The new employment tax incentive
26 February 2014
Posted by: Author: Carin Grobbelaar
Author: Carin Grobbelaar (Grant Thornton)
The Employment Tax Incentive Act No 26 of 2013 was signed into law on 18 December 2013 and became effective on 1 January 2014. The Act aims to encourage private employers to employ young workers by providing a tax incentive, which will reduce employers’ cost related to hiring young people. The savings will be brought about through a cost-sharing mechanism with government, which if certain conditions are met, can run for a maximum of two years.
The incentive is available to all private sector employers that are registered with SARS for PAYE, across all economic sectors.
Young people are considered to be ‘qualifying employees’ if they –
- have a valid South African ID;
- are between 18 and 29 years old (please note that the age limit is not applicable if the employee renders services inside a special economic zone (SEZ) to an employer that is operating inside the SEZ, or if the employee is employed by an employer that operates in an industry designated by the Minister of Finance);
- are not domestic workers;
- are not "connected persons” (as defined in the Income Tax Act) in relation to the employer;
- were employed by the employer or an associated person to the employer on or after 1 October 2013; and
- earn at least the minimum wage applicable to the employer or R2 000 per month (where there is no minimum wage relevant to the employer) but less than R6 000 per month.
There is no limit to the number of qualifying employees that an employer can hire.
How does it work?
The employer will calculate and claim the incentive on a monthly basis, which will reduce the PAYE payable to SARS without affecting the amount paid to the qualifying employees. The amount of the reduction in PAYE will depend on the salaries paid to the qualifying employees. The incentive amount per qualifying employee will be calculated as per the table below.
PAYE is calculated in the normal way each month way for each qualifying employee and deducted from the employee’s salary and the employee receives the net amount. The employer then calculates the incentive value for each qualifying employee in accordance with the table below. The incentive amount is deducted from the PAYE withheld and the net amount paid to SARS.
The credit amount will be halved at the end of first 12 months of employment. In determining the first or the second 12-month period, only the months during which the employee was a qualifying employee can be taken into account.
Employer ABC employs two qualifying employees, Ms X and Mr Y in May 2015. Their monthly salaries is R2,500 and R5,000 respectively. Ms X is in the 5th month of employment with Employer ABC and Mr Y is in the 18th month. The incentive for Employer ABC for May 2015 will be:
Ms X: R2,500 = R1,000
Mr Y: R500 – (25% X (R5,000 – R4,000)) = R250
Total credit for May 2015 = R1,250 (R1,000 + R250).
Employers may not reduce their PAYE liability in circumstances where they have outstanding tax returns or outstanding tax debts. Should employers reduce their PAYE in these circumstances, SARS may levy normal penalties for underpayment of PAYE. However, where an employer fails to claim the credits in any particular month (due to an outstanding return or tax debt), the amount of the unclaimed credits may be rolled over as a credit to the next month.
Should an employer reduce its PAYE in respect of an employee that does not qualify for the incentive, the employer will be liable for a penalty equal to 100% of the credit received, and will also have to pay back the incentive amount to SARS. Further, where an employer is deemed to have displaced an existing older, non-qualifying employee (in circumstances that constitute an automatically unfair dismissal in terms of the Labour Relations Act), and the employer replaces that dismissed employee with a ‘qualifying employee’, the employer is liable to pay a penalty of R30 000 in respect of that employee and may be disqualified from receiving the employment tax incentive.
The incentive is currently scheduled to end on 31 December 2016 and employers are urged to participate in this incentive.
This article first appeared on gt.co.za.