Understanding the Tax Implications of the Youth Wage Subsidy
03 June 2016
Posted by: Author: Gareth Hardy
Hardy (BCE Consulting)
the controversial Youth Wage Subsidy, made possible through the Employment
Incentive Act (EIA) has been with us for a while, many businesses don’t realise
that they should be receiving monetary benefits from it. With its extension
beyond 2016 in doubt, businesses have limited time to apply for an ETI
The Youth Wage Subsidy,which came into being through the Employment
Incentive Act No 26 of 2013 (ETIA),allows employers to claim a deduction on the
amount of PAYE they have to pay over to SARS based on the number and salary of qualifying
employees, provided that certain conditions are met.
Since its inception in January 2014, the Employment Tax
Incentive (ETI) has been both fiercely criticised and praised. It will no doubt
again draw the political spotlight before it either comes to an end in December
2016 or is extended.
There are number of compelling reasons why some companies
find the ETI to be a powerful mechanism. For one it is immediately accessible, in
other words, a business does not need to go through a special application
process to gain access to its benefits.There are no Black Economic Empowerment
or gender requirements.The ETI is not taxable and it doesn’t have an impact on
other allowances such as the Learnerships’Allowance. Perhaps its most alluring
aspect is that the ETI can result in a physical cash refund or reimbursement to
In this way, the ETI
immediately affects your bottom line and frees up cash reserves to grow and
enhance your business. Lastly, the ETI
is a self-assessment tax claim, no audit or pre-approval are required before
claiming the benefit.
I have studied the ETI in detail and consulted across various
industry sectors. Without a doubt one of the biggest challenges ETI faces are
that few are actually aware that the ETI program exists. Those that do know of
its existence may not understand the ETI’s computations and compliance
requirements; and may be under the misconception that the ETI is easy to
calculate and manage.
Who Qualifies For the
Although the ETI provides potential benefits there are a
number of criteria that the employer must meet.
Step 1 - It is important to ensure that the
employer qualifies to claim ETI and has qualifying employees. For the most part
- provided the employer is registered for PAYE, is not a sphere of government,
and does not fall foul of any of the anti-avoidance measures - they will be
eligible an employer.
Step 2 - The employer must be ETI Tax
compliant on the day of the submission of the ETI claim via the Monthly
Employer Declaration (EMP 201) form.
Step 3 –The employer needs to claim the ETI
deduction for "qualifying employees” – these are employees who meet the
must be employed on or after 1 October 2013;
employee must have a green ID book or valid asylum seekers work permit;
- employees must be younger than 29,
unless the employer is located in a
special economic zone in which case this requirement falls away, and;they must earn less than R6000 per
You may not terminate an existing non-qualifying employee in
favour of hiring those that meet the ETI requirements. The penalty for doing so
Alright, so your
business qualifies for ETI, but how much does it have on the bottom line?
An employer who is entitled to an ETI credit for "qualifying
employees” receives the benefit through the offset of the gross monthly ETI
value against any PAYE payable. In other words, PAYE liability is reduced.
This credit is calculated per employee per month in
accordance with a SARS formula and submitted with your monthly PAYE return. You
may only claim an ETI credit for a maximum of 24 months for any one employee
and the ETI credit is decreased after 12 months. There are 28 ETI critical events in the full claim
period for any one employee that the employer must manage.
When calculating ETI, please note that since 1 March 2015
hours are to be used instead of days when apportioning ETI.
Let’s have a look at an example of how an ETI claim works
Assumptions: The employer has ten qualifying employees which
all earn R2 000 per month and a total PAYE bill of R50 000 per month.
Claim: The employer submits the monthly PAYE return showing that
they have a R50 000 PAYE liability. However, because they employ 10 qualifying
workers, they also have R10 000 in ETI credit. This means that the employer
needs to pay SARS R40 000. The R10 000 credit is treated as if it had been
actually paid to SARS.
What does this mean from a business perspective?
This translates into a reduction of 37.5 per cent in direct labour
costs in the example above.
The hoops you need to
In order to claim ETI you must be ETI compliant on the day
you submitted your ETI claim. This means that there may be no outstanding tax return
for any tax type, nor must there be any tax amounts outstanding. Timing of the
submission is important.
