Job creating & the youth wage incentive
04 April 2014
Posted by: Author: Kabelo Malapela
Author: Kabelo Malapela (EY)
With the government announcing that the Employment Tax Incentive has already created 56 000 youth jobs in this year’s Budget Speech, Kabelo Malapela discusses the ins and outs of what the incentive entails
With our economy growing at a sluggish average of just over 2 percent of GPD and an unemployment rate of 24 percent, our government faces the mammoth task of creating an environment for real sustainable jobs. That being said, this is not a task that the government can tackle on its own, the private sector needs to come to the party and play a critical role. This will require creativity and investment from both government and the private sector, especially small business, as realistically this is where a large number of these jobs are expected to come from. Given our increasingly young population, the majority of the unemployed are the youth of this country, and if something drastic is not done now, we face a bleak future.
Apart from the scarcity of jobs, one of the barriers to young people finding employment is their lack of experience, and the reluctance of business to hire inexperienced people. It’s a bit of a "chicken and egg” situation really - one can’t find work if one doesn’t have experience, but how does one get the experience if they are not given the opportunity to work? I am certain that most people that are employed today can attest to the fact that finding that very first job is crucial, as it sets you up for the rest of your working life. Studies even indicate that unemployed youth with previous work experience are three times more likely to find a job than those who don’t. In an effort to resolve this conundrum and after much talk and political mudslinging, our government finally took the bold step, and, under the umbrella of its youth employment strategy (National Youth Accord), legislated the "youth wage subsidy” in the form of the (the Employment Tax Act) with an effective date of 1 January 2014 (the incentive will no longer be available after 1 January 2017).
This year, we heard Finance Minister Pravin Gordhan announce in his Budget speech that in its first month of implementation this incentive has managed to attract 56 000 beneficiaries. It is essentially a cost-sharing mechanism with the private sector to hire young, inexperienced workers for entry level positions. This is a two-phased short term stimulus; phase one being the implementation of the incentive, which is meant to be simple using existing income tax administration platforms. Phase two, to follow after two years, will be focused on additional policy features and refinements, based on evaluation and monitoring during phase one.
What is the actual benefit for the employer?
This is a rebate system, in terms of which a qualifying employer can, in a particular month offset the incentive available against its employees’ tax liability. There is also provision for a refund system, though not yet effective, which puts cash back in the pockets of employers.
The amount by which the employees’ tax liability is reduced or any refund received by an employer is exempt from income tax.
Which employers qualify?
In order to qualify, the employer must be registered as an employer for employees tax, i.e. Pay as You Earn (PAYE) for purposes of the Income Tax Act .
- Government departments, municipalities, municipal entities etc. (national, provincial or local), public entities in terms of the Public Finance Management Act - PMFA (unless otherwise designated by the Minister of Finance). This incentive is aimed primarily at the private sector, hence, the exclusion of government and government related employers.
- Employers disqualified from receiving the incentive by the Minister of Finance for displacement of employees, where this is linked to unfair dismissal.
- Employers that do not meet conditions prescribed by the Minister of Finance in consultation with the Minister or Labour, including, training requirements of employees and classification of trade in the most recent Standard Classification Code issued by Statistics SA.
What is a qualifying wage (monthly remuneration)?
The incentive is calculated based on the monthly remuneration of each qualifying employee, therefore, an employer will not qualify for the incentive if the monthly remuneration paid to any employee is less than:
- An amount based on sectoral determination or bargaining counsel agreement; or
- R2 000 (for employers that are not subject to the above) or pro-rata amount where the employee is employed for less than a month.
The maximum qualifying monthly remuneration is set at R6 000.
Who is a qualifying employee?
A qualifying employee must:
- Be between the ages of 18 and 29 (inclusive) at the end of any month in which the incentive is claimed (where the employee works for an employer that operates in a designated economic zone or designated industry, the age restriction does not apply).
- Be in possession of a valid South African Identity Document or asylum seeker permit.
- Not be a connected person in relation to the employer.
- Not be a domestic worker, i.e. the incentive is intended to co-fund business and not personal expenditure.
- Not be employed by the employer or associated institution before 1 October 2013.
When is the incentive not available (Non –compliance by employer)?
Even if the employer qualifies for the allowance, it will not be available if at the end of any month:
- An employer has failed to submit any return; or
- Owes SARS a tax debt (except where the employer has entered into an agreement with SARS).
Any amount of the incentive not utilised in one month is carried forward to the next month, until the end of the 24 month period for each employee.
What amounts can be carried forward?
The legislation allows for some amounts to be carried forward (subject to limitations) such that the amounts that can be claimed in a particular month per employee is calculated as follows:
Note 1: An ordinary excess is created where the amount of the incentive in any month exceeds the PAYE liability.
Note 2: A penalty related excess arises where an employer was prohibited from claiming the allowance in any month as a result of non-compliance.
Carry forward limitation: On the first day of the month after the end of each employees’ tax reconciliation period, the amount that can be brought forward is limited to R6 000 per employee.
The legislation makes provision for refunds to be claimed by employers in certain circumstances. The refund provisions, however, did not come into effect on 1 January 2014. Based on the Budget Speech, this system will become effective on a date to be announced in the fourth quarter of 2014. Employers will be able to claim a refund of the entire incentive amount available at the end of each employees’ tax reconciliation period. The excess amount will then revert to nil for the following month. However, the employer will not be able to claim the refund if they are non-compliant (as discussed above). The refund system is likely to affect small businesses.
Penalty provisions under this system
The following penalties can be levied to employers for various offences:
The above penalties will not be deductible for income tax purposes.
- If a non-qualifying employer, by virtue of not meeting the minimum wage requirements, claims the incentive, that employer must pay a penalty to SARS of 100% of the incentive claimed for every month claimed.
- If the employer is deemed to have displaced an employee, the employer is liable for a penalty of R30 000 per employee so displaced.
Employers wishing to take advantage of this incentive need to gear up their systems to be able to perform these calculations and to track the amounts claimed. The best option being to incorporate this into their existing employees’ tax systems. This places an additional administrative burden on employers, especially small businesses that would benefit from this sort of initiative. That being said, business is being given the opportunity to participate in making a difference to this country and contributing to providing much needed skills to our youth. Although a good mechanism, of its own the incentive will not create jobs to the extent needed by the economy. It is however a good start and when applied with other initiatives will eventually take us there over time.
This article first appeared on the March/April edition of Tax Talk.