Employment tax incentive - accounting and income tax treatment
23 July 2014
Posted by: Author: Beric Croome
Authors: Dr Beric Croome and Kego Magobe (Tax ENSight)
It is no hidden secret that unemployment in South Africa remains considerably high. According to the World Economic Forum Global Risk 2014 Report, structural unemployment and underemployment appears second overall in the Ten Global Risks of Highest Concern as many people in both advanced and emerging economies struggle to find jobs. The youth and minorities are especially vulnerable. Youth unemployment rates hover around 50% in some countries and South Africa was listed among them. Therefore, previous similar reports encouraged the South African government to introduce a cost-sharing taxation structure in order to encourage the employment of young and less experienced work seekers in the form of the Employment Tax Incentive Act 2013, No. 26 of 2013 ("ETIA") that commenced on 1 January 2013. The ETIA provides an employment tax incentive in the form of an amount by which employees' tax, also known as Pay-As-You-Earn ("PAYE") may be reduced. However, this incentive has further income tax implications, and accordingly it is necessary for employers to understand not only the qualifying criteria for the employees’ tax incentive, but the accounting and income tax treatment as well.
Briefly, the ETIA provides that eligible employers who can receive the incentive are private entities that are duly registered for PAYE, and that are not disqualified from receiving the incentive by the Minister of Finance (the "Minister") due to the displacement of an employee or by not meeting, inter alia, the training and classification conditions as prescribed by the Minster by regulation. Eligible employers must employ qualifying employees who are between 18 to 29 years old at the end of the month the incentive is claimed, and who have South African Identity documents or asylum seeker permits. However, the age limit is not applicable if the employee renders their services to an employer who operates in a special economic zone or an industry designated by the Minister. However, the employee must not be employed as a domestic worker, nor be a 'connected person' to the employer or an associated person to the employer on or after 1 October 2013. Furthermore, the employee must be paid the applicable minimum wage in that sector or industry, or be paid a wage of not less than R2 000 if a minimum wage is not applicable.
Section 7 of the ETIA sets out the formulae to determine the amount of the employment tax incentive. For instance, from 1 January 2014 for each month of the first 12 months of which an eligible employer employs a person for a full month and who earns R2 000, the employer will enjoy a reduction of R1 000 of their monthly PAYE liability.
Regarding the accounting and income tax treatment of the employment tax incentive, e.g. R1 000, section 13 of the ETIA read together with Schedule 1 refers to the amendment of section 10 of the Income Tax Act 1962, No. 58 of 1962 ("ITA"). Section 10(1)(s) provides that:
"There shall be exempt from normal tax any amount by which the employees' tax as defined in section 1 of the Employment Tax Incentive Act 2013, payable by an employer as contemplated in section 3 of that Act is reduced in terms of section 2(2) of that Act or paid in terms of section 10 of that Act.”
It follows that, the benefit enjoyed in the form of the above employment tax incentive is exempt from income tax, and will be accounted for as income in the accounting records of the employer.
The ETIA also provides for the "roll-over" of the incentive amount, whereby the incentive amount may be rolled over to the next month in three instances. Firstly, where the incentive exceeds the PAYE otherwise due in a month, secondly if the employer did not claim the available incentive in the appropriate month; and finally if the employer failed to submit any tax return or is liable for any tax debt that is outstanding and which is not subject to an agreement entered into with SARS. In these circumstances, the employer will be allowed to carry forward the incentive to the next month and this timing difference creates a deferred tax asset that should be accounted for in the balance sheet of the employer.
Furthermore, section 10 of the ETIA provides for a reimbursement from SARS of the excess amount of the incentive so carried forward at the end of each employees’ tax reconciliation period. Such reimbursement would result in the correction of the overstated tax expense in the income statement and as a current asset on the balance sheet.
In conclusion, the Quarterly Labour Force Survey released by Statistics South Africa on 5 May 2014 has confirmed that unemployment in South Africa continues to rise. This begs the question as to whether the tax incentive is attracting enough employers to create new jobs because the unemployment rate in South Africa rose to 25.2% in the first quarter of 2014, up from 24.1% in the fourth quarter of 2013. Therefore, the effects of the tax incentive are still to be felt. However, those employers who have taken advantage of the employees’ tax relief should ensure that they have treated it correctly for tax purposes.
This article first appeared on ensafrica.com.