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05Dec

Changes to the Long Service Award Requirement – Effective 1 March 2022
PAGSA Newsflash 2022-03 discussed the general (simpler) changes made by the 2021 tax amendment Acts that were published on 19 January 2022 and indicated that there are two complicated amendments that the PAGSA has been discussing with the authorities for some time to get clarity. One of the two problematic amendments that we have been discussing with SARS is the changes to the taxation rules for qualifying Long Service Awards, and the correct method of reporting this information on tax certificates, and we have today received the SARS opinion on the issues. Background to Long Service Awards
Paragraphs 2(a) and 5 of the Seventh Schedule of the Income Tax Act provide that when an employee acquires an asset from an employer either for no consideration or for a consideration which is less than the value of the asset, a taxable fringe benefit arises. Depending on the circumstances, the value is either the cost to the employer, or the market value. Generally, for long service awards, the value is the cost to the employer. However, if an employer gives an asset is to an employee in recognition of long service and the conditions for ‘long service’ are met (discussed below), the fringe benefit value can be reduced by the lower of the asset value and R5 000. The Budget Review of 2021 noted that in practice some employers reward employees for long service in a variety of forms other than the acquisition of an asset and proposed that the taxable value of these other forms of awards should in total also be reduced by up to R5 000 on condition that the ‘long service’ conditions are met. These proposals were turned into draft amendments, issued for comment in July 2021, and were promulgated in the final Taxation Laws Amendment Act on 19 January 2022. The ‘Long Service’ Conditions
The ‘Long service’ conditions are specified in paragraph 5(4) of the Seventh Schedule as being:
An initial unbroken period of service of not less than 15 years, or
Any subsequent unbroken period of service for the same employer of not less than 10 years. The reduction in the fringe benefit value does not apply automatically at intervals of 15, 25, 35 etc. years of service. Employees who received their initial long service award after, for example, 17 years of service, must wait for a further 10 years (i.e. after 27 years of work for the same employer), before the reduction of the value of the fringe benefit can be applied again. The ‘Long Service’ Amendments – Effective from 1 March 2022
The final amendments are included in the appendix to this Newsflash for your convenience. In short, the types of awards for long service whose taxable value can be reduced by up to R5 000 from 1 March 2022 are listed below coupled to a reference to the applicable legislation:
Existing type of award available prior to, and from 1 March 2022
1.Acquisition of an Asset at Less than Actual value [Seventh Schedule par 5(2)(b)]
New types of awards available from 1 March 2022
2.Right of Use of an Asset [Seventh Schedule par 6(4)(d)]
3.Free or Cheap Services [Seventh Schedule par 10(2)(c)]
4.Cash [“gross income” in section 1 of the Income Tax Act, par (c) and proviso (vii)]
Note the following regarding the above types of long service awards available to employers from 1 March 2022:
1.Point 1 above is not new (as far as I can determine, this provision has been in the Act since 1985)
2.Points 2, 3, and 4 are the new forms of award that are available from 1 March 2022
3.Points 1, 2, and 3 are fringe benefits
4.Point 4 is an award paid in cash. These changes are all welcome and probably legitimise what some employers have been doing in practice for years, but they do raise some complications. The addition of points 2 and 3, being fringe benefits, is not a radical departure from the principle that we have been familiar with for many years but allowing a cash payment as a long service award, is a radical departure. But this departure from the rule is only if the long service conditions are met. that are also cash payments. Guess what.

A Long Service Cash Award given to an employee that complies with the initial 15 years and any subsequent 10 years unbroken period of service requirement – par (vii) of the proviso under par (c) of “gross income” in section 1 of the Income Tax Act should be reported under IRP5 code (code) 3622 (3672 for foreign services income) from the 2023 tax year. Prior to the 2023 tax year a cash value was not allowed as a long service award for the R5000.00 non taxable reduction. The value of the portion of the long service award included in IRP5 code (code) 3622 (3672 for foreign services income) must be added under IRP5 code (code 3696) only if the sum of 3622/3672 and 3835/3885 does not exceed R5,000. If it exceeds R5000.00 the value should be included under IRP5 code (code) 3699 on the employee tax certificate.

