News FlashesMarch 28, 2022CRS News Flash 25 March 2022 – SOUTH AFRICA – ETI changes to curb the abuse of the ETI system

MARCH 2022 – SOUTH AFRICA
EMPLOYMENT TAX INCENTIVE CHANGES
It is important that employers note the following:

Employment Tax Incentive (ETI) changes to curb the abuse of the ETI system

During the 2022/2023 Budget Speech, the Minister of Finance announced an increase in the ETI values which took effect 1 March 2022.

To curb the abuse of the ETI system, important changes were made in the Taxation Laws Amendment Act (TLAA) which was promulgated on 19 January 2022. The TLAA was accompanied by a final Explanatory Memorandum, published on 25 January 2022.

Three areas of the ETI Act have been changed by the final TLAA. They are:

·        The definition of an employee;

·        The definition of monthly remuneration; and

·        The remuneration qualifying condition of section 6(g) of the ETI Act.

Definition of monthly remuneration
The definition of monthly remuneration was extended by inserting the underlined wording starting from “provided that” (referred to as ‘the proviso’).

Notes:

·        Subsection (c) ensures an employment relationship by specifying that an employee must be recorded by the employer as required by section 31 of the BCEA (Basic Conditions of Employment Act).

·        Substance over legal form will be considered when assessing an employer’s ability to claim the ETI. Therefore, work must be done in terms of an employment contract, remuneration must be paid to the employee in return for the work done (services provided), and the employee must be documented in the employer’s records in terms of section 31 of the BCEA.

Notes:

·        Paragraphs (a) and (b) are unchanged and their wording reflects the labour law work/reward principle “where an employer employs and pays remuneration to a qualifying employee” to emphasise again that there must be a legitimate employment relationship.

·        The difference between the two paragraphs is that paragraph (b) provides that remuneration must be ‘grossed-up’ if less than 160 hours are worked for the month.

·        The ‘remuneration’ referred to in paragraphs (a) and (b) is remuneration as defined by the Fourth Schedule.

 

The Proviso:

Note that the requirements of the proviso must be applied first (potentially reducing the value of Fourth Schedule remuneration), before ‘grossing-up’ the reduced remuneration amount if necessary.

·        “Provided that in determining the remuneration paid or payable …” means:

·        Fourth Schedule remuneration amounts that are not a cash payment are the taxable fringe benefits specified by the Seventh Schedule to the Income Tax Act. If there are any taxable fringe benefits, their value must be ‘disregarded’ when calculating the value of ETI monthly remuneration.

·        ..an amount other than a cash payment … must be disregarded” means:

·        Fourth Schedule remuneration amounts that are not a cash payment are the taxable fringe benefits specified by the Seventh Schedule to the Income Tax Act. If there are any taxable fringe benefits, their value must be ‘disregarded’ when calculating the value of ETI monthly remuneration.

·        “..a cash payment that is due and payable to the employee” means:

·        The remuneration portion of cash net pay after deductions, and not to the total cash remuneration before deductions.

·        “..after having accounted for deductions in terms of section 34(1)(b) of the Basic Conditions of Employment Act” means:

·        The “cash payment that is due and payable” must be increased by the value of any deductions in terms of BCEA section 34(1)(b) that were made from the employee’s remuneration.

 

Summary of the Proviso
Monthly remuneration is therefore limited to cash amounts paid to the employee plus any amount that the employer has legally deducted under section 34(1)(b) of the BCEA.

 

Monthly Remuneration value:

·        Starts as Fourth Schedule remuneration;

·        Then reduced by:

·        “an amount other than a cash payment” (fringe benefits) that ‘must be disregarded’

·        BCEA Section 34(1)(b)¹ deductions “in terms of a law, collective agreement, court order or arbitration award”

·        The ‘net’ amount is used to calculate the value of monthly remuneration by ‘grossing-up’ if hours are < 160.

 

The remuneration qualifying condition of Section 6(g) of the ETI Act

Section 6(g) is the qualifying test that checks an employee’s “remuneration” against the R6 500 pm threshold.

Definition of monthly remuneration
The definition of monthly remuneration was extended by inserting the underlined wording starting from “provided that” (referred to as ‘the proviso’).

Notes:

·        Section 6 of the ETI Act stipulates the conditions that need to be met for the employee to be classified as a qualifying employee for ETI purposes.

·        The emphasis is therefore on “mainly involved in the activity of studying” as opposed to providing services to the employer and must be measured “on actual hours spent studying and employed”.

·        If the employee is mainly (more than 50%) involved in studies, the employee does not qualify for ETI.

·        The last part of the proviso to section 6, namely “in determining the time spent studying….and employed” does not apply to learning programmes as defined in the SDL Act. Therefore:

·        Where the employer and learner have entered a learning programme as defined in the SDL Act, the employer is not required to track the actual hours.

·        Where the employer and employee have not entered a learning programme as defined in the SDL Act, the employer is required to track the actual hours.

 

ETI calculation formula

In the 2022/2023 Budget Speech delivered by the Minister of Finance, Enoch Godongwana on Wednesday, 23 February 2022, an expansion of the employment tax incentive through a 50% increase in the maximum monthly value to R1 500, was announced.

This was dealt with in the News Flash of 24 February 2022 detailing the tax changes.

Herewith the updated ETI calculation formula for ease of reference.

To view the Taxation Laws Amendment Act (20 of 2021), follow the link.

Portions of the information included in this news flash were obtained from the Payroll Authors Group of South Africa (PAGSA) and is used with their consent.

 

 

Contact our legislation team at info@crs.co.za if you require any additional information. 

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