Print Page   |   Report Abuse
News & Press: TaxTalk Business

Tax incentives to consider in the recruitment process

21 November 2014   (0 Comments)
Posted by: Author: Erich Bell
Share |

Author: Erich Bell (SAIT Technical)

A lot of businesses have solid recruitment strategies in place to ensure that only the best candidates are employed. Typical tools included in a recruitment policy include, psychometric testing, two to three rounds of interviews and solid retention strategies. However, given the fact that the recruitment function is normally outsourced, a lot of businesses lose out on the tax incentives available on the employment of certain classes of employees.

The driver of these incentives is South Africa’s high unemployment rate. As usual, government turned to fiscal policy to provide incentives aimed at increasing education and decreasing unemployment among youth. This article will shed some light onto the available incentives and the possible tax savings they may hold.

Learnership agreements

Section 12H of the Income Tax Act (No. 58 of 1962) (hereinafter ‘Act’) provides an allowance to an employer in addition to any income tax deductions that may otherwise be allowed if the employer entered into a learnership agreement with an employee that is registered in accordance with the Skills Development Act (No. 97 of 1998) before 1 October 2016.

The annual allowance for every 12 full calendar months that the learner is a party to a registered learnerhsip agreement is equal to R30 000 if the learner is a person without a disability or R50 000 if the learner is a person with a disability. The annual allowance must be apportioned should the employee not have been a party to a registered learnership agreement for the full 12 months during the year of assessment. A completion allowance is also provided on successful completion of the registered learnership agreement which would amount to R30 000 or R50 000 (depending on whether the employee has a disability) if the learnership agreement is less than 24 months or R60 000 or R100 000 (depending on whether the employee has a disability) if the learnership agreement is for 24 months or longer. 

Employment Tax Incentive

The Employment Tax Incentive is available to eligible employers who employ employees between the ages of 18 and 25 and may be deducted from the monthly PAYE that the employer pays over to SARS. In addition to the age requirement, the following requirements must be met:

  • The monthly salary/wage paid to the employee may not be less than the amount payable by virtue of a wage regulating measure applicable to that employer or if the wage paid to the employee is not subject to a wage regulating measure, R2000;
  • The monthly wage paid to the employee is not more than R 6000;
  • The employee is in possession of a South African identity card or asylum seeker permit;
  • The employee is not a connected person (i.e. family) in relation to the employer;
  • The employee is not a domestic worker; and
  • The employment commences on or after 1 October 2013;

The amount of the incentive for each month during the first 12 months would be equal to the following:

  • If the remuneration of the employee is R2000 or less, 50 per cent of the remuneration paid to the employee;
  • If the remuneration of the employee is more than R2000 but less than R4001, an amount of R1000;
  • If the remuneration of the employee is more than R4000 but less than R6000 an amount determined by subtracting from R1000 halve of the remuneration exceeding R4000.

For the second 12 months, the monthly incentive would be equal to 50 per cent of the monthly incentive during the first 12 months.

Even though this incentive may definitely provide some valuable assistance to struggling cash flows, employers are urged not to displace older employees in an attempt to employ qualifying employees in order to receive the incentive. This may lead to the employer being disqualified from the incentive and being liable for a fine of R30 000 per employee displaced. An employer would be deemed to have displaced of an employee if it was found that the dismissal of the employee constitutes an automatically unfair dismissal in terms of section 187(1)(f) of the Labour Relations Act (No.66 of 1995) (based on discrimination, including discrimination on age) and the employer replaced that employee with an employee in respect of whom the employer is eligible to receive the incentive.

Incentives for employees

Section 10(1)(q) of the Act provides an exemption of the value of a scholarship or bursary provided by an employer to an employee, should the employee agree to reimburse the employer in the event that he or she fails to complete his/her studies (except as a result of death, ill-health or injury).

In practice it would normally happen that an employee would be required to contractually bind him/herself to render services to the employer for a specified period of time in return for the bursary. The employer would then typically require the employee to repay a portion of the bursary should he/she terminate his/her services before the expiry of the said period. Should the employee decide to terminate his/her employment and the employee’s new employer decides to pay the amount owing to the former employer, no fringe benefit would have to be included in the employee’s gross income if the employee contractually agrees to render services to the new employer for a period that is not shorter than the period of unexpired services due to the former employer. Furthermore, should the employee be a party to a registered learnership, the section 12H learnership allowance would also be available to the new employer even though the allowance in the year of transfer of employment would have to be apportioned.

Practical example

The example below illustrates the savings available to employers who take cognisance of the tax implications associated with employment when recruiting personnel. 

Employer X, a company not qualifying as a small business corporation, employed Kevin on the 1st of March 2014 and immediately registered him for an approved learnership agreement of 30 months. Kevin is a South African resident who turned 20 on the first of March 2014 and does not have a disability. It was contractually agreed that Kevin would be paid R4000 per month until he completed his learnership, in which instance he would become a partner of the firm. Kevin’s salary is not subject to a wage regulating measure.

The implications of the above transaction for Employer X would be the following:

Year 1

  • Upon assessment, it would be entitled to a deduction of the annual salary R48 000 in terms of the general deduction formula.
  • It would be entitled to an annual section 12H allowance of R30 000 which would be deducted from its income. 
  • It may deduct R1000 per month from the PAYE that it has to pay to SARS as a result of the Employment tax Incentive.

The total cost of employment for Employer X in year 1 therefore equals R48 000 - ((R48 000 + R30 000) x 28%) + R12 000) = R14 160. That is merely 29.5 per cent of the annual salary!

Year 2

The implications would be exactly the same as year one, with the exception that the amount of the Employment Tax Incentive would be equal to R500 per month.

The total cost of employment for Employer X in year 2 therefore equals R48 000 - ((R48 000 + R30 000) x 28%) + R6 000) = R20 160 which would constitute 42 per cent of the annual salary.

Year 3

  • It would be entitled to deduct the annual salary of R48 000 upon assessment in terms of the general deduction formula.
  • It would be entitled to an annual section 12H allowance equal to R15 000 as Kevin is only party to a registered learnership agreement for six full months.
  • It would be entitled to a completion allowance of R60 000 should Kevin have successfully completed his learnership. 
  • It may deduct R500 per month from the PAYE that he has to pay to SARS as a result of the Employment tax Incentive.

The total cost of employment for Employer X in year 3 therefore equals R48 000 - ((R48 000 + R15 000 + R60 000) x 28%) + R6 000) = R7 560 which would constitute 15.75 per cent of the annual salary!

Conclusion

Even though tax should never be the driver when making decisions, it is worthy of taking note of the available incentives. In our above example, over the three years Employer X saved R102 120 which constitutes 70.92 per cent of Kevin’s salary for the said period. 

It is advised that taxpayers contact their SAIT tax professionals to enquire as to which incentives they may qualify for. You never know – you might be missing out.



WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

MINIMUM REQUIREMENTS TO REGISTER

The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

Membership Management Software Powered by YourMembership.com®  ::  Legal