A Long Service Award given to an employee that complies with the initial 15 years and any subsequent 10 years unbroken periods of service requirement should be reported under IRP5 code (code) 3835 (3885 for foreign services income) from the 2023 tax year. The value of the portion of the long service award included in IRP5 code (code) 3835 (3885 for foreign services income) must be added under IRP5 code (code 3696) only if the sum of 3622/3672 and 3835/3885 does not exceed R5,000. If it exceeds R5000.00 the value should be included under IRP5 code (code) 3699 on the employee tax certificate.

05Dec

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.

05Dec

ETI (EMPLOYMENT TAX INCENTIVE)

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 and their response
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 [my emphasis] 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)

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.” (not less than 18 and not more than 29)
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 unless it is the month of September or March (month after reconciliation periods end date). Excess ETI amounts can only be carried over to the periods of reconcilliatio. These periods are August and Febraury of every year. Any unutelised excess ETI will be lost in the month after August (thus September) and February (thus March)

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 unless it is the month of September or March (month after reconciliation periods end date). Excess ETI amounts can only be carried over to the periods of reconcilliatio. These periods are August and Febraury of every year. Any unutelised excess ETI will be lost in the month after August (thus September) and February (thus March)
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 periods end date). Excess ETI amounts can only be carried over to the periods of reconcilliatio. These periods are August and Febraury of every year. Any unutelised excess ETI will be lost in the month after August (thus September) and February (thus March)

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 periods end date). Excess ETI amounts can only be carried over to the periods of reconcilliatio. These periods are August and Febraury of every year. Any unutelised excess ETI will be lost in the month after August (thus September) and February (thus March)

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).

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 employer 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 unless it is the month of September or March (months after reconciliation period end date). Excess ETI amounts can only be carried over to the periods of reconcilliatio. These periods are August and Febraury of every year. Any unutelised excess ETI will be lost in the month after August (thus September) and February (thus March)

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 (months after reconciliation period end date). Excess ETI amounts can only be carried over to the periods of reconcilliatio. These periods are August and Febraury of every year. Any unutelised excess ETI will be lost in the month after August (thus September) and February (thus March)

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 (months after reconciliation period end date). Excess ETI amounts can only be carried over to the periods of reconcilliatio. These periods are August and Febraury of every year. Any unutelised excess ETI will be lost in the month after August (thus September) and February (thus March)

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.

Excess ETI amounts can only be carried over to the periods of reconcilliatio. These periods are August and Febraury of every year. Any unutelised excess ETI will be lost in the month after August (thus September) and February (thus March)

05Dec

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.

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

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).

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

6. Excess ETI (s9)

7. ETI refunds by SARS

8. Backdated ETI claims:

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.

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

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.

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).

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))

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)

05Dec

Excess Employment Tax Incentive (ETI) amounts that cannot be utilized in a specific month are carried forward to future months. These excess ETI amounts can be offset against the employer’s monthly PAYE liability in subsequent months, subject to the limitations and restrictions set out in the ETI legislation.

The ETI legislation allows for the carry-forward of excess ETI amounts for up to six consecutive months from the start of the tax year (August and February). This means that if an employer has more ETI credits than their PAYE liability in a particular month, the excess amount can be carried forward and used to reduce the PAYE liability in the following months, up to August and Febraury whereafter it will be forfeited. Up to the end of the current reconciliation period

It’s important to note that excess ETI amounts cannot be refunded or claimed as a cash payment. They can only be offset against the employer’s PAYE liability. Sars refund this after the processing of the reconciliation

SARS typically refunds excess ETI amounts after the processing of the reconciliation at the end of the tax year or at the end of the mid-year reconcilliation. If there are excess ETI amounts that cannot be utilized to offset the employer’s PAYE liability in the following months, these amounts will be taken into account during the annual or bi-annual reconciliation process. The reconciliation process usually takes place after the end of the tax year or in August, and any refund due will be processed accordingly.

