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Is the ETI applicable to independent contractors?

12 March 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: Is the ETI applicable to independent contractors who have PAYE deducted from their fees?

My client runs an advertising firm whereby individuals are asked to perform in the ads/TV commercials. This is a once off amount they are paid, and 25% PAYE gets deducted. No UIF. The particular person might be used for another ad in a few months’ time. Sometimes an advertising agency sends the person to my client to appear in the ad. Other times, they use someone from their database who is willing to appear in a TV commercial. Do these persons qualify for the ETI?

A: Sec 2(2) of the Employment Tax Incentive Act (No. 26 of 2013) (hereinafter referred to as ‘the ETI’), states the following:

‘... If an employer is eligible to receive the employment tax incentive in respect of a qualifying employee in respect of a month, that employer may reduce the employees’ tax payable by that employer in an amount determined in terms of section 7 or receive payment of an amount contemplated in section 10 (2), unless section 8 applies.’.

Sec 3 of the ETI sets out the employers eligible to register and states the following:

‘(a) is registered for the purposes of the withholding and payment of employees’ tax by virtue of paragraph 15 of the Fourth Schedule to the Income Tax Act; and

(b) is not—

(i) the government of the Republic in the national, provincial or local sphere;

(ii) a public entity that is listed in Schedule 2 or 3 to the Public Finance Management Act, 1999 (Act No. 1 of 1999), other than those public entities that the Minister of Finance may designate by notice in the Gazette on such conditions as the Minister of Finance may prescribe by regulation;

(iii) a municipal entity defined in section 1 of the Local Government: Municipal Systems Act, 2000 (Act No. 32 of 2000); and

(c) is not disqualified from receiving the incentive—

(i) by the Minister of Finance in accordance with section 5 (1) (b), due to the displacement of an employee by virtue of section 5 (2); or

(ii) by not meeting such conditions as the Minister of Finance, after consultation with the Minister of Labour, may prescribe by regulation, including—

(aa) conditions based on requirements in respect of the training of employees; and

(bb) conditions based on the classification of trade in the most recent Standard Industrial Classification Code issued by Statistics South Africa.’

Therefore, generally speaking, an employer registered for PAYE in terms of the Fourth Schedule to the Income tax (No. 58 of 1962) (hereinafter referred to as ‘the Act’) who is in the private sector would qualify for the allowance. From the information provided, it would appear as if the taxpayer qualifies as an ‘eligible employer’ unless an exclusion in terms of sec 3(c) applies.

Sec 6 of the ETI stipulates what constitutes a ‘qualifying employee’ and states the following:

‘6.   Qualifying employees.—An employee is a qualifying employee if the employee—

(a)  (i)  is not less than 18 years old and not more than 29 years old at the end of any month in respect of which the employment tax incentive is claimed;

(ii)  is employed by an employer operating through a fixed place of business located within a special economic zone designated by notice by the Minister of Finance in the Gazette and that employee renders services to that employer mainly within that special economic zone; or

(iii)  is employed by an employer in an industry designated by the Minister of Finance, after consultation with the Minister of Labour and the Minister of Trade and Industry, by notice in the Gazette;

(b)  (i)  is in possession of an identity card referred to in section 14 of the Identification Act, 1997 (Act No. 68 of 1997), issued to that employee after application for the card in terms of section 15 of that Act; or

(ii)  is in possession of an asylum seeker permit, issued to that employee in terms of section 22 (1) of the Refugees Act, 1998 (Act No. 130 of 1998), after application for the permit in terms of section 21 (1) of that Act;

(c)  in relation to the employer, is not a connected person as defined in section 1 of the Income Tax Act;

(d)  is not a domestic worker as defined in section 1 of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997);

(e)  was employed by the employer or an associated person on or after 1 October 2013 in respect of employment commencing on or after that date; and

( f )  is not an employee in respect of whom an employer is ineligible to receive the incentive by virtue of section 4.’ (Own emphasis added).

Whether an employee meets most of the above requirements is self-explanatory. In terms of sec 6(e) of the ETI Act, the Incentive will only be available in respect of employees where their employment commenced on or after 1 October 2013. It is submitted that sec 6(e) of the ETI Act would be met if a person was employed before 1 October 2013 who left the employment in that period and who was re-employed on or after 1 October 2013.

