax compliant (no outstanding tax affairs)

b. In cases where the employer is not tax compliant for the ETI refund process, the employer will have six months from the start of the next reconciliation cycle (1 September to 28 February or 1 March to 31 August in respect of the interim and annual reconciliations) to correct any non-compliance and be able to receive the ETI refund. If the employer doesn’t become compliant by the end of the next six month reconciliation period, 28 February or 31 August, the ETI refund will be forfeited

8. Backdated ETI claims:

SARS has provided a period of time until 1/3/2017 for employers to implement ETI. Until this period, employers were allowed to claim backdated ETI calculated. Please refer to the following link:
https://www.sars.gov.za/FAQs/Pages/2303.aspx

From 1 March 2017 the employer cannot claim backdated claims for any period. The last month available to the employer to make that claim was February 2017 EMP201 return. The ETI amounts which the employer did not claim despite it being available at that time will be forfeited.

In terms of Section 7 of the ETI Act, the employer must calculate the ETI for each month during which he employs a qualifying employee. This calculated amount (ETI available for employer) must then be completed on the EMP201. If the amount is not completed on the monthly EMP201, it simply means that the employer has a 0.00 calculated ETI amount for that specific month.

Should an employer after the submission of the monthly EMP201, then calculates ETI for any of these backdate months, it will not be allowed by SARS, unless it is in the same reconciliation period (either March to August or September to February).

In order to claim the ETI, the employer must complete the calculated ETI field with the amount of the ETI that he calculated up to that month in the same reconciliation period during the current month in which the EMP201 is completed.

For example:
Sep ETI: 500 (not claimed)
Oct ETI: 500
EMP201 for October will have to reflect R1000 (500 for Sep + 500 for Oct) as calculated.

Section 9(4) of the ETI Act: However, if the ETI falls within the same reconciliation period. E.g. 1 March to 31 August OR 1 September to 28 February, then the employer may claim the backdated calculation in that period in the current month.

Please note that if the employer only applies ETI from September, it will means that he will not be allowed to claim ETI for the previous interim reconciliation period (e.g. 1 March to 31 August) in terms of the provisions of section 9(4), such amount will be forfeited.

Section 9 of the ETI Act deals with the Roll-over amounts in cases where the ETI was available but could not be claimed due to non tax compliance or limited PAYE available to off-set the available ETI.
The ETI claim field may not exceed the PAYE liability on the EMP201.

9. Cessation of ETI Act: No employer will be able to claim ETI after 28 February 2029

ETI legislation breakdown [applicable to Covid tax relief periods (01/05/2020-31/07/2020 & 01/08/2021-30/11/2021)]
An employer must apply the test prescribed in the ETI Act, in order to determine if ETI can be claim for a specific employee.

When all the above-mentioned tests are satisfied, the employer must determine the ETI amount in respect of the relevant employee (s7).

2. Does the employer comply with a wage regulating measure in respect of the specific employee
a. Is the amount of wage paid to the employee NOT lower than —
(i) A wage regulating measure (if applicable): OR
(ii) National minimum wage; OR
b. If a. above is not applicable (there is no wage regulating measure AND the employer is exempt from paying the national minimum wage) —
(i) If the employee was employed and paid for at least 160 hours, the amount must not be less than R2000
(ii) If the employee was not employed and paid for less than 160 hours, the amount must not be less than R2000 ÷ 160 x hours employed and paid
Wage regulating measure is either a —
• s23 (Labour Relations Act) collective agreement, or
• s51 (Basic Conditions of Employment Act) sectoral determination; or
• s31 (labour Relations Act) binding bargaining council agreement including extended agreements 9s32)
HOURS is ordinary hours as defined in s1 of Basic Conditions of Employment Act.
• The SARS Non Binding Private Opinion issued to the PAGSA confirms that ‘wage’ as referred in the ETI Act is as defined in the Basic Conditions of Employment Act. In terms of this definition, wage is: “The amount of money paid or payable to an employee in respect of ordinary hours of work, or if they are shorter, the hours an employee ordinarily works in a day or week”.
• The use of the term ‘money’ means that wage can only be an amount paid in cash i.e. that appears on the earnings side of the payslip, and does not include payments in kind, being benefits or employer-paid contributions of any nature. This makes it clear that other types of payments to the employee such as a housing allowance or the provision of a house, do not constitute wage as has been suggested by some.

3. Is the employee a Qualifying employee
a. Is the employee between 17 and 30 years old on the last day of the month and was employed after 30 September 2013; OR
b. Is the employee between 17 and 30 years old on the last day of the month and was employed before 1 October 2013; OR
c. Is the employee between 30 and 66 years old on the last day of the month; OR
d. Does the employee render services in a special economic zone where a qualifying company carries on trade; OR
e. Is the employee employed by an employer in a designated industry;
AND
f. Do the employee have an identity card OR asylum seeker permit OR ID document
AND
g. Is not a connected person to the employer
AND
h. Is not a domestic worker
AGE:
• “With regards to the age requirement under a above, an employee will qualify in the month in which they turn 18 and will cease to qualify in the month in which they turn 30.”
For example, if an employee turns 29 on 31 January, this person will qualify for ETI for January and the next 11 months as he has not yet turned 30. This employee will cease to qualify in January of the following year when the employee turns 30.
• “With regards to the age requirement under b above, an employee will qualify in the month in which they turn 18 and will cease to qualify in the month in which they turn 30.”
• “With regards to the age requirement under c above, an employee will qualify in the month in which they turn 30 and will cease to qualify in the month in which they turn 66.”
Notes:
1. The qualifying age test is applied at the end of each month based on the employee’s age in that calendar month.
2. Although an employee ceased to qualify in terms of a above due to employment date, such employee may qualify due to b above
3. Although an employee ceased to qualify in terms of a and b above due to employment date or age test, such employee may qualify due to c above
4. No employment date is applicable for employee render services in a special economic zone where a qualifying company carries on trade OR employee employed by an employer in a designated industry as sub-paragraph (e) was deleted in the Act