An employer will not be allowed to claim the Employment Tax Incentive (ETI) for a specific month under the following circumstances:
1. **Employer Not Registered for PAYE:** If the employer is not registered for Pay-As-You-Earn (PAYE) withholding tax with the South African Revenue Service (SARS), they will not be eligible to claim the ETI.
2. **Non-Compliance with ETI Legislation:** If the employer does not comply with the requirements and conditions set out in the ETI legislation, such as employing individuals who do not meet the age criteria or are excluded from the incentive, they will not be allowed to claim the ETI.
3. **Exceeding the Monthly ETI Limit:** If the employer exceeds the monthly ETI limit allowed for each qualifying employee, they will not be able to claim the excess amount in that specific month. The ETI limits are set by SARS and must be adhered to by the employer.
4. **Connected Persons:** If the employee is a connected person to the employer, as defined in the ETI legislation, the employer will not be allowed to claim the ETI for that individual.
5. **Not Meeting Documentation Requirements:** If the necessary documentation, such as valid identification documents, is not provided for the qualifying employees, the employer may not be allowed to claim the ETI for that month.

It is essential for employers to understand and comply with the ETI legislation to ensure that they meet all the requirements for claiming the incentive in eligible months. Failure to meet these criteria may result in the employer not being allowed to claim the ETI for specific months.
An employer can’t claim the ETI (i.e. reduce their PAYE (Employees’ Tax) liability) if on the last day of the month, the employer-
• Has failed to submit any return/declaration
• Has any tax debt outstanding, excluding a tax debt –
o Where an agreement has been made for a deferral payment
o That has been suspended pending an objection or appeal or
o Where the tax debt is less than R100.
• Has paid the employee a wage exceeding R6 000 in a specific month.

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

FAQ: When will an employer not be allowed to claim the Employment Tax Incentive (ETI) in a specific month?

05Dec

UIF

The code used to reflect UIF (Unemployment Insurance Fund) on the IRP5/IT3(a) form in South Africa is code 4141 as issued through the Business Requirement Specification from SARS.

The monthly UIF Remuneration threshold increased to a maximum threshold of R17 712 per month (R212 544 per year) from 1 June 2021. This means that UIF should be calculated on Remuneration up to the amount of the threshold. Commission is specifically excluded from this Remuneration.

Payment of contributions

Section 8 and 9 of the Unemployment Insurance Contributions Act, prescribed to the employer to which Commission he is obliged to pay the UIF monthly contribution.

Section 8 prescribed that if the employer is registered at SARS for payroll taxes, then such employer is obliged to pay the UIF contribution to SARS monthly by using the process associated to the EMP201 monthly return.

Section 9 prescribed that if the employer is not registered at SARS for payroll taxes, has not registered voluntarily at SARS for said taxes and is not liable for SDL, such employer is obliged to pay the UIF contribution to UIF Commissioner monthly.

Furthermore, section 8(3) and 9(4) both prescribed that if the employer has made the UIF contribution payment to either SARS or UIF Commissioner incorrectly, that he must be refunded.

Therefore, as a result of the above, the UIF contributions should be made to the relevant authority prescribed in section 8 and 9. Where the contribution was made in error to the incorrect authority, the situation should be corrected by declaring the correct UIF contribution amount to the corrected authority.
This action would then result in penalties and interest being levied by the authority for the late payment of the contribution, however, a request for the waiving of this penalties and interest must be made with the proof that the contribution was originally paid to the incorrect authority.
Furthermore, the incorrect authority should be requested to refund the UICF contributions paid incorrectly to them to the employer.

The UIC Act does not give the employer any permission to pay UIF where the employer was obliged to pay SARS.