Despite the requirements of sec 6, an ‘employee’ is defined in sec 1 of the ETI as follows:

‘... means a natural person—

(a) who works directly for another person; and

(b) who receives, or is entitled to receive remuneration, from that other person,

but does not include an independent contractor’. (own emphasis added)

 In analysing the definition of ‘employee’  the first step would be to determine what is meant with ‘directly’. According to the Oxford English Dictionary, it means the following ‘with nothing or no one in between’. It therefore follows that there need be some sort of contract between the employer and the employee albeit verbal to have the services rendered. If actors are provided through advertising agencies, then is submitted that the actor will not be working directly for the employer (your client) and the employer would consequently not be entitled to the incentive in respect of the actors so provided. The services would also have to be rendered directly to the employer (i.e. not through a personal service provider or labour broker – although a labour broker may qualify in his/her personal capacity).

An ‘independent contractor’ would not qualify for the ETI. The reason being that par (ii) of the definition of ‘remuneration’ as defined in the Fourth Schedule to the Act excludes amounts paid to independent contractors. Consequently no PAYE is deducted from such payments. It is not necessarily correct to refer to these actors as ‘independent contractors’ given the fact that they do not necessarily qualify as such taking into account the ‘mainly at premises test’ and the ‘control or supervision test’. The determination as to whether a person is an independent contractor is fact-specific and would have to be applied to every person rendering services to the company. Please refer to Interpretation Note No 17 (Issue 3) for useful guidance in this regard.

Throughout the ETI Act, no reference is made to the duration of the employment. It is thus submitted that the taxpayer would qualify for the allowance in respect of the ‘actors’ that are not classified as independent contractors, meeting the other requirements of ‘employee’ and who qualifies as a qualifying employee in terms of sec 6 of the ETI Act.

It may also be quite common for these actors to work for more than one employer during a single month. It should be noted that a single employee working for more than one employer during the same time can generate the tax incentive for all the employers, just as long as the employers are not ‘associated persons’ to one another. An ‘associated person’ is defined in sec 1 of the ETI Act as follow:

 ‘... in relation to an employer—

(a) where the employer is a company, means any other company which is associated with that employer by reason of the fact that both companies are managed or controlled directly or indirectly by substantially the same persons;

(b) where the employer is not a company, means any company which is managed or controlled directly or indirectly by the employer or by any partnership of which the employer is a member; or

(c) where the employer is a natural person, means any relative of that employer...’

 In calculating the allowance, your client would have to take special note of sec 7(5) of the ETI Act which states the following:

‘If an employer employs a qualifying employee only for a part of a month, the amount of employment tax incentive to be received in respect of that month in respect of that qualifying employee must be an amount that bears to the total amount calculated in terms of subsection (2) or (3) the same ratio as the amount of remuneration paid by the employer in respect of that month bears to the amount of remuneration that would have been payable in respect of that month had the employer employed that employee for the entire month.’

Sec 7(5) therefore has the effect that the ETI would be equal to the following:

amount of the incentive calculated in terms of sec 7(2) or (3) x remuneration paid to the employee in the month/the total remuneration that would have been payable had the employer employed the employee for the full month.

Given the amount of time it takes to do an advertisement, this may greatly reduce the incentive available to the client. An example would be where a person is doing an advertisement that takes a day to complete. Should the employer qualify for the allowance in respect of the particular employee and the employee’s services are not made use of again during the month then the allowance must be apportioned by multiplying the allowance with i.e. 1day/30days. The extent of the apportionment will depend on what the contract/agreement with the particular employee states i.e. is the person paid per day/per project/per hour etc.?


Should an employee not be regarded as an ‘independent contractor’ and he or she provides his or her services directly to the employer (your client), then the incentive may be claimed subject to the normal requirements of the ETI Act. As illustrated above, amount of the incentive will however be very low, considering that these employees are only made use of once a month or twice at most. Your client must therefore consider whether it would be worthwhile as the compliance costs may very well far exceed the incentive.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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.


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.

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