A tax clearance certificate will not be adequate to proof
The ETIA is still subject to the provisions of the Tax
Administration Act. The most important
of these is "Burden of Proof”. When your ETI claim is eventually audited by
SARS I would recommend that you have already compiled a bare minimum SARS audit
pack that includes including the following:
that employees were paid minimum wage or where there is no minimum wage paid at
least R2 000 p.m;
that there were no returns outstanding or taxes due on the date of each submission;
detailed computations per month per employee. Remember, SARS can ask for the
data electronically and as such could request a report and verification of
every single employees ETI computation, and;
of contract of employments together with company policies regarding working
hours, salaries, copies of ID documents, etc.
The ETIA contains numerous anti-avoidance measures. Although
non-compliance with these measures is a common pitfall, sadly the pitfalls are not widely publicised.
Company A has a monthly PAYE cost of R50 000 per month. In
January of 2014 they were subjected to a VAT audit and SARS adjusted the input
VAT leaving a R2 000 balance payable. The company submitted an objection in
January 2014, which is likely to succeed. However, before the objection was conceded
Company A calculated that their ETI Benefit was
R10 000 and used this value going forward. In July 2014 SARS concedes
to the VAT objection and there is no more outstanding VAT.
The ETI was disallowed because at the time of submission there
was an outstanding tax debt due to SARS. The ETI loss is R60 000, penalties and
interest are levied at +- R6000. The company now owes SARS +- R66 000. Furthermore
all the PAYE monthly returns are wrong from January 2014 to June 2014.
The July 2014 ETI benefit may not be utilised until the
outstanding PAYE balance is settled. Not only does Company A now owe +-R66 000
to SARS but they can no longer utilise their ETI benefit.
Had Company A made use of the relevant relief provisions in
the Tax Administration Act in terms of section 164, the VAT debt would not
affect the ETI Compliance. Alternatively the other simple option - if viable -
is to pay the outstanding VAT balance and object thereafter.
How ETI reimbursement works
Most companies who qualify to claim for ETI never receive a refund
paid into their bank accounts. The PAYE owed is offset against the ETI credit and
because they usually owe SARS more in PAYE each month than what their ETI
credit is worth, they do not receive payment from SARS.
That said, as a taxpayer you may find that your ETI credit is
greater than the amount of PAYE owed to SARS every month and /or you never
utilised your ETI before, so this results in a once off reimbursement.
These cash refunds will only happen every six months after the
physical returns submitted together with the monthly and annual calculations as
well as the source documents have been rigorously audited.
Industries with high staff turnover, lean management
structures and low wages usually give rise to material ETI reimbursement.
What is in it for the
Taxpayers – ETI Claimants
Taxpayers will benefit financially by releasing working
capital into their business and be able to grow them in line with the intention
of this incentive. By reducing the cost of employment, ETIs make firms more
competitive locally and globally. The additional freed up cash could also be
utilised towards training and education programs for employees.
However, in order to claim these benefits corporates will
need to raise their level of education in relation to tax as a whole and
specifically when it comes to matters concerning ETI.
The potential and efficacy of the ETI will hopefully be
realised leading to the extension of the ETI beyond 2016. At this point
treasury is unable to gauge the magnitude of the potential liability of ETI
going forward. This is a valid concern, however it may be possible for changes
to be made to the legislation that would negate the unknown liability factor
and have the desired employment effect.
SARS benefits from the ETI because it increases Tax
compliance as taxpayers need to make sure that that their tax affairs are in order
to claim ETI. These improved processes and compliance at taxpayer level will
stay in place going forward.
Independent Audit firms – Assurance
In the months to come, I believe the level of assurance
required in order to deal with the "ETI Factor” will only become an issue once
the audit has begun. It is near impossible for an audit firm to predict the
materiality of the ETI and risk involved for any one client and thus account
for it in the audit budget.
This will become especially important where ETI employees are
transferred between group companies. ETI is complex and will provide challenges
especially where we have used the word refund and re-imbursement
interchangeably above. ETI is a re-imbursement and not a refund. Reimburse
means that the ETI cash benefits belong to the taxpayer already. They need only
claim the benefit.
There is very little time left to claim your ETI benefits.
The preparation and compliance checks may require more time than expected so we
would urge all qualifying tax payers to begin as soon as possible. ETI is
simple in theory but in reality it is a complex affair. An ETI strategy should
try to address the following questions in order to maximise benefit and
- How far back am I claiming?
- How much to claim?
- When to claim?
- How to claim?
If you are unsure, we recommend
consulting your SAIT professional for assistance in claiming what you are entitled
to, this incentive could make a tangible difference in your business.
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This article first appeared on the May/June 2016 edition on Tax Talk.