In terms of the Unemployment Insurance Act (not the Unemployment Insurance Contributions act), the employer must also register at UIF for purposes of section 56 of that Act:

56. Information to be supplied by employer.—
(1) Every employer must, as soon as it commences activities as an employer, provide the information referred to in subsection (2) regarding its employees to the Commissioner, irrespective of the earnings of such employees.
(2) The information contemplated in subsection (1) must—
(a) include the street address of the business, and any of its branches, of the employer;
(b) if the employer is not resident in the Republic, or is a body corporate not registered in the Republic, include the particulars of the authorised person who is required to carry out the duties of the employer in terms of this Act; and
(c) include the names, identification numbers and monthly remuneration of each of its employees, and must state the address at which the employee is employed.
(3) Every employer must, before the seventh day of each month, provide the Commissioner with all information for the previous month in terms of subsection (1).
(3A) The Minister will issue regulations on a special dispensation applicable to domestic employers and small businesses or enterprises regarding the submission of information in subsection (3).
(4) The Commissioner may request the employer to provide such additional particulars as may reasonably be required to give effect to the purpose of this Act within 30 days of the request, or within such extended period as the Commissioner may allow.

Therefore, if you are obliged to pay UIF to SARS, you are still obliged to register for UIF declaration purposes at UIF as per section 56 above.

Furthermore, in terms of section 10(2) of the Unemployment Insurance Contributions Act, the Minister has made a regulation that employers must submit information of their employees to the UI Commissioner on a monthly basis (irrespective of where the employer is obliged to register for UIF purposes). This regulation was published in Government Gazette Notice No. 23651 (R987) dated 19 July 2002).

UIF claim when retire

An employee who has contributed towards UIF and is obligated to retire at the age of 65 are eligible to claim UIF.

Should such an employee re-enter the employment market after retirement, such employee will again be obligated to contribute towards UIF.

The Unemployment Insurance Contributions Act, does not provide an exemption for previous retired employees or due to age.

Remuneration

In order to explain this, we have to look at the legislation.

Worked or employed is not part of the criteria of determining whether a person is an employee. The only component that must be determine is whether or not such a person receive remuneration. If such a person received remuneration he/she is defined as an employee in terms of the relevant Acts.

An employee is defined in the Unemployment Insurance Contributions (UIC) Act as:
“employee” means any natural person who receives any remuneration or to whom any remuneration accrues in respect of services rendered or to be rendered by that person, but excludes an independent contractor

This means that whether or not they worked for the company, if they receive remuneration as defined, then they are an employee.

Remuneration is defined in the UIC Act as:
“remuneration” means remuneration as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act, but does not include any amount paid or payable to an employee

This definition basically refers you to the definition in the Fourth Schedule which is:
“remuneration” means any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered, including-….

Commission is specifically excluded from UIF Remuneration.

This means, if you pay a person an allowance for services (attending of meetings, etc.), such an allowance is remuneration as defined and such a person is an employee as defined due to the fact that such a person are paid remuneration.

Therefore, if the person is employed for more than 24 hours a month, UIF is deductible from the remuneration so paid. The word employed is referred to in the UIC Act and not physical working hours. This is the main reason why you need to have an employment contract stipulating what the hours are than an person is employed for any specific month/period.

The dictionary definition of employed means to hire or engage the services of a person. By using family members to attend meetings, the company are engaging the services of such members.

In terms of the provisions of the UIC Act and the Fourth Schedule, the person does not have an option to elect whether or not to be an employee as defined in the relevant definition of the Act, therefore, the statement that “the persons do not want to be regarded as employees is not a fact that can be taken into consideration as the Act is clear on when it is defined as an employee.

Mutual separation agreement court cases

A growing trend of terminating the employment relationship is the conclusion of a mutual separation agreement (“MSA”), which envisages the termination of employment by mutual consent between the employer and the employee. This is neither a resignation, nor a dismissal. In his book entitled Workplace Law 8 ed (Juta Cape Town 2005) at pages 84 and 85, Professor John Grogan remarked as follows regarding this form of termination of employment:

“Just as the consensus of the parties brings the employment contract into existence, so too consensus may end a contract… [this] does not constitute a dismissal for the purposes of the common law or the LRA.”

