The Employment Tax Incentive Bill - Who Stands To Gain Here?
14 November 2013
Posted by: Author: Nicole Paulsen
Author: Nicole Paulsen (Cliffe Dekker Hofmeyr)
Unemployment remains a critical problem in South Africa, especially amongst the youth who are excluded from economic activity due to the fact that prospective employers are, in many instances, reluctant to hire young job seekers. This is mainly due to the fact that young job seekers lack the necessary skills, qualifications and experience. Given the substantial investment generally required to provide the necessary skills and experience, a well-structured incentive is required.
Government recognises the need to share the costs of expanding job opportunities, especially in relation to young job seekers, within the private sector. Therefore, in an attempt to address youth unemployment and thereby stimulate a demand for young workers in South Africa, approval was given by Cabinet to the publication, for public comment, of the draft Employment Tax Incentive Bill (the Bill). The purpose of the Bill is to implement a tax incentive which will reduce the cost to employers of hiring young and inexperienced youth through a cost-sharing mechanism. The Bill therefore seeks to encourage employers to create job opportunities for young and inexperienced job seekers, in addition to boosting employment by firms operating in Special Economic Zones (SEZ).
The Bill gives effect to the announcement by the President in his 2010 State of the Nation address, as well as the announcement by the Minister of Finance in his 2010 budget speech, that Government will table proposals to introduce an employment tax incentive in order to subsidise the cost of hiring young and inexperienced job seekers. The Bill further gives effect to the announcement by the Minister of Finance in the 2013 Budget Review, that tax revenue of R500 million will be set aside for the implementation of the incentive for the 2013/2014 tax year.
While it is the intention of Government to focus on labour market activation and to thereby stimulate a demand for young workers, through the implementation of the tax incentive, the question that remains is whether the Bill will in fact achieve its objective? In other words, will the Bill stimulate economic activity across the employment spectrum and thereby benefit all businesses or will the incentive operate exclusively for the benefit of large corporations to the exclusion of the small scale employers? This article will examine the main features of the employment tax incentive and consider whether theory will in fact turn into practice.
PRACTICAL APPLICATION OF THE EMPLOYMENT TAX INCENTIVE
The employment tax incentive is essentially a cost-sharing mechanism between the private sector and Government, which operates by reducing the amount of tax that is owed by an employer through the Pay-As-You-Earn (PAYE) system. It is proposed that where the employer hires a "qualifying employee”, the employer is entitled to deduct the amount of the incentive from the amount of PAYE which the employer is required to remit to the South African Revenue Service (SARS). What is important to note is that the "qualifying employee” will not receive an additional monetary benefit relating to PAYE (i.e. the PAYE credit of the employee remains unaffected). It should further be noted that the employer’s deduction is limited and may not exceed the total amount of tax that is owed to SARS through the PAYE system.
ELIGIBLE EMPLOYERS AND QUALIFYING EMPLOYEES
The employment tax incentive is not available to all employers. The Bill proposes that the employment tax incentive apply only to employers that are registered with SARS for PAYE purposes. Accordingly, where an employer has a legal obligation to withhold and pay tax on behalf of their employees, through the PAYE system, the employer will be eligible for the tax incentive. Due to the fact that the incentive is aimed at private sector employers, public entities are not eligible for the employment tax incentive, unless specifically designated by the Minister of Finance, by way of notice in the Government Gazette.
The employment tax incentive will also apply within SEZs and designated industries where the age restrictions (see discussion below) will not apply. The employment tax incentive is further limited to an eligible employer hiring a "qualifying employee”. In this regard, a number of criteria must be met before an employee will be considered to be a "qualifying employee”. Firstly, the employee must be a South African citizen or permanent resident in possession of a valid South African Identity Document and must be between the ages of 19 and 29. Further, the employee must not have been employed with the current employer (or an associated institution) before 1 October 2013 and must receive a salary that is between the minimum wage for that specific sector and R6000 per month. Domestic workers and connected persons to the employer are specifically excluded from the definition of a "qualifying employee” due to the private nature of the expense.
CALCULATION OF THE EMPLOYMENT TAX INCENTIVE
The determination of the incentive to be deducted from the employer’s PAYE obligation should take place on a monthly basis and is calculated as the aggregate of the incentive available for that month together with any roll-over amounts from previous periods. The value of the incentive is prescribed by way of a formula with three different components, which utilises different wage levels. For example, for monthly wages of R2000 or less, the incentive is 50% of the monthly remuneration of the employee. For monthly wages between R2001 and R4000, the value of the incentive is R 1000 per month per "qualifying employee” in the first twelve months. For monthly wages between R4001 and R6000, the value of the incentive tapers down from R1000 to zero. In the first year of employment the employer can deduct the full value of the incentive, but in the second year of employment the incentive is halved throughout the wage bands.