4. Calculating ETI for each qualifying employee. Where all 3 the above-mentioned tests are satisfied, the employer may calculate the ETI amount in respect of each qualifying employee (s7).

a. The employer must first determine the “monthly remuneration amount. Due to the amendment to the definition of monthly remuneration, no grossing-up must be done. If the employee was employed and paid for at least 160 hours, the total remuneration paid to him for the month will be used

b. However, to determine which part of section 7 must be used, the qualifying month of the qualifying employee must first be determine.
ETI Qualifying months
• refers to months in which an employee qualified to generate ETI for an eligible employer.
• Assuming that the employee qualifies, each ‘qualifying month’ must be recorded from the start date of employment of the employee, irrespective of whether or not the employer claimed ETI via the EMP201 process.
• Where the employee does not qualify due to the remuneration being more than the R6500 (s6(g), that specific month during the employment period do not count as a qualifying month.
The PAGSA requested a ruling from SARS, and SARS confirmed and also referred to paragraph 3.3 of the Guide to the Employment Tax Incentive (Issue 3) that states as follows: “The 24-month period is determined with reference to the period that a qualifying employee is employed and not the periods during which the ETI are actually 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.”
In this regard, see also example 4 in the SARS ETI Guide (Issue 3).
• The same principle applies to employees who ‘come and go’ (such as seasonal workers).
• The employer must count ‘qualifying months’ from the first period of employment in which the employee qualified for ETI, and continue counting the ‘qualifying months’ in each subsequent period of employment for which there is an ETI value.
Refer to example 17 in the SARS ETI Guide.
• The qualifying months counted by an associated employer must be taken into account

c. Qualifying month indicator = 1: If the qualifying month count (for employees in 3(a), (d) and (e)) is 1-12, then ETI must be calculated as follows:
• Remuneration 0-1999: ETI is 87.5% of the remuneration
• Remuneration 2000-4499: ETI is R1750
• Remuneration 4500-6500: ETI is: R1750 – (0.875 x (monthly remuneration – R4500))

d. Qualifying month indicator = 2: If the qualifying month (for employees in 3(a), (d) and (e)) count is 13-24, then ETI must be calculated as follows:
• Remuneration 0-1999: ETI is 62.5% of the remuneration
• Remuneration 2000-4499: ETI is R1250
• Remuneration 4500-6500: ETI is: R1250 – (0.625 x (monthly remuneration – R4500))

e. Qualifying month indicator = 3:
If the employee qualifies for employees in 3(b) and (c), OR
If the qualifying month count (for employees in 3(a), (d) and (e)) exceeds 24, then ETI must be calculated as follows:
• Remuneration 0-1999: ETI is 37.5% of the remuneration
• Remuneration 2000-4499: ETI is R750
• Remuneration 4500-6500: ETI is: R750 – (0.375 x (monthly remuneration – R4500))

f. After the ETI amount was calculated as in (c), (d) and (e) above, the ETI so calculated must be gross-down if the remuneration was not received for at least 160 hours by: ETI calculated ÷ 160 x hours remunerated

5. The SUM total (ETI available) of the ETI for all employees (as determine according to 4(f) above) must be claimed against the PAYE payable for that specific month.

a. In cases where the ETI available exceeds the PAYE for the specific month, the ETI available in that specific month which exceeds the PAYE should be treated as an excess ETI

6. Excess ETI (s9)

7. ETI refunds by SARS

a. The excess ETI indicated for covid months will be monthly refunded by SARS if —
• The bank details are correct on the SARS record
• The employer is tax compliant (no outstanding tax affairs)

ETI on suspension pay
An eligible employer may claim ETI in respect of a qualifying employee.
Thus before we can consider the requirements under section 4 of the ETI Act which deals with the minimum wage, we need to first consider whether the person meets the definition of “employee” under section 1(1) of the ETI Act. The definition states that an employee must be a natural person who works for another person and who receives or is entitled to receive remuneration from that person.
Since the definition of “employee” under section 1(1) of the ETI Act requires that the natural person must work for another person, it is clear that the person that has been suspended by the employer will not meet the definition of “employee” under section 1(1) of the ETI Act and thus the employer may not claim ETI in respect of this person. Furthermore, the ETI calculated is gross-down by dividing the ETI amount with 160-hours and multiply with ACTUAL HOURS WORKED. If a person on suspension do not work for the month, this calculation will result in zero.