Section 16(1)(a) of the Unemployment Insurance Act 63 of 2001 (the “UIA”) provides that a contributor is entitled to claim unemployment benefits only for the reason for the unemployment due to termination of a fixed term contract, dismissal or insolvency. Since the termination of employment in terms of an mutual separation agreement does not constitute dismissal, does it then mean that the employee cannot claim unemployment benefits? This issue was brought before the Labour Court in the recent case of Swanepoel v KPMG Services (Pty) Ltd (J494/19) [2021] ZALCJHB 457.

The facts, briefly, of the Swanepoel matter are that Swanepoel was terminated in terms of an MSA as a means to avoid potential disciplinary process for his poor work performance. His employer, KPMG, recorded “involuntary resignation” as reason for termination on his UI19 form, whereupon which Swanepoel approached the Labour Court to compel KPMG to amend the reason for termination on his UI19 form to ‘retrenchment’, to enable him to claim unemployment benefits.

The court scrutinised the background and wording of the MSA and concluded that it was clear that the contract of employment terminated on a mutual basis. The court further referred to section 64(1) of the UIA which stipulates that it is a criminal offence for employers to misrepresent the nature of the reason for termination in order to assist the employee in qualifying for the fund benefits, and that Swanepoel was asking the court to compel KPMG to commit the said criminal act. The court made it clear that it cannot compel an employer to commit a criminal offence by way of such misrepresentation and concluded that it lacked jurisdiction to adjudicate the matter.

The Labour Court dismissed Swanepoel’s claim, holding that it was ill-conceived and unjustified. Notably, the court observed that KPMG’s recordal of “involuntary resignation” of Swanepoel’s UI19 also constituted false entry and, consequently, a criminal act in terms of section 64.

This decision not only serves as a caution to employees seeking to enjoy unemployment insurance benefits consequent to termination of employment in terms of an MSA but also to employers against misrepresenting the true reason for termination.

Certain categories of individuals are not required to contribute to UIF. These include:
1. Employees who work less than 24 hours a month for an employer.
2. Employees who are under the age of 18 or over the age of 65
3. Employees who are employed by the South African government.
4. Employees who are foreign diplomats or members of their staff.
5. Employees who are employed by foreign governments or international organizations and are exempt from paying tax in South Africa

05Dec

SOURCE CODE DESCRIPTIONS IRP5 code 4007

Deduction codes

In the electronic file IRP5 code 4007 is used for: Prior to the 2017 tax year Arrear (re-instated) retirement annuity fund contributions values must be included in IRP5 code 4007. This code is not applicable from the 2017 year of assessment.

The prescribed Length of IRP5 code 4007 in the electronic file is: N15

The abbreviations used within the description of the relevant codes mean:
• PAYE: Income is subject to the deduction of Employees’ Tax and will also be taxed when the income tax assessment for the employee is processed.
• IT: Income is not subject to the deduction of Employees’ Tax but will also be taxed when the income tax assessment for the employee is processed.
• Excl: Income is not subject to the deduction of Employees’ Tax and will also not be taxed when the Income Tax assessment for the employee is processed.
• Excl/PAYE: Depending on the circumstances described in the legislation, the income is either subject to both PAYE and Income Tax, or it is excluded from both PAYE and Income Tax

05Dec

SOURCE CODE DESCRIPTIONS IRP5 code 4002

Deduction codes

In the electronic file IRP5 code 4002 is used for: Prior to the 2017 tax year Arrear pension fund contributions paid by employee values must be included in IRP5 code 4002. This code is not applicable from the 2017 year of assessment.

The prescribed Length of IRP5 code 4002 in the electronic file is: N15

05Dec

SOURCE CODE DESCRIPTIONS IRP5 code 4004

Deduction codes

In the electronic file IRP5 code 4004 is used for: Prior to the 2010 tax year Employee’s arrear provident fund contributions is included in IRP5 code 4004. The value of Employee’s arrear provident fund contributions must be included in the value of code 4003 with effect from the 2010 year of assessment. IRP5 code 4004 is not applicable from 2010.

The prescribed Length of IRP5 code 4004 in the electronic file is: N15

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