EXCLUSIONS AND DISQUALIFICATIONS
The employment tax incentive is not intended to benefit employers in non-compliance with their legal obligations towards their employees, or employers who structure their business affairs to the detriment of existing employees with the sole purpose of maximising access to the incentive. Accordingly, certain exclusions and disqualifications are proposed in order to prevent any abuse and exploitation of the employment tax incentive. The exclusions are summarised as follows:
PAYE LIABILITY REDUCTION MAY BE DENIED
- An employer who is bound to a sectoral determination or a bargaining counsel agreement will not be eligible to receive the employment tax incentive if that employer does not remunerate that employee in accordance with the minimum wage. Where an employer is not bound by a sectoral determination, it is proposed that a minimum wage of R2000 per month is applied.
- An employer will be disqualified from receiving the incentive where a finding is made by a competent court, the Commission for Conciliation, Mediation and Arbitration (CCMA) or a counsel or private agency that the employer "unfairly dismissed” an old employee in order to hire a new "qualifying employee” and thereby take advantage of the tax benefit. Employers found guilty of an "unfair dismissal” under these circumstances will incur a very onerous penalty of 150% of the value of the incentive that they received for the previous twelve month period and will further be excluded from any future participation in the incentive.
- Lastly, the Minister of Finance may, after consultation with the Minister of Labour, prescribe any conditions by regulation that may be necessary in respect of granting the tax incentive.
Even though an employer may be eligible to reduce its PAYE liability by applying the incentive in a particular month, an exclusion applies where the particular employer has failed to submit any tax returns or owes a tax debt to SARS on the last day of that month. However, where the employer has entered into an arrangement with SARS regarding the tax debt owing, the aforementioned exclusion will not apply.
ROLL-OVER RELIEF FOR EMPLOYERS
The draft Bill proposes two instances where an incentive amount may be rolled over. The first instance is where the incentive amount exceeds the PAYE due and payable by an employer in that particular month. In the aforementioned scenario the excess amount may be rolled over to be used against a potential future PAYE liability. There is however an excess limit of R6000 per "qualifying employee” that may be rolled over. The second instance where roll over may be applied for future use is during a period of tax debt or return submission.
Currently, the Bill does not provide for a reimbursement mechanism for excess amounts generated. However, from a date to be announced by the Minister of Finance through notice in the Government Gazette, employers will become entitled to reimbursements on a bi-annual basis. It is envisaged that the implementation of the reimbursement facility will extend the scope of the incentive to the informal sector, where employers are currently excluded from benefiting from the incentive.
COMMENCEMENT AND CESSATION OF THE EMPLOYMENT TAX INCENTIVE
It is proposed that the employment tax incentive be implemented from 1 January 2014 to 31 December 2016. However, in order to avoid a situation where employers delay hiring young job seekers until 1 January 2014, so as to maximise their access to benefit from the incentive, it is proposed that the incentive apply to all qualifying employees who were hired after 1 October 2013. The proposed incentive will cease after 1 January 2017 and incentive amounts not deducted from PAYE as at 31 December 2016 will be forfeited.
It must be noted that the employment tax incentive will be introduced in phases. The first phase of the incentive is intended to be simple and easy to implement and will be based on the existing tax administration platforms. Thereafter, National Treasury and SARS will review the effectiveness and the impact of the incentive and a decision on its future will be made in 2016. Only after the initial review of the incentive will the second phase of the incentive be introduced. The second phase of the incentive will include additional policy features and will possibly be a refinement of the first phase.
The implementation of the incentive will hopefully stimulate the demand for young, inexperienced job seekers to address some of the issues and consequences of youth unemployment in South Africa. However, the current version of the Bill is likely of no benefit to small-scale employers that have little or no PAYE liabilities – and it is exactly that type of employer who should be first in line to be incentivised. It remains to be seen whether the current version of the Bill will be revised to extend the scope of the tax incentive, so that the benefit is not only exercised by the large corporations (and in particular large labour intensive industries), but that small-scale employers also get a look-in.
Earn 15 minutes Verifiable Output Tax CPD – click here.
This article was first published in TaxTalk magazine - November/December